Most people are unaware of the various vehicles which can be utilized to make a charitable contribution now (and claim charitable income tax deductions), but be able to postpone the decision of which charity or charities will ultimately receive the contribution until many years from now. I’ve witnessed the pleasant surprise when people further learn that such contributions can be accumulated over a period of many years, grow in value, and then be distributed in a lump sum as a single contribution to a selected charity. Donors like the concept of being able to control just when and for what purposes a contribution will be made.
Let’s say you will be fortunate enough this year to be able to make a significant charitable contribution (a minimum of $2,500). You’d like to make the contribution this year and get a tax deduction, but you just can’t decide on which charities should get the money. Fear not, the Private Foundation, the Supporting Organization, or the Donor Advised Fund are here to help. This article is not meant to be a treatise comparing these vehicles in depth. Rather, it is meant to be an eye opener that may lead to further inquiry.
The Private Foundation – A Private Foundation is a separate non-profit entity, either a corporation or a trust, that can be created by an individual or a family. An application for tax exemption must be completed and filed with the Internal Revenue Service for approval. In terms of flexibility, the Private Foundation gives the donor the greatest control and flexibility in terms of both designating charitable beneficiaries and selecting the trustees or directors of the foundation. For individuals or families seeking to establish a long-term vehicle that can employ family members or carry out certain family objectives such as instilling the values of charitable giving, a Private Foundation is a wonderful vehicle. The flexibility and control granted to Private Foundations, however, comes with a price. Each year, filings to the Internal Revenue Service and the state are required to demonstrate continuing compliance with state and federal law. Record keeping needs to be properly maintained and the rules, regulations, and limitations regarding Private Foundations can be quite complex. Contributions to Private Foundations are limited to 30% of the donor’s adjusted gross income compared to a 50% limitation that applies when contributions are made to public charities. Special limitations also apply to gifts of appreciated property, and different limitations apply depending on whether the property is considered to be “qualified appreciated property’. A Private Foundation must make annual charitable grants equal to a minimum of 5% of the value of assets it is holding. Finally, an excise tax of 1% or 2% is assessed on investment income. People who have operated a business will usually not find the requirements of operating a Private Foundation to be overwhelming.
The Supporting Foundation or Organization – For those, that find the operation of a Private Foundation to be too costly, restrictive or burdensome, a Supporting Foundation is worthwhile considering. Indeed, many Private Foundations that have grown weary from the compliance requirements have transferred their assets to supporting organizations. A supporting organization operates under the auspices of a public charity like the Palm Beach Community Foundation or the Jewish Community Foundation. Typically, the public charity will prepare and file an application with the IRS to be treated as a public charity. Likewise, all annual filings and record keeping functions will typically be handled by the selected public charity. All compliance issues will also generally be handled by the overseeing public charity. On the other hand, certain information about the supporting organization will be open to the public. In terms of formalities, usually one annual meeting is required The Supporting Foundation typically bears the name of the donor, his or her family, or any other designation requested. A separate dedicated board of trustees is appointed, but a majority of such trustees must be non-family members selected by the public charity. A minority of trustees can be appointed by the donor or donor’s family. In my experience, family members do not usually view this as an unacceptable restriction because reality dictates that the non-family members appointed to the board will usually go along with the desires and recommendations of the family members as long as such requests are reasonable and not inconsistent with the purposes of the selected public charity. The non-family members selected by the public charity will usually not object to a grant request made by family members and will generally not make a grant without the family members’ consent. Most importantly, Supporting Foundations are not bound by the same limitations as Private Foundations. Contribution limitations and the rules regarding contributions of appreciated property are the same as for those of public charities . There is no applicable excise tax on investment income and, like Private Foundations, Supporting Foundations can generally choose their investment advisors and determine what investments to make. The public charities typically charge a small annual management fee for their services. The Supporting Foundation is a very under-utilized vehicle.
The Donor Advised or Philanthropic Fund – By far the easiest and least burdensome vehicle is the Donor Advised Fund- sometimes referred to as a Philanthropic Fund. This vehicle can be established with relatively little funds (as low as $2500). Donors receive all the tax advantages that apply to contributions to a public charity without any of the costs and compliance issues related to Private Foundations. While a Donor Advised Fund can be established with a community foundation, several mutual fund families also offer this vehicle to the general public. Technically, the donor or the donor’s family only make recommendations for charitable distributions, but again reality reflects that distributions are virtually dictated by the donor or persons selected by the donor as “advisors”. My experience is that when donors make recommendations, boards generally follow and approve those recommendations subject to the same tests for reasonableness applicable to Supporting Foundations. Unlike the Supporting Foundation, the public charity or mutual fund will manage the investments. Some organizations offer the donor the opportunity to choose among a small selection of investment styles. Like the Supporting Foundation, the public charities typically charge a small annual management fee for their services. Finally, where a Private Foundation can continue for many generations, the Donor Advised Fund typically ends at the death of the donor or other persons selected as advisors.
Conclusion: To quote another author on the subject, “foundations are remarkable inventions because they provide private persons a freewheeling opportunity to be publically influential without having to meet the tests either of the market or the ballot box. Private persons can determine what the needs of society are and how best to go about meeting them”. Having the use of these vehicles can enhance your power to make a difference that is meaningful to you and your family.
Mark has been practicing law in Boca Raton for over 25 years. He is Board Certified in Wills, Trusts and Estate law and is also a CPA. His office address is 1801 N Military Trail, Suite 203, Boca Raton. He can be reached at mark@markschaumlaw.com or 561-750-7575.