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What You Need to Know to Start a Family Foundation by Adam Cohen, CPA

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Posted on July 27, 2026 by Adam Cohen

Private foundations help high-net-worth families create lasting, multi-generational philanthropic legacies that reflect their unique values and goals and deliver unique income and estate tax advantages. While they provide a legal structure for family members to control their giving and maximize the impact of those gifts, they also come with a long list of rules, restrictions and compliance requirements family members must abide by to avoid running afoul of the law.

What is a Private Family Foundation?

Private foundations are nonprofit entities formed and funded by individuals or families under state law, typically as corporations or trusts, to support charitable interests, often through grantmaking to qualified public charities and other private foundations or, in some cases, through direct charitable activities. They are typically managed by one or several family members, who serve on a board of directors with the power to decide which organizations to support and the amount and timing of their donations to maximize impact, effectiveness and tax efficiency, both during their lives and long after they pass away.

However, due to their tax-exempt status, private foundations must be established and operated in compliance with very specific IRS guidelines, including, but not limited to, the following:

Steps to Establish a Private Family Foundation

Document your goals and mission. A successful private foundation clearly identifies the audience it intends to serve, the rationale behind its existence, its charitable purpose, and the activities it intends to conduct to achieve that vision. It must also address the roles family members will play in managing the foundation and whether they qualify to receive compensation for those activities. Equally important is the development of a team of professional advisors to manage the myriad legal and financial aspects of the foundation’s formation and operation.

Because different types of grants and activities may carry different compliance requirements, private foundations should evaluate their intended charitable activities before funding or making distributions.

File articles of incorporation with the state where the foundation is located. Generally, a private foundation is incorporated under state law as a nonprofit corporation or charitable trust. To accomplish this, the foundation must prepare articles of incorporation or trust documents that include a description of its charitable purpose, how it intends to use its funds to accomplish its mission and goals, the names of its directors or trustees (i.e., family members) and specific clauses addressing its dedication to charitable purposes, its refusal to engage in lobbying activities, the prohibition of political campaign intervention, the prohibition of fund transfers to family members or other insiders, and its plans for distributing foundation assets upon dissolution of the entity exclusively for exempt purposes.

Apply to the IRS to request an Employee Identification Number (EIN) and tax-exempt status. Regardless of whether a private family foundation has employees to whom it pays wages, it must file IRS Form SS-4, Application for Employer Identification Number, to establish a tax account with the federal agency.

In addition, the entity must file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code and pay a user fee to be recognized as a legal charitable entity. With the filing of this application, private family foundations should be prepared to include the following documentation:

Request tax-exempt status from the state. After receiving tax-exempt status from the IRS, private foundations may have an obligation to file similar paperwork with the states where they are registered, where they hold assets and where they intend to solicit charitable funds from non-foundation sources.

Fund the family foundation and abide by IRS financial requirements. Family members should first recognize the IRS’s rules regarding charitable deductions for cash gifts versus appreciated assets, and how those deductions differ for gifts to private foundations versus public charities. For example, cash gifts to public charities may generally be deductible up to 60 percent of the donor’s adjusted gross income (AGI). By contrast, endowments to a private family foundation are subject to a 30 percent AGI limit (or 20 percent for gifts of appreciated assets).

In operating the foundation, family members have a responsibility to exercise ordinary business care and prudence in meeting the foundation’s financial needs and carrying out its exempt function. This includes protecting investments from excessive risks, supporting the organization’s mission and goals, and maintaining IRS compliance. For example, the IRS requires private family foundations to distribute at least 5 percent of the average fair market value of their noncharitable use, nonexempt assets annually through qualifying distributions, subject to the detailed rules governing the foundation’s minimum investment return and distributable amount.

Failure to meet this obligation may result in a 30 percent excise tax on the foundation’s undistributed income with an additional 100 percent tax if the IRS does not fix the shortfall in a timely manner.

Meet annual IRS tax-filing requirements. Private family foundations are required to maintain detailed records and file annual tax returns using IRS Form 990-PF. For foundations operating on a calendar year, the filing deadline is May 15 of the following year, with the option to request a six-month extension to November 15.

About the Author: Adam Cohen, CPA, is a director with Baker Tilly x Berkowitz Pollack Brant’s Tax practice, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency while complying with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.