The Role of the Private Foundations. In recent years, several private foundations (“Foundations”) have gained prominence in the media, and raised public awareness of their causes. Foundations, including the Bill and Melinda Gates, are often created with one philanthropic goal in mind. In the right circumstance, Foundations can make smart financial and estate planning sense for clients.
Generally, a Foundation is a separate entity, privately funded by the client. It is created with the specific purpose of contributing to various charitable causes. As a distinct legal entity the Foundation:
- Contributes to a charitable cause and takes a tax deduction
- Minimizes estate tax liability
- Avoids capital gains tax on the sale of contributed appreciated property
- May provide some employment and activity for your family members
- Identifies and preserves your family name for years to come.
Create and Control Your Foundation. A Foundation must be created with a charitable “intent.” The Foundation is managed by a trustee or executive director that oversees the Foundation’s investments and distributes the Foundation’s assets.
You may appoint yourself as the trustee of your own Foundation. This way, you maintain control over the assets contained in the Foundation. Instead of making a one-time gift to a public charity (and losing control of that gift), you can monitor your favorite charities. If one non-profit changes its focus, or if a more meaningful cause comes along, you can reallocate your Foundation’s support.
Income Tax Benefits. If you have highly-appreciated assets that you’re holding to avoid steep capital gains taxes, a Foundation may help. Any appreciated assets that you transfer to a Foundation can be sold by the Foundation with no capital gains taxes. Also, you may attain an immediate tax deduction for any money or property contributed to the Foundation. This deduction can equal up to 30% of your adjusted gross income (20% for appreciated property). Any income tax deduction not used in your contribution year may be carried forward over the next five years.
Estate Tax Benefits. Every dollar that you contribute to your Foundation may mean one less dollar included in your estate for estate tax purposes . Gifts that are regularly made to charities can instead be used to fund your Foundation. You can make such contributions to a Foundation without affecting the $13,000 annual gift tax exclusion or the current $1,000,000 Gift Tax Credit .
Required Distributions to Charities. Under the Internal Revenue Code, a Foundation must generally distribute at least five percent (5%) of its assets each year to public charities.
Caveats. A Foundation to be legitimate and not challenged by the IRS should be operated like a real business. You must keep books and records to show how you arrived at your decisions, and establish strict rules prohibiting self-dealing. Salaries must be earned, with enough documentation to show that work was actually performed. There are also potential excise taxes, and significant penalties if the minimum 5% annual distribution is not adhered to.
Donor Advised Fund Alternative. Sometimes a Donor Advised Fund (“DAF”) may be a viable alternate to a Foundation. A DAF is a charitable giving vehicle administered by a third party (i.e., such as Fidelity Investments) created for the purpose of managing charitable donations on behalf of an organization, family, or individual. A DAF offers the opportunity to create an easy-to-establish, low cost, flexible vehicle for charitable giving as an alternative to direct giving or creating a Foundation.
COMMON ESTATE PLANNING DOCUMENTS AND CONCERNS: