Charitable Foundations & Trusts

Both are exempt under section 501(c)(3); the difference is where the money comes from and what follows. A public charity draws at least a third of its support from the public or from program revenue, is governed by a board the family cannot fully control, and gives its donors the higher deduction limit of 60 percent of adjusted gross income for cash. A private foundation is funded by one family or company and may be governed entirely by them, and in exchange it pays a 1.39 percent excise tax on investment income, must distribute about five percent of its assets each year, and is barred from any transaction with its insiders regardless of price. Cash gifts to a foundation are deductible only up to 30 percent of adjusted gross income, and appreciated property other than publicly traded stock only at basis. Families who want control choose the foundation and accept the rules; families who want simplicity choose a donor-advised fund at a public charity.

A charitable remainder trust pays you or your family a fixed annuity or a fixed percentage of its value each year, for life or for a term of up to twenty years, and the remainder goes to charity. Because the trust itself is exempt, it can sell an appreciated asset without immediate capital-gain tax and reinvest the whole proceeds, with the gain taxed to you only as payments come out. The payout must be between five and fifty percent, and the charity's remainder must be worth at least ten percent of the contribution when the trust is funded. A charitable lead trust reverses the order: charity is paid first, for a term, and the family takes what is left, with the gift to the family valued at a discount that grows as interest rates fall. The remainder trust suits a founder selling a company; the lead trust suits a family moving wealth down a generation at low gift-tax cost.

Recognition takes an application and a structure that passes two tests. The organizational test is in the documents: the purposes must be limited to exempt ones and the assets must be dedicated to charity on dissolution. The operational test is in the conduct: no private inurement, no more than insubstantial lobbying and no political campaign activity. Form 1023 filed within 27 months of formation makes the exemption retroactive to the first day. Keeping the status then depends on the Form 990 series return, filed every year without fail, since three consecutive missed returns revoke the exemption automatically. Foundations add the five percent payout, the excise tax and the self-dealing rules, and Illinois adds registration and an annual report to the Attorney General. Most revocations we see were missed filings, not misconduct.

Yes, within limits that depend on the vehicle and the asset. Cash to a public charity or a donor-advised fund is deductible up to 60 percent of adjusted gross income; cash to a private foundation, up to 30 percent. Appreciated stock held more than a year is deductible at fair market value, up to 30 percent of income for a public charity and 20 percent for a foundation, and unused amounts carry forward five years. From 2026, itemized charitable deductions count only above a floor of half a percent of adjusted gross income. The estate-tax deduction for charitable bequests has no ceiling at all, which is why a bequest or a charitable lead trust can remove an entire taxable estate. We do not promise a particular result; we design the gift so the deduction claimed is the one the law allows, and we coordinate the numbers with your tax advisers.

An account at a sponsoring public charity, usually a community foundation or the charitable arm of a financial firm, to which you contribute irrevocably and from which you recommend grants over time. The deduction is taken in the year of the contribution at public-charity limits, the sponsor invests the balance tax-free, and there is no minimum annual payout. The price is control: the sponsor owns the assets legally and may decline a recommendation, and grants cannot buy anything for you, including a table at a gala. It makes sense for a donor who wants a deduction this year and decisions later, for appreciated stock a small charity could not easily take, and as a trial run before a foundation. It makes less sense for a family that wants to employ its members, hold a building or run its own programs, which only a foundation or an operating charity can do.

An examination of a foundation usually begins with the Form 990-PF and turns on three things: whether the payout was met, whether any transaction touched an insider, and whether compensation to family members was reasonable for work actually done. Self-dealing carries an initial tax of ten percent on the insider and must be corrected, meaning undone and the foundation made whole, or a second-tier tax of 200 percent follows. The Illinois Attorney General separately polices charitable trusts and solicitation and can seek the removal of trustees. We represent clients in matters before the IRS, handle the state inquiry for the entity, and, where the family finds a problem first, correct it before anyone else finds it.