You can also claim a deduction of up to 20 percent of AGI for gifts of appreciated property held over a year. Should a donor decide to give more in any one year, the deduction may be carried forward for five years.

Contributing a portion of your assets to a family foundation during your lifetime, or leaving it to your foundation upon your death, reduces your taxable estate and places assets in a private foundation where they can grow in perpetuity, free from income tax and capital gains tax on future appreciation. Because assets can grow faster in a foundation, you will be able to give more money to the causes you care about.

• All substantial contributors to the foundation;
• Each investment held and all capital gains and losses;
• All officers, directors and trustees plus their compensation;
• Top-paid staff members and their compensation; and
• All grants distributed, along with the purpose and amount of the grant.

The form is due on the 15th day of the fifth month following the close of the tax year (or May 15 for those using a calendar year). Some states require additional filings.

Private family foundations are the most regulated of all tax-exempt organizations; therefore, complying with all of the rules and restrictions is a daunting task.

First and foremost, the Internal Revenue Code requires a private foundation to distribute a minimum of five percent of the fair market value of its investment assets annually, subject to certain modifications. This minimum payout is required to prevent foundations from simply receiving gifts, investing the assets and allowing the donors to enjoy the tax benefits without ever benefiting any charitable purpose.

The penalty for failing to meet the annual minimum payout requirement is 15 percent tax on the income that remains beyond the time it should have been distributed. If the foundation fails to make the required distribution a second time, the penalty rises to an additional 100 percent tax -- in other words, five percent of the value of the foundation's investment assets will be confiscated by the IRS.

Although private foundations are exempt from income and estate taxes, they must page a 2 percent excise tax on its net investment income for the tax year. (If the foundation's distributions exceed the required minimum amount, it may be eligible to pay a reduced rate of 1 percent.)

Private foundations must also be aware of the prohibition against self-dealing. Simply stated, a private foundation is prohibited from entering into certain financial or business transactions with individuals defined in the law as "disqualified persons." In general, disqualified persons include the foundation manager; directors and trustees; substantial contributors to the foundation; specified owners, their families and related business entities; and government officials.

Examples of self-dealing include purchasing items from or selling items to the foundation, using foundation assets or income for personal reasons, lending money, and providing monetary payments or property to a government official. Investments that jeopardize the foundation's exempt purpose are also prohibited. Violations may lead to substantial taxes and penalties.

Financial matters aside, a private foundation can create an ongoing family legacy that binds family members together and provides tremendous personal satisfaction. If you are interested in learning more about family foundations, a CPA can help get you started.

In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.