Transferring a Private Foundation?

Many families that have established private foundations choose to revisit the decision at some point, wondering whether the structure still makes sense for them. Over time, administration can become burdensome, and as the next generation assumes leadership, they may want to consider a simpler strategy for their giving. For them, transferring the foundation’s assets to a donor advised fund can offer a more flexible path forward.

If you and your clients are not already familiar with the general benefits of a donor-advised fund, we have prepared a side-by-side comparison of donor advised funds and private foundations. A donor-advised fund can reduce administrative responsibilities, eliminate many of the complex tax compliance requirements and allow families to focus more fully on their charitable goals rather than ongoing operations.

The mechanics of transition are straightforward

The technical mechanics of making the transition are relatively straightforward. While the process varies by jurisdiction, it typically works as follows:

• The private foundation’s governing body approves transfer of the assets to a donor advised fund, followed by dissolution of the foundation. The process for receiving this approval depends on how the foundation is structured. If the foundation is structured as a nonprofit corporation, the approval and dissolution process is usually governed by its articles of incorporation or bylaws. If the foundation is structured as a trust, the terms of the trust typically outline the process for approval and dissolution.
• The private foundation’s governing body selects a donor advised fund sponsor and establishes a donor advised fund that aligns with the foundation’s giving priorities. This includes naming the person or people who will be advising current distributions from the fund, and the person or people who will be responsible for directing the fund’s distributions in the future.
• The private foundation’s governing body pays any outstanding pledges, attorney and accounting fees, and other administrative and operational expenses.
• Once any final pledges and expenses have been paid, the private foundation’s governing body transfers the foundation’s remaining assets to the donor advised fund.
• The private foundation then files its final Form 990-PF, as well as any required state filings related to its dissolution.

While these steps are important, the transition is ultimately about more than mechanics. It is an opportunity to reposition the family’s philanthropy for the future — reducing administrative friction while preserving, and in many cases enhancing, the impact of the family’s giving.

Communication is essential for a smooth transition

A truly successful transition requires going beyond the mechanics. An important aspect people often overlook is communication with grantees. Many private foundations have relationships with nonprofit organizations that have developed over years. In some cases, grantees may rely on the foundation for annual or recurring support.

When a private foundation winds down, clear communication with grantees can avoid confusion or uncertainty. Here are four tips for helping your clients develop a communication plan for their transition to a donor advised fund:

1. Encourage them to communicate early and clearly with key grantees. Your client does not want nonprofits to hear about the transition from anyone else.
2. Resist the urge to overcomplicate things. A straightforward email message explaining that the private foundation is transitioning to a donor advised fund, and that the family remains committed to charitable giving, can go a long way.
3. If possible, have them reach out personally to each nonprofit grantee to ensure they received the email and answer any questions. This is not just a nice touch; it is a powerful way to maintain and deepen trust.
4. If they intend to continue supporting certain organizations, they can reassure those nonprofits that they can recommend future grants to them from the donor advised fund.

Madison Community Foundation is here to help you and your clients navigate both the technical and relational aspects of this process. Whether your client is ready to move forward now or simply beginning to explore options, our team is honored to work alongside you to ensure a smooth and thoughtful transition to support your clients’ charitable objectives. Please contact us at 608-232-1763 or email us at legacy@madisongives.org to speak to a member of our Donor Engagement team.

Please note that this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.