Choosing the Right Structure for Private Foundations: Corporation vs. Trust
Establishing a private foundation is a significant decision that involves choosing the right structure to meet the founder’s goals. A private foundation is essentially a tax-exempt charity funded and controlled by a small group of people, commonly a wealthy family. Foundations can be set up either as a not-for-profit corporation or as a trust. Both structures are treated the same for tax purposes, but each has distinct advantages and disadvantages that impact the foundation’s operations, flexibility, and control.
Forming a Not-for-Profit Corporation
Establishing a foundation as a not-for-profit corporation involves filing a certificate of incorporation with the home state and adopting bylaws that outline the internal workings of the organization. Unlike for-profit corporations, not-for-profit corporations usually have no shareholders. Instead, they may have members who elect a board of directors. This board appoints the officers or, in some cases, elects its own successors. The minimum number of directors is typically set by state law, with most states requiring at least three directors.
One of the main advantages of a corporate foundation is its flexibility. The board of directors can amend bylaws, relocate the foundation, and even redefine its charitable purpose, allowing the foundation to adapt to changing needs and circumstances over time. This flexibility is appealing for families who want the foundation to evolve with future generations. Additionally, officers and directors of a nonprofit corporation enjoy limited liability, protecting their personal assets from claims against the foundation. Corporations can exist in perpetuity, ideal for foundations intended to last indefinitely.
However, the flexibility of a corporate foundation also means there is a higher risk of mission drift, where future directors might shift the foundation’s focus away from the founder’s original intent. To maintain tighter control, a founder can make a donation of a restricted grant to the foundation, ensuring that a specific block of money is used for a particular charitable purpose. Additional grants can then be made outside of this restriction, allowing the rest of the funds to evolve with future foundation leadership.
Forming a Private Foundation Trust
To establish a private foundation as a trust, the founder must sign a written document making a gift, in trust, to one or more trustees. The founder can also serve as a trustee. Trust registration rules vary by state, but a private foundation set up as a trust must have at least one trustee, with the exact number specified in the trust document. Some states allow for just one trustee, providing a high level of control for a founder who prefers minimal involvement from others.
Trusts offer a high level of control over the foundation’s assets and operations. The terms set by the trust document are difficult to amend, often requiring court approval and sometimes involvement from the attorney general. This rigidity increases the likelihood that the foundation’s mission remains aligned with the founder’s original intent. Depending on the provisions of the trust agreement, trusts can be structured very tightly to limit future decision-making or more loosely to provide future trustees with greater flexibility. While trusts offer a great deal of control, their rigidity can hinder adaptability.
Many states impose restrictions on the perpetual existence of trusts, limiting their ability to exist indefinitely. Additionally, trustees have a fiduciary duty to the beneficiaries, a higher standard than the “business judgment” rule that applies to corporate directors, which can make it more challenging to attract outsiders as trustees. Lastly, beneficiaries of a private foundation trust (e.g., specific public charities named as future beneficiaries of grants) may have standing to sue if they do not receive grants, a right they would not have if the foundation were a corporation.
Conclusion
Choosing between a not-for-profit corporation and a trust for a private foundation depends on the founder’s priorities and goals. Corporations offer flexibility and perpetual existence but come with the risk of mission drift. Trusts provide strict control and alignment with the founder’s intent but lack flexibility and face potential perpetuity limitations. Each structure has its own set of advantages and disadvantages, and the decision should be made based on the specific needs and long-term vision for the foundation.
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