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FAMILYPHI LAl",'THROPY

Ask the Center: What is a Private Operating Foundation, and when should familiesconsider this option?E-Newsletter Article, April 2011 Family Giving News

Donors and families who establish private foundations often have a variety of issues they care about, and are lookingfor a vehicle that gives them the flexibility to make a wide variety of choices on where to invest their philanthropicassets with other members of their families across multiple generations.

Some donor families begin with - or identify over time - a more direct vision for what they wish to accomplish. Theymay decide to use the majority of their charitable dollars to create and manage programs and services for a particularneighborhood, or they may wish to develop, support and conduct original research on a specific area of interest.

For the latter category of donors, the private operating .foundation may be the preferred choice of charitable givingvehicle. According to the Minnesota Council on Foundations' Toolkit for Giving, a private operating foundation is "aspecial form of private foundation which uses the bulk of its income to actively run its own charitable programs orservices. Examples include the operation of a museum, library, research facility or historic property,"

The IRS distinguishes between public and private foundations and, within private foundations, between operating andnon-operating (grant-making) foundations. While private operating foundations may choose to make some grants toother charitable organizations, they must engage primarily in direct charitable activities by running their own programs(i.e., using their own facilities, staff and resources to directly further their charitable operations).

REASONS SOME FAMILIES USE PRIVATE OPERATING FOUNDATIONS

A key advantage of the operating foundation model is that it allows the founding donor or family to invite others tocontribute to its endowment for the programs or services it supports, and for these other investors to receive thesame tax benefits as for gifts to a public foundation.

Other reasons that donors and families may choose to establish a private operating foundation include:

• An interest in managing activities that are directly aligned with your philanthropic mission• A desire to engage directly and regularly with the community you serve• An interest in encouraging others' investment in your philanthropic mission, and in leveraging your family's investment

REQUIREMENTS FOR PRIVATE OPERATING FOUNDATIONS

In return for these advantages, a private operating foundation must meet two important tests. These tests aredesigned to ensure that the operating foundation is conducting its exempt activities directly and not simply makinggrants to other organizations. Meeting these tests each year can be difficult for families with diverse funding interests,and it is critical that you understand these requirements before exploring the private operating foundation alternative.

Read a complete description of these important tests here.

EXAMPLES OF FAMILY FOUNDATIONS USING THE OPERATING FOUNDATION VEHICLE:

According to the National Center for Charitable Statistics, there were nearly 5,400 private operating foundations in theU.S. as of the end of 2009. Many of these vehicles were established, and continue to be guided by, philanthropicfamilies. Examples of just a few of these family foundations functioning as private operating foundations include:

The Flintridge Foundation in Los Angeles has worked for more than 25 years to address issues of disparity thatimpact the lives and futures of young people in Northwest Pasadena and Altadena. In 2007 the Foundation

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What and When to Consider Incfp.org http://www.ncfp.orglresources/ask_the_ center/private-operating- founda.;

converted to a new entity, the Flintridge Operating Foundation, and in 2010 the foundation changed it's name tothe Flintridge Center and updated it's mission statement to reflect its new approach.

The Binning Family Foundation is a private operating foundation located in Littleton, Colorado. The Foundationwas created to design and operate programs that directly improve the quality of life for Colorado youth bysupporting their personal development.

The Orton Family Foundation works with with selected towns in New England and the Rocky Mountain West toplan for growth and change that preserves and enhances community character.

The Heinz Family Philanthropies, with offices in Pittsburgh and Washington, DC, works to create positive changein areas including health care, women and health, and the environment, primarily through grants to a preselectedgroup of organizations.

The Jacobs Family Foundation in San Diego was established to explore new philanthropic roles and relationshipsfor strengthening under-invested neighborhoods. The foundation makes grants and other investments that supportinnovative, practical strategies for community change. Read "Place-Based Philanthropy: Investing in CommunityChange," a first-hand account of the Jacobs Family Foundation's work by Valerie Jacobs, trustee of thefoundation, from the March 2010 issue of Family Giving News, for additional details.

The Hogan Family Foundation, based in Newbury Park, California, was established in 1998 by the founders ofthe largest tour operator serving Hawaii. The foundations mission is to promote the entrepreneurial spirit throughthe creation and operation of educational, civic-minded and humanitarian programs designed to encourage amore prooucnve and contributory society.

The Doris Duke Charitable Foundation has an ongoing relationship with a number of operating foundations andrelated entities that were established in accordance with Doris Duke's will.

ADDITIONAL RESOURCES ON PRIVATE OPERATING FOUNDATIONS

For the right family, private operating foundations can be a powerful vehicle. To learn more, you can start by reviewingthe following more detailed resources:

• Private Operating Foundations, by Non-Profit After Hours• IRS description of private operating foundations• Taxstrategy.com's description of private operating foundations

Editor's Note: The information in this article should not be taken as qualified legal advice. Please consult your legaladvisor for questions about specific legal issues discussed here. The information presented is subject to change,and is not a substitute for expert legal, tax, or other professional advice. This information may not be relied upon forthe purposes of avoiding penalties that may be imposed under the Internal Revenue Service.

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