“Charitable foundations give you the greatest tax-deferral benefit of all, something like an IRA but on a grand scale.”

“You can draw an income while simultaneously building tax-deferred wealth to give to your most cherished cause.”

Many of the richest families in our country have, over the last century, used their excess wealth to set up a private or public foundation. Such foundations are created either while the individual is alive or upon their death. Their children and heirs can work for the foundation, earning an income for themselves and also furthering the aims of the foundation.

What qualifies as a charitable foundation? What you do for a living must be educational in nature or in support of a worthy cause. For example, all universities are non-profit foundations as are many large national organizations and small local enterprises that protect the environment, provide homes, vocational training and jobs for the impoverished, or promote the arts.

The advantages of setting up a charitable foundation are immense. For example, the revenue from your activities can flow into this public foundation and escape income taxation from the outset. This gives you the greatest tax-deferral benefits, something like a 401(k) plan or an IRA but on a much larger scale.

You can draw an income up to the value of your services, but you only need to draw what you must have to live on. The result is that the remainder of your income, or your revenues less expenses, is not taxed to begin with. The excess can be invested and the value compounded tax-free, which makes it possible to rapidly expand the assets of the foundation.

As long as you are serving the purposes of the foundation, you can continue to draw an income throughout your life from the tax-deferred income and the investment returns it generates. Simultaneously, the assets of the foundation will accumulate an accelerated rate, allowing you to generate wealth to give to your most cherished causes. Over time, you or your heirs can shift the goals and purposes of the foundation. This gives you the flexibility to choose the most worthy causes of interest to you, especially as your preferences change.

The primary difference between public foundations and private foundations is the number of restrictions on income sources and the amount of investment income the foundation can generate.

• Private foundations offer fewer restrictions but they do minimally tax the investment income. Donors to private foundations can only make a tax-deductible donation of 20% of their adjusted gross income, or in the case of private operating foundations, 30%.

• Public foundations have more restrictions, but their donors can make a tax-deductible contribution of up to 50% of their adjusted gross income.

Setting up a charitable foundation requires the expert advice of a lawyer and a financial planner or tax consultant. If you don’t have the level of income or resources to justify the cost of setting up a foundation, there is another alternative. Umbrella organizations such as the National Heritage Foundation allow you to start your own foundation, under their auspices, at a lower initial cost. Later you can split off from the umbrella organization and run the foundation independently. Be careful when going this route however. Make sure that the umbrella organization you and your advisor choose has sound legal and administrative policies and an excellent reputation among the smaller organizations they have taken in.