Private Foundations For the Common Man

"Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs," according to the IRS.

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It takes a few simple steps to establish a foundation, said Tim Walter, executive director of the Association of Small Foundations in Washington.

A foundation must have governing documents such as articles of incorporation and bylaws. It must also register with the state and file with the IRS to obtain a tax exemption.

Walter said "the rule of thumb" is that attorneys usually charge "$2,000 to $5,000 to set one of these up for you."

"It is possible to do it by yourself, paying simple filing fees. It's not a lot of money and doesn't take a lot of process," he said. But he cautioned that if you hire someone, you should make sure they are familiar with private foundations. This is particularly true when it comes to filing the foundation's tax return. The return isn't hard, but it's different from other returns, and there can be serious penalties for getting things wrong.

But if private foundations are so wonderful, why doesn't everybody do them?

For "individuals intending to endow [a foundation] with a substantial amount of money and deal with it over an extended period of time," a private foundation can be appropriate, said David M. Bradt Jr., managing director of the McLean office of WTAS, a wealth and tax advisory service.

But for those with lesser amounts in mind and shorter time horizons, Bradt suggested that contributing to a "donor-advised" fund or a community foundation can provide many of the same benefits as a private foundation but with less hassle and expense.

Community foundations are grant-making charities that are in effect associations of other grant-making organizations. And unlike private foundations, they meet the requirements of a public charity and thus are subject to more-generous limits on tax deduction. Tax deductions for donations to charity are generally limited to a percentage of your income, and the percentage for most private foundations is lower (30 percent of income) than it is for public charities (50 percent).

Donor-advised funds are charities, including some mutual funds run by big financial firms such as Fidelity Investments, that can receive donations, invest them, and then distribute them to charities of the donor's choosing.

Bradt noted that community foundations can include donor-advised funds and that with a donor-advised fund, family members can talk through their charitable goals, much as they would with a foundation, except that they need only make a recommendation to the fund to carry out their plan.

Or for real simplicity, you can make donations directly to a charity -- something that is as easy as writing a check and taking a deduction.