How to Set Up a Private Family Foundation

A private family foundation is a distinct philanthropic entity established and funded by a family, often managed by its members to direct charitable giving. This structure provides a dedicated framework for families to organize their charitable endeavors. Its primary purpose is to facilitate grant-making to other charitable organizations, enabling the family to create a lasting impact on causes they support. Establishing a private family foundation appeals to those seeking control over their charitable assets and a multi-generational legacy of giving.

Making Key Preliminary Decisions

Before embarking on the formal establishment of a private family foundation, several foundational decisions require careful consideration, as these choices shape the entity’s structure and operations. These steps ensure the foundation aligns with the family’s philanthropic vision and is legally sound. Thoughtful deliberation at this stage can streamline legal and tax-exemption processes.

Choosing the legal structure is a significant initial determination, with options being a non-profit corporation or a charitable trust. A non-profit corporation is a separate legal entity, offering directors and officers personal liability protection. This corporate form provides greater administrative flexibility, allowing the board to modify bylaws, change the corporation’s situs, and adapt its charitable purpose more readily than a trust. Financial institutions also find it simpler to work with corporations for banking and other financial services.

Conversely, a charitable trust establishes a fiduciary relationship where trustees hold assets for charitable beneficiaries or purposes. While simpler to establish in some jurisdictions, trusts are more restrictive regarding governance modifications, often requiring court approval for significant changes. Trustees are held to a higher fiduciary standard than corporate directors, implying a more stringent duty of care regarding the trust’s investments and management. Tax rates for unrelated business income may also be higher for trusts than for corporations, a consideration if the foundation anticipates such income.

Defining the foundation’s mission and purpose is another preliminary step, requiring a clear articulation of its charitable goals and the specific areas it intends to support. This mission statement guides all future activities, including grant-making and operational strategies. Establishing a precise mission is important for internal governance and demonstrating the foundation’s charitable intent to regulatory bodies.

Selecting a name for the foundation should consider uniqueness and relevance to its mission. Many family foundations choose names honoring their founders, linking to the family’s legacy. The chosen name will represent the foundation publicly and reflect its charitable identity.

Identifying initial board members or trustees is fundamental to the foundation’s governance and direction. These individuals oversee operations, make grant decisions, manage finances, and set strategic plans. Board members assume duties of care, loyalty, and obedience, acting in the foundation’s best interest, avoiding conflicts of interest, and adhering to its governing documents and applicable laws.

The IRS requires a minimum of three board members for organizations seeking federal tax-exempt status. While state laws regarding minimum board members vary, the federal requirement of three members must be met to obtain a 501(c)(3) designation. Family members frequently serve on the board, but including independent, non-family members introduces diverse perspectives and expertise. Although related individuals can serve, a majority of unrelated board members is preferred to demonstrate independence and avoid scrutiny regarding conflicts of interest.

Establishing an initial funding strategy involves determining how the foundation will be capitalized. Assets commonly used for funding include cash, publicly traded securities, private stock, real estate, and other assets. While there is no strict legal minimum for initial funding, many new private foundations are established with endowments of at least $1 million to cover ongoing operating costs, compliance, and grant distributions. However, it is possible to establish a foundation with less, provided there is sufficient capital to support its administrative and charitable activities.

Establishing Legal Existence

Once preliminary decisions are solidified, the next phase involves formally establishing the private family foundation as a legal entity. This process typically occurs at the state level and involves drafting and filing specific organizational documents, followed by obtaining a federal Employer Identification Number (EIN). The precise steps depend on whether the family has chosen a non-profit corporation or a charitable trust structure.

For a non-profit corporation, the process begins with drafting and filing Articles of Incorporation with the relevant state agency, often the Secretary of State. These articles serve as the foundation’s public record, requiring its legal name, a clear statement of charitable purpose, and the designation of a registered agent. They also include the names and addresses of initial board members and the incorporator. Filing these articles officially secures the foundation’s name and establishes its limited liability status.

When establishing a charitable trust, the foundational document is a Trust Agreement, rather than Articles of Incorporation. This private document outlines the terms and conditions under which the trust’s assets will be managed and distributed for charitable purposes. Key provisions include the trust’s name, a description of its charitable purpose, identification of initial trustees, and delineation of their powers and duties. The agreement also specifies charitable beneficiaries or purposes, and must include language confirming the trust’s irrevocability and dedication of assets to charitable uses. Unlike corporations, trusts are typically not filed with a state agency for legal existence, though some state regulations may require subsequent registration.

Regardless of the chosen legal structure, obtaining an Employer Identification Number (EIN) from the IRS is a mandatory federal step. The EIN is a unique nine-digit number that functions like a Social Security number for businesses and other entities, serving as the primary identifier for federal tax purposes. This number is essential for various activities, including opening a bank account for the foundation, filing federal tax returns, and applying for federal tax-exempt status.

The application for an EIN is typically completed using IRS Form SS-4. Applicants must gather necessary information such as the foundation’s legal name, type of entity (corporation or trust), the reason for applying, and the Social Security Number or Individual Tax Identification Number of the responsible party. The most efficient method for obtaining an EIN is through the IRS’s online application system, which generally provides the number immediately upon completion. Alternatively, Form SS-4 can be submitted via fax, with processing typically taking about four business days, or by mail, which can take approximately four to five weeks. There is no fee associated with applying for an EIN directly through the IRS.

Obtaining Federal Tax Exemption

Establishing legal existence at the state level does not automatically confer federal income tax exemption; this requires a separate application to the IRS. Obtaining 501(c)(3) status is a key step for a private family foundation, exempting it from federal income tax and allowing donors to claim tax deductions. This status also enhances the foundation’s credibility and facilitates access to grant opportunities. Private family foundations are a specific classification within the broader 501(c)(3) category.

Securing federal tax exemption involves preparing and filing Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3).” This form demonstrates to the IRS that the organization meets the organizational and operational requirements for tax-exempt status. As of January 31, 2020, the IRS mandates all Form 1023 applications be submitted electronically through Pay.gov.

A non-refundable user fee of $600 (as of 2025) must accompany the Form 1023 application, payable through Pay.gov. While a streamlined Form 1023-EZ exists with a lower fee of $275, most private family foundations do not qualify due to limitations on anticipated gross receipts and assets. The comprehensive Form 1023 is typically the appropriate application, and using the correct form avoids delays.

A complete Form 1023 submission includes several components. Applicants must attach a copy of their organizing document, such as the Articles of Incorporation or Trust Agreement, with any amendments and state filing certification if applicable. The foundation’s bylaws or other governing rules are also required attachments, providing insight into internal governance. All attachments should be consolidated into a single PDF for electronic submission through Pay.gov.

The application necessitates financial data, including statements of revenues and expenses for past years, if applicable, and projections for the next three to four years. A narrative description of the foundation’s past, present, and planned activities is also required, explaining how these activities align with its charitable purpose. This narrative should describe the organization’s origins, founders’ intentions, needs it aims to address, and operational plans.

Additional attachments, such as a conflict of interest policy, are included to demonstrate adherence to good governance. Depending on the foundation’s activities, various schedules (A through H) may also need to be completed and attached to Form 1023. These schedules gather specialized information for certain types of organizations or specific classifications within the 501(c)(3) framework.

After Form 1023 is submitted, the application enters the IRS processing queue, which varies in duration. Processing times fluctuate due to IRS backlogs and application complexity; a typical Form 1023 application can take three to twelve months, or longer, for a determination. The IRS may request additional information or clarification if the initial submission is incomplete or unclear, extending the processing timeline. Responding promptly to these requests prevents further delays.

Upon approval, the IRS issues a determination letter, the official document recognizing the organization’s 501(c)(3) tax-exempt status. This letter specifies the foundation’s classification (e.g., private foundation) and outlines its annual federal filing requirements, typically Form 990-PF. The effective date of exemption is generally retroactive to the organization’s formation date, provided Form 1023 was filed within 27 months. This determination letter should be preserved as proof of tax-exempt status for donors, grantmakers, and other stakeholders.

Setting Up Initial Operations

After legal formation and securing federal tax-exempt status, the private family foundation can focus on establishing its day-to-day operations. This phase involves putting internal governance structures in place, activating financial accounts, transferring initial assets, and setting up record-keeping systems. These steps ensure the foundation is ready to pursue its philanthropic mission.

Developing bylaws or operating policies is a foundational step for internal governance. These documents provide rules for the foundation’s operation, detailing procedures for board meetings, including frequency and quorum, and outlining decision-making processes. Bylaws define the roles and responsibilities of officers and trustees, establish compensation policies (though board members often serve without compensation), and address conflicts of interest. While state law may mandate bylaws for non-profit corporations, all foundations find it advisable to have such internal operating rules, as they are easier to amend than initial formation documents.

Opening dedicated bank accounts in the foundation’s name is essential for managing finances transparently and separately from personal funds. To open these accounts, financial institutions require documentation, including the foundation’s EIN letter, approved Articles of Incorporation or Trust Agreement, and bylaws. A list of authorized officers or trustees, and sometimes a board resolution authorizing the account opening, may also be required. While a bank account can be opened once the foundation is incorporated and has an EIN, many foundations wait until they receive their 501(c)(3) determination letter to access nonprofit-specific banking services and avoid tax complications related to early deposits.

The transfer of initial pledged assets into the foundation’s bank accounts marks the formal capitalization of the entity. These assets can include cash, publicly traded securities, real estate, or other property. Donors contributing to the foundation may be eligible for income tax deductions, with specific rules applying to different asset types, such as appreciated securities which may qualify for a fair market value deduction. Guidance on charitable contributions and their deductibility is in IRS Publication 526. The transfer of assets from founders to a private foundation they control does not affect the foundation’s tax-exempt status or trigger self-dealing rules.

Establishing record-keeping systems is important for legal compliance, efficient operations, and future audits. This involves maintaining organized records for all financial transactions, grant-making, and administrative processes. Key documents to retain permanently include founding papers, such as the Articles of Incorporation or Trust Agreement, and the IRS determination letter. Financial records, including bank statements, invoices, receipts, and payroll records, should be kept for at least seven years. An organized filing system, whether physical or digital, combined with regular backups for electronic data, ensures information is accessible and protected, supporting the foundation’s long-term accountability and transparency.