Supporting Organizations
What is it? A supporting organization is an individual foundation organized under Section 509(a)(3) of the IRS Code that is operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified public charities. It is sometimes seen as a compromise between the autonomy of a private foundation and the lesser control of a donor advised fund, and has the tax advantages of a gift to a public charity.
When is it used? When a donor's mission or goals are consistent with the broad charitable purposes of The Minneapolis Foundation, but there is a desire to retain a separate board, control of grants, or control of investments. A supporting organization at The Minneapolis Foundation can have a public profile similar to a private foundation while it enjoys the infrastructure and tax advantages of a component fund. It is generally used when a donor wishes to commit $5 million or more as a charitable endowment to benefit the community. Such donors may include private foundations wishing to simplify their administrative and financial demands, owners of privately held companies, donors wishing to establish a foundation with illiquid assets, and founding benefactors who seek permanent family involvement in their charitable legacy.
How does it work? A supporting organization is similar to a private foundation in structure, except that it must satisfy certain organizational and operational tests set forth in the IRS Code. In essence, in order to confer the benefits of taxation as a public charity, the organizational test defines and limits the purpose of the supporting organization to insure that it is subservient to the mission of The Minneapolis Foundation. The supporting organization may initiate its own programs and grantmaking, as long as these benefit the same charitable class served by the beneficiary organization.

The supporting organization must apply to the IRS for approval as a supporting organization. The regulations relating to supporting organizations are complex, and competent legal advice is essential.

There are three types of supporting organizations. A supporting organization may be:

  • Type 1 - operating, supervised or controlled by the beneficiary charity;
  • Type 2 - supervised or controlled in connection with the beneficiary charity; or
  • Type 3 - operated in connection with the beneficiary charity.

Each option reserves some degree of the supporting organization's governance for the trustees of The Minneapolis Foundation. The third option provides the greatest autonomy for the supporting organization, but it requires two additional tests: A responsiveness test, insuring that the supporting organization is "attentive" to the Foundation's input at the board level, and an integral part test, asserting that the supporting organization's activities would be carried out by The Minneapolis Foundation if the supporting organization didn't exist. Type 3 may be the preferred structure for an existing family foundation that is being transformed into a supporting organization but, by applying these additional tests, it requires a higher standard of conformity with The Minneapolis Foundation's mission in exchange for more independent governance.

What are the advantages?

  • The donor's appointees (including family members) may participate fully as trustees of the supporting organization.
  • The supporting organization can assume its own identity in serving the community, call itself a "foundation" and maintain a greater degree of independent visibility than a component fund may.
  • The Minneapolis Foundation will handle accounting, tax preparation, correspondence, etc., and the supporting organization's trustees will have access to the technical and grantmaking expertise of the Foundation's seasoned program and administrative staff.
  • The supporting organization can invest its assets separately from those of the Foundation. It may accept and hold gifts of appreciated stock in its portfolio, including closely-held stock and other illiquid assets.
  • It is recognized as a public charity and not a private foundation, allowing donors to enjoy maximum tax advantages. Also, the excise taxes that private foundations must pay do not apply to supporting organizations.
  • Supporting organizations are not subject to the minimum payout requirements and other restrictive rules that apply to private foundations.
  We're happy to help you find the charitable giving or estate planning option that works best for your situation. We can work directly with you or through your professional advisor. Call us today at (612) 672-3874 or e-mail us at development@mplsfoundation.org.