2019 Pocket Tax Guide
Apr 18, 2019
Personal Philanthropy: Family Foundations
Personal Philanthropy: Family Foundations
A private foundation is an excellent tool if you have any charitable intent and yet at the same time a desire to create a perpetual legacy for your children and future generations to come.
A family foundation is a charitable trust or nonprofit corporation created to make grants either to other charitable organizations or to individuals for charitable purposes. The Bill & Melinda Gates Foundation is a prime example of a private family foundation.
Creating a family foundation during your lifetime can reward you and your family in many ways. Some of the reasons why are as follows:
- Your family may feel more unity when involved in the foundation’s activities and experience more meaningful family interaction and an increase in family pride;
- Your family may enjoy new rewarding acquaintances (giving creates social opportunities);
- Your family may feel more security as its influence and power in the community expands;
- When your family is known for making gifts, the community approaches you and educates you as to their needs and the solutions that are being offered for those needs;
- Foundations allow your family to join and enjoy the benefits that come from grantmaking affinity groups;
- When your family is researching an organization (to whom you are considering making gifts), they often allow you to see inside their organizations in ways not generally available to outsiders;
- Your family may often receive preferential treatment, such as being given tours and invited to special events;
- Foundations make the expense of charitable giving tax-deductible: expenses such as trips for grant research, foundation facilities or family gatherings to discuss gifts;
- Foundations protect the assets from taxation, personal creditors, spendthrift heirs and your children’s potential divorcing spouse;
- Foundations allow you to create for yourself, your children, and others, salary-paying positions of prestige (board directorships or executive officer positions);
- Family foundations can provide lifelong jobs for your children, and future generations to come.
The deductibility limits to a private foundation are subject to lower limitations than if you were to make donations to a public charity.
In any given year, you may contribute cash to a public charity and deduct an amount equal to as much as 50% of your adjusted gross income (AGI). However, when you contribute cash to a private foundation, your deductible amount may not exceed 30% of your AGI.
Donating appreciated property, such as stocks, bonds or real estate, allows you to receive a deduction for the fair market value of the property without paying tax on the appreciation. If you contribute appreciated property to a public charity, then you may deduct an amount equal to as much as 30% of your AGI. However, when you contribute appreciated property to a private foundation, your deductible amount may not exceed 20% of your AGI.
Due to the closely held nature of private foundations and the potential for abuse, there are certain limitations and requirements imposed on private foundations which include:
- Restrictions on self-dealing with substantial contributors and other disqualified persons;
- Mandatory distributions of at least 5% of its assets for charitable purposes;
- Limits on holdings in private businesses;
- Provisions that investments must not jeopardize the carrying out of exempt purposes;
- Provisions to assure that expenditures further exempt purposes;
- Maintenance of accurate accounting records including information of contributions from donors / to donees;
- Annual reporting of activity to the IRS and state agencies, which are open for public inspection;
- Net investment income is subject to a 1-2% excise tax;
Creating a family foundation is a long-term philanthropic commitment that can prove a rewarding experience for you and your family for generations to come.
Ask Our Experts
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Donald Foster, CPA T (732) 842 3113 dfoster@www.withum.com
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
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