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Achieving Significance with Your Success through Philanthropy

Achieving Significance with Your Success through Philanthropy

Many of our clients have reached levels of success that even they didn’t expect. Most seek far more than just financial success, and instead seek a level of significance by getting involved in things that benefit their community and the world. One topic that often comes up is the idea of creating a private foundation.

A private foundation is a special type of tax-exempt entity that is most often established by a single family to fulfill its charitable mission. There are operating and non-operating foundations, though most private foundations are of the non-operating type.

Private foundations have very specific rules and regulations that must be followed. Most well-known is the rule that mandates a 5% distribution to charity annually. However, there are also rules against self-dealing, holding certain types of investments known as jeopardy investments, and rules against creating excessive personal benefits from the foundation. While it is common to have family members on the Board of Directors get paid for their services, pay must be reasonable compared to other similar-sized charities.

Contributions to private foundations generally create an income tax charitable deduction subject to the deductibility limitations. Deductions are available in the year of the gift and can be carried forward for five succeeding years if needed. Contributions may be deductible at fair market value or cost basis, depending on the type of asset contributed. Private foundations are tax exempt under most circumstances, but caution must be taken if assets are being considered that might create Unrelated Business Taxable Income (UBTI).

While there is no legal minimum under the law to establish a private foundation, there is a practical dollar amount needed to justify the cost. While that amount used to be $5 or $10 million, it is now common to see private family foundations established with $1 million, and sometimes less.

An alternative to a private family foundation is a donor-advised fund. These funds are established as public charities and contributions are tax deductible as charitable gifts. They can be established with a relatively small contribution (many require an initial gift of only $5,000) and the expenses are often charged as an asset-based fee. This makes them substantially less expensive to establish than a family foundation.

Distributions or grants are processed on the recommendation of the donor to qualified charities. The grant can either identify the donor or they may choose to remain anonymous. Donors can also name successor donors to continue the charitable objectives of the fund beyond their lifetime.

Donor-advised funds are also established by Community Foundations or other institutions. They are accounts that are held separately for the donor that establishes the fund. Normally they allow the donor, with the consent of the Community Foundation, to distribute his or her charitable gifts to as many other charities and in any amount as the donor desires.

Some funds allow the donor to appoint his own money manager or to direct the money management independently. This type of flexibility has become very popular among the giving community. Contributions to donor-advised funds are deductible in the year of the contribution and for five succeeding years.

For clients who like the idea of long term charitable giving (with income tax benefits today), the private foundation and the donor advised fund can be excellent tools to help them wrap structure around their philanthropic giving.

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