Supporting Organizations:
An Alternative to the Private Foundation
In determining the best method of
charitable giving, many individuals consider establishing a private
foundation or donor-advised fund in order to maximize tax benefits and donor
control. However, it may also be beneficial to consider establishing a
supporting organization. A supporting organization has many of the benefits
of the private foundation, such as the ability to control the timing of the
charitable tax deduction and the timing and amount of grants, but is not
subject to the same restrictions and excise taxes which burden private
foundations. Many donors are drawn to this type of organization for these
reasons, as well as for the close relationship it affords with one or more
chosen charitable organizations.
General Overview
The primary purpose of a supporting
organization is to support a publicly supported charity. Supporting
organizations may be funded primarily or even entirely by single entities,
families or individuals, and yet they will not be treated as private
foundations and accordingly, will not be subject to the excise tax on
investments or other special regulations that private foundations face. The
rationale behind this rule is essentially that the supported organizations
will scrutinize the supporting organization’s operations, reducing the need
for IRS examination and regulation.
Required Structure of a Supporting Organization
There are numerous requirements to
forming a supporting organization, with which an organization must carefully
comply. A supporting organization must be organized and operated
exclusively for the benefit of, to carry out the purposes of, or to perform
the functions of one or more publicly supported organizations, and may not
be controlled by a substantial donor, a director, officer, manager, or a
family member of any of these. Also, the supporting organization must meet
one of three complex relationship tests. Although the requirements for each
test are different, the supported organization must generally be designated
in the supporting organization’s organizational documents, and the
relationship between the two organizations must be clear.
Possible Structures Involving a Supporting Organization
A supporting organization may be used
in many different ways. The most common arrangement is to have the
supporting organization benefit a specified charitable organization, and
make distributions of its income to support that organization’s activities.
A supporting organization may also be set up to support a community
foundation, which allocates charitable resources to numerous community
organizations. In this way, a supporting organization may indirectly
support a number of different charities without including them in its
organizational documents. In order for the supporting organization to
exercise greater control over when and to which organizations the community
foundation makes distributions, a supporting organization may also be
established to support a donor-advised fund operated by the foundation. The
supporting organization establishes the fund through an initial grant to the
community foundation (or other similar organization), and then may make
periodic recommendations as to the distributions of the funds. The
community foundation will then make distributions to various charities in
the name of the supporting organization. Although the recommendations of
the supporting organization are not legally binding, this arrangement
affords the organization far greater input into the operation of the fund.
As illustrated, supporting
organizations are very flexible and have fewer administrative and tax
burdens than private foundations, and may be a desirable charitable giving
vehicle for many donors. For further information on the benefits and
requirements of establishing a supporting organization, please contact your
tax advisor.