Starting a Private Foundation

What Is a Private Foundation?

A private foundation is a type of tax-exempt organization recognized by the IRS. Unlike public charities, most private foundations are funded by a single source—often an individual, family, or corporation—and typically make grants to other charitable organizations rather than operating their own direct programs.

While some entities like hospitals and universities qualify as public charities, most other tax-exempt organizations fall under the private foundation category. These foundations are generally subject to an excise tax on their net investment income.

To qualify for tax-exempt status, an organization must operate exclusively for purposes such as religious, charitable, scientific, literary, or educational advancement. In some cases, political organizations may also be eligible for exemption, though they are governed by different IRS rules.

Understanding what qualifies as a private foundation is the first step in evaluating whether it aligns with your philanthropic vision and long-term planning needs.

What Does a Private Foundation Do?

Private foundations typically provide grants to other charitable organizations, though in some cases, they may also offer funding directly to individuals. These grants are used to support a range of causes aligned with the foundation’s mission. The financial assets held by the foundation are known as its endowment, which is managed to support ongoing charitable giving.

Should You Start a Private Foundation?

If there’s a specific cause or issue you’re passionate about—and no existing organization currently addressing it—starting a private foundation may offer a structured way to make a long-term impact. However, it’s important to understand that managing a private foundation involves ongoing administrative responsibilities, legal requirements, and financial oversight. Factors such as operational costs, regulatory compliance, and potential personal liability should all be carefully evaluated before proceeding.

Example of a Thriving Charitable Foundation

Before starting a private foundation, it can be helpful to review examples of existing foundations that have achieved long-term sustainability and impact.

One such organization is the MJ Murdock Charitable Trust, which supports initiatives in education, scientific research, the arts, and spiritual development throughout the Pacific Northwest. Established in 1975 through a bequest from the estate of Jack Murdock, co-founder of Tektronix, the Trust began with $91 million in initial funding. Since then, it has provided more than $975 million in grants to nonprofit organizations and currently holds assets valued at approximately $1.2 billion.

The Murdock Trust serves as one example of how long-term philanthropic planning can create enduring support for regional causes. Reviewing models like this can offer insight into the structure, funding, and mission alignment required for private foundation success.

Studying how established foundations operate can provide insight into the strategies that lead to long-term success in philanthropic planning.

9 Tips for Starting a Private Foundation to Support Your Legacy Goals

Starting a private foundation can be part of a long-term strategy for high-net-worth individuals who want to make a lasting impact. These tips can help you approach the process with clarity and foresight.

1. Include Your Foundation in Your Estate Plan

If your long-term goal includes establishing a foundation, ensure it’s outlined clearly in your estate planning documents. This step becomes especially important if unforeseen events occur.

One real-world example is Jack Murdock, whose estate directive led to the creation of the Murdock Charitable Trust in 1975, four years after his passing. His estate not only directed the formation of a foundation but also specified a clear mission—to support educational, cultural, social, and spiritual development.

By incorporating your intent into your estate plan, you help ensure that your philanthropic vision continues, even if you’re not there to carry it out personally.

2. Choose a State and Register the Name

Private foundations must be incorporated in a specific state, and requirements vary by jurisdiction. Consider reviewing which state’s legal framework best supports your goals for tax treatment, compliance, and administration.
You’ll also need to secure a unique name for your foundation. This process may include checking availability with your state’s business registry and filing for name reservation. Involving family members in naming discussions can make the foundation more meaningful across generations.

3. Address Legal Requirements and Governance

Establishing a private foundation involves several formal legal steps. This includes preparing your foundation’s mission statement, articles of incorporation, bylaws, and a conflict-of-interest policy. These documents serve as the foundation’s legal and operational blueprint, helping ensure compliance and clarity for future governance.

You don’t need to handle all of this alone. Legal and financial professionals can assist in drafting these documents or guide your family through the setup process to ensure the foundation is structured according to state and federal requirements.

4. Define the Mission and Long-Term Purpose

Your foundation’s mission should be clear, actionable, and aligned with your long-term values. Whether you’re supporting education, scientific research, or charitable causes, articulating a focused purpose helps prevent ambiguity later. A well-defined mission also ensures continuity, guiding future board members and advisors, possibly decades down the line, in a direction that reflects your original intent.

Consider documenting your vision in writing and reviewing it with your family or board to ensure alignment and long-term sustainability.

5. Decide How to Manage Foundation Assets

Private foundations may hold various types of assets—from cash and securities to real estate and alternative investments. Choosing how to manage these assets is crucial to sustaining your foundation’s impact over time.

You generally have three options:

• Internal management: Hire an in-house investment team within the foundation.
• External management: Partner with investment firms for oversight and execution.
• Hybrid approach: Use internal oversight while outsourcing day-to-day investment activity.

For example, some longstanding foundations maintain an internal board that sets investment policies, while third-party firms handle implementation. This approach supports flexibility and specialization without compromising governance.

6. Establish Criteria for Selecting Investment Managers

Selecting the right asset managers is a foundational step in setting up a lasting private foundation. While it’s possible to launch a foundation with as little as $250,000, ultra-high-net-worth individuals often start with significantly more, sometimes in the tens or hundreds of millions. With that scale comes the responsibility to ensure your foundation’s assets are managed with both strategy and stability.

This responsibility shouldn’t be taken lightly. The firm or individual you entrust with managing your foundation’s portfolio must align with your goals, values, and long-term vision. They are not just handling investments—they are helping to preserve your legacy.

To support this, it’s essential to create clear selection criteria. These might include:

• A proven track record of institutional asset management
• Experience managing portfolios of similar size and complexity
• Transparent fee structures with no conflicts of interest
• Familiarity with mission-aligned or impact investing strategies
• Strong performance through varying market conditions

For instance, the Murdock Trust developed a detailed process to evaluate and select external asset managers, requiring professional credentials, experience with large endowments, and consistent reporting standards. This structure allowed them to scale their giving while preserving and growing the foundation’s resources over time.

Although the majority of private foundations in the U.S. manage under $1 million in assets, your foundation may begin on a larger scale. By establishing robust selection criteria from the outset, you increase the likelihood that your foundation remains financially healthy and mission-focused for generations.

7. Define Clear Performance Expectations for Investment Managers

After selecting investment managers, it’s essential to establish performance benchmarks that align with your foundation’s long-term objectives. This ensures accountability and transparency as your foundation begins managing significant assets.

For example, foundations like the Murdock Trust provide detailed investment policies that outline acceptable risk levels, reporting frequency, and return targets. This clarity gives managers a defined framework to operate within—and ensures they’re supporting the foundation’s goals, not just market performance.

As you establish your own foundation, consider:

• Setting a consistent review schedule (e.g., quarterly or annually)
• Outlining prohibited asset classes, if any (such as venture capital or speculative real estate)
• Defining the asset allocation strategy based on your foundation’s purpose (e.g., long-term capital growth vs. capital preservation)

If your goal is to maintain a perpetual foundation, performance guidelines should prioritize long-term stability over short-term gains. This balance is crucial for sustaining charitable giving well into the future.

8. Hire and Appoint a Capable Foundation Team

Once your foundation’s structure, investment criteria, and performance expectations are in place, the next step is assembling the right team to carry out daily operations.

Running a private foundation involves more than just overseeing investments. You’ll need qualified individuals or teams to manage:

• Grant application review and distribution
• Financial reporting and compliance
• Operational logistics
• Investment performance tracking
• Donor communications and impact measurement

One of the most resource-intensive responsibilities is managing the grantmaking process. You’ll need a reliable system for reviewing requests, evaluating proposals, and ensuring funds are allocated to initiatives that reflect your mission.

Whether you hire an internal team or work with external service providers, choosing professionals with nonprofit or endowment experience is vital. These roles support the heart of your foundation’s work—helping ensure your assets are used efficiently and in alignment with your values.

9. Fund the Foundation and Begin Giving

Once your private foundation is established, the final step is funding it and putting your charitable goals into action. For many high-net-worth individuals, this isn’t about fundraising—it’s about allocating a meaningful portion of your wealth to create lasting impact.

At this stage, you can begin distributing grants to qualified recipients aligned with your foundation’s mission. Whether your goals are centered on education, healthcare, environmental sustainability, the arts, or other causes, your foundation can provide funding to nonprofits and institutions that reflect those values.

Some families choose to establish multiple giving programs or grant categories within their foundation. This allows you to support a broader range of initiatives while maintaining clear oversight and accountability.

You may also:

• Create annual or quarterly grant cycles to distribute funding
• Develop eligibility criteria for nonprofit partners
• Set giving priorities that align with long-term social, scientific, or cultural goals

By directing your foundation’s resources to the areas that matter most to you, you’re not just supporting causes—you’re helping shape a legacy. And for many individuals, this becomes one of the most rewarding aspects of establishing a private foundation.

Planning to create a lasting legacy? These foundational tips can help you align charitable giving with long-term wealth management strategies.

5 Ways to Start a Nonprofit Organization Without Large Upfront Costs

Starting a nonprofit or charitable foundation doesn’t have to begin with a large budget. While launching any organization involves some financial planning, many successful nonprofits began with limited resources and a clear mission. If you’re exploring how to establish a 501(c)(3) nonprofit or a private operating foundation, the following steps can guide you through the process, cost-effectively.

1. Define Your Core Values and Mission

Every impactful nonprofit starts with purpose. Before filing paperwork or building a website, take time to clarify your core values. These principles will guide your nonprofit’s direction—from outreach and funding to programming and partnerships.

If you’re launching a nonprofit based on a cause you deeply care about, you likely already have a sense of its purpose. Turn that passion into a clear mission statement that answers key questions:

• What issue are you addressing?
• Who will benefit from your work?
• How will your organization create impact?

Establishing a focused mission makes it easier to attract volunteers, apply for grants, and build community support, without spending heavily upfront.

2. Research Startup Costs and Prepare a Budget

Once you’ve defined your mission, the next step is to prepare for the administrative and legal costs of launching your nonprofit. Fees vary by state, so it’s important to research the costs specific to your location. These may include:

• State incorporation filing fees
• IRS Form 1023 or 1023-EZ filing fees for federal tax-exempt status
• Legal or accounting support, if needed
  

The IRS website is a valuable resource for understanding how to apply for 501(c)(3) status and what documents you’ll need. Creating a basic budget early will help you stay organized and identify which areas require funding before you launch.

3. Begin Fundraising for Initial Operational Costs

For many nonprofit startups, one of the biggest hurdles is covering initial filing and operational costs. Crowdfunding platforms can offer an effective way to raise early-stage funds. By reaching out to your personal network—including friends, family, and supporters of your cause—you can build both financial support and awareness for your mission.

Consider using simple, clear messaging and visuals to communicate your purpose. Transparency and storytelling go a long way in helping others connect with your goals.

4. Establish a Legal Foundation for Your Nonprofit

Though not required in all cases, forming a nonprofit corporation is highly recommended. Incorporating your nonprofit can offer liability protection, allow you to apply for federal and state tax-exempt status, and make you eligible for larger grants and donations.

To form a nonprofit corporation, you will need to:

• Choose a board of directors
• Draft and approve bylaws
• File articles of incorporation
• Adopt a conflict-of-interest policy
• Submit your IRS 501(c)(3) application

This step gives your organization a legal identity and credibility when approaching funders and community partners.

5. File for Tax-Exempt Status

Once your nonprofit is legally incorporated and your foundational documents are in place, the next major step is applying for federal tax-exempt status. This is done by filing IRS Form 1023 (or Form 1023-EZ for eligible smaller organizations).

This application allows your nonprofit to be officially recognized as a 501(c)(3) organization, exempt from federal income tax. It also enables your donors to make tax-deductible contributions—an essential benefit for fundraising.

Keep in mind:

• Form 1023 requires detailed information about your organization’s mission, structure, finances, and planned activities.
• It’s helpful to consult a tax professional or legal advisor with nonprofit experience to ensure accuracy and compliance.

Completing this step successfully will establish your nonprofit’s credibility and help you move forward with confidence as you begin operations. Exploring cost-effective options can help you begin your philanthropic journey even if a full private foundation isn’t the right fit at the moment.

Benefits of Having a Private Foundation

Establishing a private foundation offers several long-term benefits, especially for individuals seeking to align their financial planning with philanthropic goals.

1. Tax Considerations
Private foundations typically qualify for tax-exempt status under IRS regulations. This means investment income generated within the foundation can be reinvested without being taxed at the corporate level, helping to preserve and grow its assets over time.

2. Multi-Generational Legacy
Many private foundations are structured to exist indefinitely, allowing for a long-term legacy that can reflect your values and philanthropic interests. With proper planning, the foundation’s mission can be carried on by future generations.

3. Family Engagement and Values
Involving family members in foundation management can promote shared values, instill a sense of social responsibility, and offer opportunities for meaningful collaboration. Serving as a board member or advisor fosters stronger intergenerational ties and encourages collective impact.

4. Leadership Development
Operating a foundation can also help younger family members develop practical skills such as decision-making, financial stewardship, governance, and teamwork. These experiences can support personal growth and prepare them for broader leadership roles in the future.

Private foundations offer unique benefits for individuals seeking to align their wealth with long-term charitable goals—understanding those benefits is key to informed planning.

How To Maintain Your Private Foundation

Regulations and Penalties

A foundation—including most family foundations—must safeguard its tax-exempt status by engaging primarily in activities consistent with its exempt purposes as prescribed by state law. For example, an organization risks forfeiting its tax-exempt privilege if it fails to file its annual return for three consecutive years. Additionally, a foundation is generally required to distribute a minimum of 5% of its assets each year in the form of grants. It is also important to note that a foundation should not participate in political campaigns, operate solely for the benefit of its founder, or run a business unrelated to its exempt purpose.

Expenses

Operating a foundation involves typical business expenses, including wages for employees and fees for professional services from accountants and attorneys, as well as day-to-day administrative costs. In many cases, a foundation may also require the services of an investment manager or advisor to help manage its assets effectively.

Ongoing compliance and oversight are essential to ensure your foundation remains aligned with regulatory requirements and long-term objectives.

The Council on Foundations

The Council on Foundations is a nonprofit membership organization representing over 800 foundations across the United States and internationally. It serves as a platform for collaboration, education, and advocacy within the philanthropic sector.

The Council’s stated vision is that “philanthropy is a trusted partner in advancing the greater good,” and its mission focuses on fostering an environment where philanthropy can thrive. By supporting a network of foundation professionals and organizations, the Council aims to strengthen the overall impact of grantmaking activities and contribute to broader philanthropic initiatives.

Resources for Starting a Foundation

The Council on Foundations offers general information for individuals or organizations interested in creating a private foundation. While it does not provide legal or technical assistance, it publishes educational resources covering the laws governing foundations and the process of establishing one.

Managed by Hurwit & Associates, the Nonprofit Law Resource Library includes information on a range of legal topics relevant to foundation formation. Topics include state-level filing and compliance, governance structures, board responsibilities, and related operational considerations.

The National Council of Nonprofits supports a network of over 20,000 nonprofit organizations. It helps members improve their effectiveness by facilitating collaboration, sharing best practices, and engaging in policy discussions that impact the philanthropic sector.

Formed through the 2019 merger of Foundation Center and GuideStar, Candid (Candid.org) serves as a central resource hub for nonprofits and foundations. It provides training opportunities and access to tools that support nonprofit research, grant funding, and organizational development.

Engaging an attorney with experience in tax-exempt and charitable foundation law is an essential step in starting a private foundation. Local and state bar associations, as well as the American Bar Association, can assist in connecting individuals with qualified legal professionals in their area.

The Council on Foundations is a nonprofit organization representing over 800 foundations across the United States and internationally. It serves as a collaborative platform for its members to explore and apply innovative strategies in philanthropy, with the aim of strengthening impact across sectors.

The Council’s stated vision is that “philanthropy is a trusted partner in advancing the greater good.” Its mission is to foster an environment where philanthropy can thrive by supporting a professional community of foundations and individuals dedicated to long-term, positive social outcomes. Through shared learning and collaboration, member organizations can increase the effectiveness of their grantmaking efforts.

The Council on Foundations website offers general information on establishing a private foundation. While it does not provide legal or technical assistance, it does publish educational resources that outline the legal frameworks and foundational steps for starting a philanthropic entity.

Additional support is available through the Nonprofit Law Resource Library, managed by Hurwit & Associates. This online resource provides information on state-level filing and compliance requirements, governance practices, board responsibilities, and related legal topics.

The National Council of Nonprofits serves a network of more than 20,000 nonprofit organizations. It offers resources and opportunities for collaboration, peer exchange, and engagement in public policy issues that affect the nonprofit sector.

In 2019, the Foundation Center and GuideStar merged to form Candid (Candid.org), an organization focused on connecting nonprofits, foundations, and individual donors with tools and information that support effective philanthropy. Candid offers training, data resources, and access to nonprofit research and funding opportunities.

When establishing a foundation, it is also important to seek legal counsel with experience in tax-exempt and nonprofit law. Local and state bar associations, as well as the American Bar Association, can help connect individuals with attorneys who specialize in this area.

These educational resources can support your journey by offering legal context, formation guidance, and community insight.

Membership in the Council on Foundations

Organizations may become eligible for membership in the Council on Foundations once they have been formally established in compliance with applicable state or federal legal requirements.

Trust or Corporation?

A trust typically involves fewer formation requirements but can be more difficult to modify, often requiring court approval for certain changes. In contrast, forming a corporation involves creating articles of incorporation, establishing bylaws, and holding regular meetings. However, corporate structures generally offer more flexibility—amendments to bylaws can be made as needed. For many foundations, the corporate format is adaptable and widely used.

Costs of Starting a Foundation

For individuals or families planning to establish and fund a private foundation, the initial amount can vary based on administrative needs. A foundation with a designated administrator may require a starting fund of approximately $500,000. If the foundation intends to hire staff and operate at a larger scale, a starting amount in the range of $2 to $5 million is often considered sufficient to support ongoing operations and grantmaking activities.

Administering a Private Foundation

Beyond the initial funding, maintaining a private foundation requires ongoing administrative and compliance support. This may include managing tax filings, recordkeeping, and grant disbursement processes. Foundations can be overseen by paid staff, consultants, or attorneys, depending on the level of complexity and available resources. In many cases, a board—either paid or volunteer—may be established to provide governance and oversight.

Regulation of Foundations

Private foundations and public charities are subject to federal oversight by the U.S. Department of the Treasury, primarily through the Internal Revenue Service (IRS). At the state level, regulatory authority typically falls under the jurisdiction of the attorney general, who monitors compliance with nonprofit laws and charitable trust regulations.

What Are Some Alternatives to Starting a Private Foundation?

Donor-Advised Funds (DAFs)

Donor-advised funds offer a simplified alternative to managing a private foundation. These accounts allow donors to contribute assets, receive an immediate tax deduction, and recommend grants to charitable organizations over time. DAFs are managed by public charities, including community foundations and nonprofit financial institutions. Contributions can be made using various assets such as cash, publicly traded securities, real estate, or life insurance policies.

The funds are typically invested for growth, and grants are disbursed according to the donor’s recommendations, within the fund’s guidelines. Tax deductions for contributions may be available, up to 50% of adjusted gross income for cash donations, and 30% for appreciated assets, depending on IRS rules.

A key benefit of working with a community foundation is its local expertise. Staff members are often closely connected to the region and can help align charitable giving with specific community needs. To find a community foundation near you, visit the Council on Foundations’ Community Foundation Locator.

Supporting Organizations

A supporting organization (SO) is a separate tax-exempt entity established to support a specific public charity. While distinct from donor-advised funds, SOs offer many similar advantages, including favorable tax deduction limits. However, they are subject to more complex legal structures and must meet regulatory tests, ensuring that the supported charity maintains a level of oversight over the SO’s activities.

Planned Gifts

Individuals interested in long-term giving may consider planned giving options such as bequests, charitable remainder trusts, charitable lead trusts, pooled income funds, or charitable gift annuities. These arrangements often include an income stream for the donor or designated beneficiaries, with the remaining assets eventually transferred to a nonprofit organization. Planned gifts can be structured through community foundations or other charitable institutions.

Direct Giving

For those preferring a simpler approach, making direct donations to nonprofits remains a valuable option. If you’re considering larger contributions, many nonprofit organizations have development teams who can assist in structuring your gift to reflect your philanthropic goals.

If a private foundation isn’t the right fit, other charitable giving structures may offer the flexibility and tax advantages you’re looking for.

Securing Your Retirement Goals Begins Now

You may envision starting a private foundation as part of your long-term legacy, but turning that vision into reality requires thoughtful planning and preparation.

Even for high-net-worth households, retirement goals can be impacted by unexpected events, such as changes in tax laws, shifts in the financial markets, or unanticipated expenses. That’s why aligning your investment strategy with your future priorities is essential.

If starting a foundation is among your retirement objectives, it’s important to begin planning early and review your strategy regularly. Working with a financial advisor or wealth manager can help ensure your plans are flexible, tax-efficient, and responsive to life’s changes.

Whether you’re planning to start a foundation or exploring other legacy options, aligning your wealth strategy with retirement goals starts with proactive planning.