Charitable Trust vs. Private Foundation: Key Differences for Financial Planning

Both trusts and foundations provide valuable legal structures for managing philanthropic giving while mitigating tax liabilities, preserving the value of your assets, and building a lasting legacy.

In this Insight, we provide a practical comparison of charitable trusts and private foundations, their benefits, and which option may best fit your personal financial plans.

What is a Charitable Trust?

A charitable trust is a financial and legal arrangement that allows individuals to transfer assets for both philanthropic giving and strategic financial planning. By placing assets into a trust, the donor designates a “trustee” to oversee the management and distribution of funds according to specified trust terms. Unlike a charitable organization, a trust is legally construed as a relationship between the trustee and donor as private parties.

At its core, a charitable trust creates a structured way to support charitable organizations while also providing financial utility to either the donor or designated beneficiaries.. This approach is particularly useful for individuals with highly appreciated assets, seeking to align efficient tax and long-term estate planning with philanthropic goals.

Types of Charitable Trusts

There are two primary types of charitable trusts, each structured to serve different financial and charitable objectives:

• Charitable Remainder Trusts (CRTs): A CRT allows a donor to contribute assets into the trust, which then distributes annual payments to the donor or another designated beneficiary for a specified term.
  
  At the end of the trust period, the remaining assets are transferred to the designated charitable organization.
• Charitable Lead Trusts (CLTs): A CLT is structured so that annual payments first go to the designated charitable organization.
  
  Once the trust term ends, the remaining assets are distributed to the donor’s heirs or another non-charitable beneficiary.

Both structures can offer distinct advantages depending on the donor’s objectives.

Benefits of a Charitable Trust

While establishing and maintaining a charitable trust requires administrative and legal steps, the potential financial planning benefits can be substantial:

1. Preserve Asset Value: Charitable trusts provide a strategic way to manage highly appreciated or non-income-producing assets. By transferring assets into the trust, donors can sell or reinvest them within the trust structure while potentially forgoing or deferring capital gains taxes. 
2. Reduce Estate Taxes:  Assets placed in a charitable trust are generally excluded from the donor’s taxable estate. As a result, these assets are not subject to estate tax. By removing them from your estate, you may reduce the overall size of the estate, potentially bringing it below applicable estate tax thresholds and helping to minimize estate tax liabilities.
3. Create Charitable Tax Deductions: The tax benefits of a charitable trust depend on its structure. In many cases, donors receive either a partial or full income tax deduction based on the present value of the assets contributed to the trust. Charitable remainder trusts, for instance, may allow for an immediate deduction in the year of the donation, while charitable lead trusts may provide deductions based on the annual charitable distributions.
4. Legal Protection for Donated Assets: Once assets are placed in a charitable trust, they are legally removed from the donor’s estate. This can provide protection from future creditor claims, lawsuits, or estate disputes.

By structuring charitable giving through a trust that is carefully aligned with long-term financial plans, donors can support causes they care about while maximizing tax efficiency and creating a lasting financial legacy.

What is a Private Foundation?

A private foundation is a legal entity established to manage and distribute charitable funds. Unlike a charitable trust, which is structured as a legal relationship between trustees and beneficiaries, a foundation operates more like a corporate entity, with formal governance and regulatory requirements.

Typically, a foundation is created by an individual, family, or corporation that provides the initial funding. These assets are then managed and distributed in alignment with the foundation’s philanthropic mission. 

Because private foundations operate as standalone entities, they are subject to specific registration, reporting, and compliance requirements in their governing jurisdiction. However, they also offer greater control and flexibility in how charitable contributions are allocated over time.

Types of Foundations: Operating versus Non-Operating

Non-Operating

Non-operating private foundations are the most-common, accounting for over 90% of foundations. They are preferred as you are able to achieve all of the same goals as an operating foundation, with less stringent regulatory requirements. Typically, non-operating foundations function primarily as grant-making organizations. However, this structure also allows use to carry out specific mission work and engage directly in charitable activities. 

From a tax perspective, the main disadvantage of a non-operating foundation is that it offers a lower maximum charitable deduction for donors. For cash donations, the maximum allowable deduction is 30% of your Adjusted Gross Income (AGI), as opposed to the 60% limit for operating foundations. Similarly, donations of appreciated long-term publicly traded securities are deductible up to 20% of AGI for non-operating foundations, compared to 30% for operating foundations.

Operating

An operating foundation is primarily focused on directly conducting charitable projects, such as running a museum or educational program. These foundations are subject to more specific IRS regulations, given their public-serving nature. Some of the key requirements for an operating foundation include:

• Asset Test: At least 65% of its assets must be used to actively conduct exempt activities.
• Endowment Test: A minimum of 2/3 of its investment income must be directed toward exempt activities.
• Support Test: At least 85% of the foundation’s support must come from the general public, with no more than 15% coming from other exempt organizations.

One question individuals may ask is why establish an operating foundation when a non-operating foundation offers similar benefits but with fewer restrictions. Part of the answer lies in the tax benefits. 

Operating foundations allow for a higher charitable deduction—up to 60% of your AGI for cash donations, and 30% for appreciated stock, as opposed to the limits for non-operating foundations. If both maximizing your tax deductions and enjoying the benefits of a foundation are important to you, but you don’t think you’ll be able to meet some of the specific restrictions above, or just want to avoid the headache, there may be a combination approach that works for you.

Combining Private Foundations with Donor Advised Fund (DAF)

It is possible to reach the 30% AGI deduction limit for appreciated stock (or 60% for cash)  in a given year, through stacking your donations. You can contribute 20% of AGI to your non-operating foundation, and top off the 10% through a Donor-Advised Fund (DAF). This combination approach may allow you to maximize your charitable deductions while maintaining flexibility in how the funds are distributed to various charitable causes. 

Additionally, you may make a grant from a DAF to a private operating foundation, but there are specific requirements to meet. If you one-day want to make your non-operating foundation, operating, you are also able to do that. 

Both charitable trusts and private foundations come with a certain amount of complexity that may not align with your personal or charitable goals. For a more streamlined and simplistic approach, you can explore our insight on Donor-Advised Funds here.

Benefits of a Private Foundation

Private foundations allow donors to maintain control over their philanthropic efforts while also providing meaningful financial planning benefits.

1. Creating a Lasting Legacy: Many private foundations are established with the intent to operate indefinitely, ensuring that a donor’s philanthropic vision continues for generations. This structure allows families to preserve their charitable impact, maintaining oversight of how funds are distributed for many years to come.
2. Control Over Donations: Unlike contributing to a Charitable Gift Fund, where you may only donate to 501(c)3 charities, or donating directly to public charities, where funds are pooled, private foundations give donors the ability to direct grants to specific causes or organizations, no matter their entity status, in alignment with their values and priorities. This control ensures that philanthropic dollars are allocated in the most personally meaningful way. 
3. Strategic Tax Benefits: Private foundations offer donors a tax-efficient way to structure their giving. Contributions to a foundation may qualify for income tax deductions and could potentially bypass capital gains tax on appreciated assets. Once inside the foundation, funds can be invested and distributed over time, maximizing long-term philanthropic impact. 
4. Structural Protections Against Liability: A private foundation operates as a separate legal entity, which can help shield personal wealth from legal claims. While foundations are subject to regulatory oversight, their corporate structure creates a legal barrier between the foundation’s activities and the personal finances of its founders, reducing potential exposure to litigation risks.
5. Engaging Future Generations: Foundations provide an opportunity to involve family members in philanthropy. By serving on the foundation’s board or participating in grant-making decisions, current and future generations can nurture a strong sense of social responsibility while ensuring the family’s values are carried forward.

Choosing Between Charitable Trusts vs. Private Foundation

Deciding between a charitable trust and a private foundation depends on your financial goals, desired level of control, and long-term philanthropic vision. Both structures offer unique advantages in managing charitable giving, reducing tax liabilities, and securing assets, but they differ significantly in complexity, cost, and flexibility.

Private foundations tend to offer greater control and tax advantages while functioning as independent legal entities. They are mostly, if not fully, exempt from Federal income tax, and allow the most control over how funds are distributed and used over time. Foundations are great for specific philanthropic missions. However, foundations come with ongoing administrative requirements and regulatory oversight.

Charitable trusts, on the other hand, are often simpler to establish and manage. They provide tax benefits, asset protection, and a structured way to support both the donor or their heirs and charitable organizations simultaneously. Trusts also offer greater privacy compared to foundations, which are subject to public disclosure requirements.

Consulting with a financial advisor or estate planning attorney can help determine which approach, or combination of approaches, align best with your objectives. Options like Donor Advised Funds provide additional options for structuring giving as part of your estate. 

Seek Financial Advice on the Best Way to Plan for Long-Term Giving

Choosing between a charitable trust and a private foundation is a significant decision that requires careful planning. Each option has unique benefits, tax implications, and administrative requirements that should be considered in the context of your broader financial goals.

We recommend working with a financial advisor to develop a customized charitable giving strategy that aligns with your personal financial planning objectives, tax situation, and philanthropic vision.

Interested in exploring the best approach for your long-term charitable giving? Schedule a complimentary 30-minute consultation with one of our financial planners today.