If you’ve decided a foundation is the right vehicle to drive your philanthropy, you are now faced with an important choice about how the foundation will be structured, either as a charitable trust or a nonprofit corporation. Which one you choose can have far-reaching implications for your foundation’s mission and how it’s run.
When a private foundation is organized as a charitable trust, it is controlled by a trust agreement that names the trustees and enumerates their powers. It also lays out how future trustees will be selected to run the foundation.
Advantages: Compared to nonprofit corporations, trusts have fewer requirements regarding state filings and how often meetings must be held. There are also fewer regulatory hurdles when they are created and have more favorable tax treatment. Highly appreciated assets that are transferred to a trust can result in a tax deduction based on the trust’s value, rather than be subject to capital gains or estate taxes. In addition, donors can designate who can be a trustee and thus exercise control over who manages the foundation.
Disadvantages: Trusts are irrevocable. You cannot take back what you have given. Once a trust is signed and sealed, it can be modified only with court approval. Some people may like the idea of making it hard for succeeding generations to alter a trust’s charitable purpose, but that inflexibility could come back to haunt the trust, especially if circumstances arise that make following the trust’s intent impractical or impossible. Also, trustees have less protection from personal liability than corporation board members if they are sued for bad decisions, even if they are made in good faith.
Foundations that operate as nonprofit corporations are governed by a board of directors and must properly record minutes of regularly scheduled meetings. They must also file articles of incorporation and bylaws with the state.
Advantages: Once you’ve gotten all of the paperwork out of the way, this structure offers wide latitude in how the foundation is run. Any changes can be made by a simple board vote, unlike a trust. This approach makes it easier for donors to have their descendants be directors of the foundation. Also, directors of nonprofit corporations are generally protected by the business judgment rule, which holds that a director would be liable only for gross negligence, self-dealing or misconduct that was willful.
Disadvantages: Nonprofit corporations are more difficult to create and can incur higher start-up costs even if you don’t hire any staff. And you have to be prepared to hold regular meetings where minutes are kept. Some states also require nonprofit corporations to file annual reports. Unlike a trust, foundations must distribute at least 5 percent of its assets annually in order to avoid tax penalties. They must also pay up to a 2 percent excise tax on net investment income.
Because of the liability protection and greater flexibility, more foundations opt for the corporate structure than a trust, according to Exponent Philanthropy. However, a final decision should be made only after consulting with an attorney or financial adviser as well as family members and others who would run the foundation.
- Protecting Donor Intent, an online resource from The Philanthropy Roundtable. It has numerous articles devoted to how donors can safeguard and define their philanthropic principles.
- Article: Private Foundations: Trust or Corporation? Choosing the Right Fit, Family Foundation Advisor
Private Foundations: What You Need to Know, a primer on the legal and tax implications of trusts and nonprofit corporations.