Historically, private foundations have served as vehicles for individuals and their families to make grants to nonprofits. However, when leveraged to their fullest potential, they can also function well beyond grant making. For example, a private foundation can be utilized to:

• Make mission-related investments

• Make program-related investments

• Engage in impact investing

The following responses can shed light on how private foundations operate:

How does a private foundation differ from a public charity? 
Unlike a public charity, private foundations, as well as their programming, are generally funded by a single individual, family, or organization. By law, private, nonoperating foundations are also required to spend—via grants or permissible administrative expenses—at least 5 percent of their net investment assets annually.

How are funds managed in a private foundation?
A board of trustees oversees and approves a foundation’s spending. Each year, the foundation must submit to the IRS a Form 990, which is a publicly available document that details the foundation’s financial activities. 

How can a private foundation advance my philanthropy?
Grant making from a private foundation is similar to offering a charitable gift, but with grants, the beneficiary is required to comply with the terms outlined in the grant agreement. These terms often include parameters on how the funds can be spent, when they should be spent by, and whether the grantee needs to report back to the foundation on its activities.

Program-related investments (PRIs) and mission-related investments (MRIs) are additional tactics a foundation can leverage to amplify its impact. PRIs are investments made for charitable activities, with market or below-market interest, whereas MRIs consist of any commercial investment activity that furthers the foundation’s mission, with market returns. By harnessing all of these potential activities, a foundation can use 100 percent of its balance sheet for impact.

What is the lifecycle of a private foundation?
Private foundations can exist in perpetuity, continuing to fulfill their philanthropic purposes indefinitely. Alternatively, a private foundation can be designed to spend down its assets over a set period of time. Future generations of the family can choose to run and oversee the foundation, or outside staff can do so. 

When should I establish a private foundation?
You can choose to set up a foundation at any time. However, it is typical for a foundation’s assets to begin at a minimum of $10 million. Due to a foundation’s infrastructure demands and annual requirements, it may make sense to delay establishing your foundation until you can contribute at least this amount toward your philanthropic aims. For tax deduction purposes, it is common for philanthropists to create foundations after a major windfall, such as an inheritance or business sale.

How do I establish a private foundation?
Establishing a private foundation can take a few months. Start-up costs typically range from $5,000 to $15,000. Once your foundation begins operations, your ongoing responsibilities may include asset management, grant administration, and general record keeping. 

Do I need to staff my foundation?
Depending on the scale and activities you’ve planned, you can choose to hire staff or outsource various functions, such as proposal review, nonprofit due diligence, and grants management, to external consultants. Speak with your legal advisor as you begin this process.

Additional Resources:

• When establishing a foundation in perpetuity, principals should have a succession plan in place and a vision for the next generation to engage with the organization. See our “Considering Legacy and Next Generation” article to dive deeper into this topic. 

• Decipher the differences between a private foundation, private operating foundation, and public charity with this article from the Foundation Group for deeper analysis.