The two most famous philanthropists of the Gilded Age pioneered the sort of large-scale private philanthropy of which foundations are a modern pillar: John D. Rockefeller and Andrew Carnegie.
The businessmen each accumulated private wealth at a scale previously unknown outside of royalty, and each in their later years decided to give much of it away.
President Harry S. Truman publicly raised this issue in 1950, resulting in a federal law later that year that brought new rigor and definition to the practice.
The law did not go very far in regulating tax-exempt foundations, however—a fact made obvious throughout the rest of that decade as financial advisers continued to push the foundation-as-tax-refuge model to wealthy families and individuals.
Community foundations are instruments of civil society designed to pool donations into a coordinated investment and grant-making facility dedicated mostly to the social improvement of a given place.
Often, a city has a community foundation with a governing board composed of many leaders of the business, religious, and local interests.
In exchange for exemption from paying most taxes and for limited tax benefits being offered to donors, a private foundation must (a) payout at least 5% of the value of its endowment each year, none of which may be to the private benefit of any individual; (b) not own or operate significant for-profit businesses; (c) file detailed public annual reports and conduct annual audits in the same manner as a for-profit corporation; (d) meet a suite of additional accounting requirements unique to nonprofits.
Administrative and operating expenses count towards the 5% requirement; they range from trivial at small unstaffed foundations, to more than half a percent of the endowment value at larger staffed ones.