Charitable Estate Planning Begins at Home - Lincolnshire, IL
When it comes to Estate Planning specifically charitable giving and creating foundations Americans may be some of the most
charitable people in the world. We tend to respond both as a nation and as
individuals to the world’s disasters. We also support our local places of
worship, social services for the poor, the arts and education, and many other
causes. For affluent families, proper estate planning can extend these
philanthropic tendencies beyond the immediate donors to several subsequent
generations.
The Private Family
Foundation
One way to do that is to establish a
Private Family Foundation that will fulfill the family’s charitable goals. The
IRS imposes several rules on private foundations. For example, the private
foundation is required to distribute at least 5% of its assets to charity each
year. There are also rules about creating personal benefits or self-dealing,
holding risky investments, or overpaying Board members. If your children serve
on the Board of Directors, they can receive a salary or fee for services, but
it has to be reasonable when compared to other private foundations of the same
size.
Private family foundations are usually
tax exempt, but care must be taken about investing in assets that create
Unrelated Business Taxable Income (UBTI). Contributions to the foundation are
deductible by the donor as a charitable contribution, based on either fair
market value or cost basis, depending on what type of asset is being
contributed. A private family foundation provides direct control over
operations and charitable contributions, and because the foundation usually
bears the family’s name, it creates a real philanthropic presence in the
community. The private foundation can also provide employment for family
members for several generations if the operation can justify the expense.
One disadvantage to a private family
foundation, however, is that it usually only makes sense if you’re gifting at
least a million dollars, and if other members of the family are passionate
about carrying on the work after you’re gone.
The
Donor-Advised Fund at a Community Foundation
There are more than 700 community
foundations nationwide; each working in a specific geographic area; managing
billions of dollars in charitable assets; and distributing millions of dollars
to charitable organizations each year. A community foundation is not the actual
user of charitable donations. Instead, it acts as administrator, manager, and
distributor of charitable donations to established charities.
One of the ways a family can be
involved with a community foundation is to establish a donor-advised fund. To
do that, a donor or family makes an irrevocable gift to a special fund
established within the community foundation, which usually bears the family
name. The donor receives an immediate income tax charitable deduction for the
gift, and the community foundation invests the gift and it grows tax-free. As
desired, the donor can request that part of the fund be paid to any charity the
donor selects. The donor can select any number of charities in any proportion.
The community foundation makes all of
the investment decisions, but the donor decides when and how much to pay out to
charities. By pooling the charitable donations from all its donors, the
foundation can gain a better return on its investments, thus keeping expenses
low, and maximizing the amounts being given to the charities.
For most families, using the community
foundation is more appropriate than establishing a private family foundation.
The private foundation requires the creation of a new business entity, applying
for tax-exempt status, paying fees, incurring ongoing legal and accounting
expenses, etc. Establishing a donor-advised fund at the community foundation is
quick and easy by comparison.
The community foundation is also better
for the donor for a number of reasons. Cash gifts to a donor-advised fund are
deductible up to 50% of the donor’s adjusted gross income. With the private
family foundation, the limit for a cash gift is 30% of the donor’s AGI. Also,
appreciated stock can be gifted to a community foundation with the donor
receiving a deduction for the fair market value of the stock. The same gift of
stock to a private family foundation is limited to its cost basis. Furthermore,
gifts to a community foundation can be made anonymously, but a private
foundation must make available the names and addresses of all substantial
contributors.
The donor-advised fund at the community
foundation does not have any requirement for minimum annual distributions so
assets can grow over a period of time. The private foundation, on the other
hand, must distribute 5% of its assets each year, even if no interest income
was earned that year. Community foundation funds have fewer investment
restrictions than a private foundation. A private foundation, for example, may
not hold more than 20% ownership in a particular corporation. Finally, there
are fewer IRS reporting requirements for community foundation distributions
than those from private foundations.
All of these benefits, coupled with the
added advantage of less IRS involvement, make the donor-advised fund at the
local community foundation the best way for most families to have a mufti-generational charitable impact.
If you or someone you know has questions on Charitable Estate Planning, or any of the topics addressed in this blog, and live near Northbrook,
Evanston, Skokie, Chicago, Lincolnshire, Glenview, Glencoe, or Highland Park, the experienced estate
planning attorneys at Orlowsky & Wilson, Ltd. can help. Call
or contact the office today for a confidential
consultation of your case.
