Private Foundations 101: How They Work, Key Differences, and Planning Strategies

Private foundations play a significant role in philanthropic giving, offering donors a way to direct charitable contributions over time while maintaining control over how funds are used. These entities are typically funded by a single source—an individual, family, or corporation—and primarily make grants to public charities or individuals for charitable purposes. While private foundations offer flexibility and long-term impact, they also come with unique compliance requirements and strategic challenges that donors should understand from the outset.

How Private Foundations Operate

Private foundations typically begin with a formal setup process, including establishing a legal entity, applying for tax-exempt status, and drafting governing documents that outline their charitable mission. Once established, they are primarily grantmaking institutions—reviewing proposals, making funding decisions, and monitoring results in alignment with the donor’s original vision. A small board oversees operations, often hiring staff or outside advisors to manage administrative or investment responsibilities.

What Makes a Private Foundation Different from Public Charities?

Private foundations differ from public charities in several ways—most notably in how they are funded, governed, and regulated. While public charities rely on broad public support and must meet a public support test, private foundations are typically funded and overseen by a single donor, family, or corporation.

This concentrated funding allows for greater control over grantmaking decisions but also comes with added regulatory scrutiny. Governance is typically handled by a small board—often the donor and close associates—making it easier to align with the donor’s philanthropic goals. However, this structure also increases the risk of prohibited self-dealing, which the IRS closely monitors.

Private foundations face different tax obligations as well. They must pay a 1.39% excise tax on net investment income and are required to distribute at least 5% of their net assets annually for charitable purposes. Public charities, in contrast, are not subject to the excise tax and have no minimum distribution requirement.

Charitable deduction limits also vary. Donors can deduct cash contributions to private foundations up to 30% of their adjusted gross income (AGI), compared to 60% for gifts to public charities. Similar limits apply to gifts of appreciated assets, which can shape a donor’s strategy for giving.

Finally, private foundations file Form 990-PF, a more detailed return than the standard Form 990 required of public charities. While public charities often engage directly with the communities they serve, private foundations tend to operate with a lower public profile.

Common Challenges Faced by Private Foundations

Private foundations offer a powerful vehicle for long-term charitable giving, allowing families, individuals, and corporations to shape their philanthropic legacy with purpose and precision. However, with that control comes a unique set of responsibilities. Unlike public charities, private foundations are subject to stricter regulations, ongoing compliance requirements, and operational complexities that can create unintended pitfalls if not carefully managed. From maintaining donor intent and avoiding conflicts of interest to meeting annual distribution requirements and navigating tax rules, these challenges require ongoing attention and strategic oversight.

1. Succession Planning

Many private foundations begin with a clear, passionate vision—typically shaped by a founder whose personal values guide early giving decisions. However, as time passes and leadership transitions to the next generation, continuity can become a challenge. Future board members may not share the same priorities or may be unprepared to take on the responsibilities of managing a foundation. To preserve the original intent and ensure long-term success, it’s important to involve future generations early, helping them understand both the mission and the mechanics of the foundation. Documenting the foundation’s purpose and grantmaking criteria in writing can serve as a guidepost through future transitions. In addition, a formal succession plan—one that outlines leadership roles, responsibilities, and expectations—can help avoid confusion and keep the foundation’s work aligned with its founding values.

2. Asset Management

Private foundations are often funded with personal assets and initially managed by the donor or a trusted advisor. While this hands-on approach can support early growth, treating foundation assets like personal investments can lead to complications. Foundations must meet an annual 5% distribution requirement; failing to plan for this can result in last-minute grantmaking or liquidity challenges. In addition, investments that generate unrelated business income may expose the foundation to UBIT (Unrelated Business Income Tax), which can carry both tax consequences and administrative headaches.

To avoid these pitfalls, it’s crucial to develop a formal investment policy that reflects the foundation’s long-term charitable goals. This policy should account for the annual distribution obligation while steering clear of high-risk or overly complex investments that may trigger UBIT. A thoughtful, mission-aligned strategy helps preserve the foundation’s financial health while advancing its philanthropic purpose.

3. Charitable Impact

While many private foundations begin with a clear vision, their impact can diminish over time without a defined strategy for giving. In the absence of intentional planning, foundations may default to replicating the founder’s past donation habits—failing to respond to evolving needs or to consider where their support could be most transformative. This can lead to missed opportunities and a dilution of the foundation’s original purpose.

To sustain relevance and maximize charitable influence, foundations should articulate a clear grantmaking philosophy—one that outlines not only who receives support but why. Defining the issues the foundation seeks to address helps sharpen focus and guide future decisions. Additionally, identifying opportunities for legacy or high-impact gifts can deepen the foundation’s long-term footprint and ensure its resources are used with purpose.

Start with the Right Guidance

Private foundations can be powerful vehicles for philanthropic giving, but they require strategic foresight, disciplined governance, and ongoing attention to tax compliance and operational efficiency. Whether you are considering starting a foundation or reassessing an existing one, it’s essential to understand the regulatory framework and build a sustainable giving strategy that aligns with your values and makes a lasting impact.

To explore whether a private foundation is the right fit—or to strengthen the one you already have—contact your CRI advisor today. We can help you assess your goals, weigh the tax implications, and develop a strategy that honors your legacy while supporting the causes that matter most.