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Wealth Advisor Insights

 
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Transitioning Out of a Private Foundation

7 Key Considerations

by Tim Bresnahan, Vice President

Download the complete white paper Transitioning Out of a Private Foundation [PDF]  

  1. Understand the consequences of terminating the foundation.  Many foundations that terminate do so by transferring the foundation’s assets to one or more donor advised funds.  While private foundations and donor advised funds both allow the donor (and his or her designees) to engage in grantmaking, there are important differences between the two vehicles, such as the degree of control over investments and the range of permissible grants.  Foundation managers should fully comprehend the effect of terminating the foundation in favor of a donor advised fund before undertaking the transaction because once it has been completed, it cannot be undone.

  2. Start the process early in the year.  Once the foundation managers decide to wind down the foundation in a given year, they cannot wait until December to start the process.  In addition to arranging for the distribution of the foundation’s assets, there are numerous regulatory hoops to jump through, and the process can take several weeks, if not months, to complete properly.

  3. Communicate the plan to terminate with existing grantees prior to termination.  It is not uncommon for a private foundation to provide ongoing financial support to multiple grantees.  If a foundation terminates without alerting its grantees in advance, the unexpected reduction in funding may create financial challenges that could have been avoided if the charities had gotten advance notice.  Early communication may help the grantees navigate the transition more successfully.

  4. Choose the right charities to receive the foundation’s assets. A private foundation that terminates in favor of impermissible grantees may incur federal termination taxes of up to 100% of the foundation’s value, so designating eligible charities (including donor advised fund programs) is crucial.  While donor advised fund programs share the same fundamental features, there may be important differences in administrative or grantmaking rules from program to program.  Understanding those differences prior to funding a donor advised fund will ensure the best possible match for the advisors.

  5. Follow the appropriate process for terminating the foundation entity (trust or corporation).  The process for terminating a private foundation is different, depending on the legal structure of the foundation (e.g., corporate form or trust form), so foundation managers should consult a lawyer for directions on how to properly terminate the foundation (and avoid regulatory penalties).

  6. Complete the foundation’s final federal tax return.  A private foundation that terminates in a given year must file a final federal tax return with the IRS.  The final tax return must include specific information and documentation, per the IRS rules.  Private foundation managers are encouraged to work with an experienced attorney or accountant when completing the final tax return.

  7. Comply with any final state filing requirements.  In addition to filing a final federal tax return, private foundation managers must also be sure to comply with any state filing requirements, such as providing notice to the Attorney General and/or filing with the Secretary of State.
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The opinions expressed here are those of the authors and do not necessarily reflect those of the Northern Trust Corporation or its subsidiaries. The information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any opinions expressed herein are subject to change at any time without notice. Any person relying upon this information shall be solely responsible for the consequences of such reliance.
IRS CIRCULAR 230 NOTICE: To the extent that this communication or any attachment concerns tax matters, it is not intended to be used, and cannot be used by a taxpayer, for the purpose of avoiding penalties that may be imposed by law. For more information about this notice, see https://www.northerntrust.com/circular230.