If I had to name one difference between private foundations (PFs) in the 20th and 21st centuries, I would use one word: “involvement.” In both centuries, plenty of PFs have made grants to operating public charities, without expecting anything in return other than an annual report from the grantee. But I recently realized, looking back on the first decade of the 21st century, that something had indeed changed among the foundations I work with: I've been involved with far more private operating foundations (POFs) in the last 10 years than in the previous 20. A POF is a type of PF that devotes most of its resources to conducting direct charitable operations rather than simply making grants from investments.

Perhaps the change is due to the dot-com entrepreneurial spirit being carried into the philanthropic realm; or perhaps another reason accounts for it. Whatever the reason, as individuals become wealthy and then want to give something back to their community or the world, they often move from being simply donors to being philanthropists. Some take the first steps into the philanthropic waters by moving from merely writing checks to accepting grant applications and then receiving reports on the results of their grantmaking. Others go all the way and apply their entrepreneurial energy to charitable projects by managing the projects themselves. When the second group go to their professionals for advice on how to wrap the tax code around their ideas, the tool that may be the best fit is the POF.

A POF has two tax advantages over a non-operating foundation. First, the 5 percent minimum distribution rule (that is, the rule that a non-operating foundation generally must distribute at least 5 percent of the market value of its investments over a 12 month period) doesn't apply to POFs. This makes sense, since a POF's purpose is to be an operating charity, not to make grants to other charities (although it can make grants). Second, donors to POFs get the same income tax deduction limits as donors to public charities. Deductions are allowed of up to 30 percent of adjusted gross income for appreciated property and 50 percent for contributions of other property. Additionally, the deduction for a donation of an appreciated asset (with the exception of publicly traded stock) to most non-operating foundations is limited to basis. But, donors to POFs can deduct the fair market value of any capital gain property contributed. This is a major advantage for donors who have assets other than publicly traded stock and cash to donate, particularly when the new POF is to hold and use the appreciated property such as art or real estate. To achieve and preserve a POF's tax status, it must meet certain asset or expense ratios, but that's a discussion for a much longer article.

Traditionally, POFs were often historic homes and gardens or operating museums. Examples of these traditional POFs include Longwood Gardens in Kennett Square, Pa., the J. Paul Getty Museum in Los Angeles and the Kreeger Museum in Washington. Donors still find that if they want to preserve a historic family home or farm, this form of charity is a perfect fit — as long as the endowment is sufficient to support the operations in perpetuity. My experience is that admission fees pay a rather small fraction of what's needed to preserve, promote and protect an historic home, house museum or elaborate garden. Although I don't have statistics, my sense is that many of the successful historic homes and museums were endowed through bequests and well planned beforehand. POFs intending to operate with such assets are often the objects of testamentary charitable planning.

What's new in POFs is the more hands-on, lifetime charitable work being done by the 21st-century philanthropists. Provide classroom mentors to new teachers, with curriculum assistance and evaluation? Check. Run a charter school? Check. Set up and run an animal refuge for exotic animals or abandoned pets? Check. Preserve a working farm to educate city kids? Check. Run an art museum? Check. The number and type of projects that can fit within the tax parameters of a POF are limited only by the donor's imagination. Of course, the donor has to convince the Internal Revenue Service of the charitable worthiness of his plan through the process of applying for exemption on Form 1023. Then, the POF has to maintain compliance with the required asset or expense ratios to continue to qualify as a POF. Subject to these constraints, the new philanthropists have the perfect charitable vehicle for their philanthropic plans during their lifetimes or even forever.

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