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What is a Private Foundation? When people think of "Private Foundations" they think of foundations
established by the captains and heirs of American industry. In Michigan, foundations with the name of
Kellogg, Mott, Ford and Kresge have been well known for years. Currently, the Bill and Melissa Gates
Foundation with its Microsoft money is receiving well deserved publicity for its good works.
However, for families of the substantially less wealthy, a Private Foundation can be a wonderful estate
planning tool and a device for insuring continued family control over the management of wealth and
philanthropy long after the original donors are gone. Let’s look at some of the benefits and costs of a Private
Foundation.
Definition. A Private Foundation, as defined by the Internal Revenue Code, is a non-profit organization which
meets the definition of §509 of the IRC. Wading through a series of double negatives, one finds that a "Private
Foundation" is a non-profit Section 501(c)(3) organization, which receives its support from a small group of
persons or organizations. Typically, the non-profit organization is established by a family to receive gifts
during lifetime or at death, from family members who are described as "disqualified persons" by the IRC.
What are the advantages of a Private Foundation? A Private Foundation operates like any other non-profit. It is
a tax exempt organization, usually a non-profit corporation, that is exempt from income taxes and offers a
charitable deduction for income, gift and estate tax purposes. The income tax deductions for Private
Foundations are lower than the deductible amounts for contributions to public charities, but the purpose of
this newsletter is not to go into detail comparing limitations of income tax deductions. Suffice it to say that one
of the objectives of establishing a Private Foundation is to claim income tax deductions for contributions.
Appreciated assets such as Microsoft stock can be donated to the Foundation without incurring capital gain
tax. The Foundation can diversify by selling the stock, again without paying a capital gain tax.
A Private Foundation is often designed to be the recipient of bequests and devises at death or from charitable
trusts, whether Charitable Lead Trusts or Charitable Remainder Trusts, depending on other estate planning
objectives.
The bottom line is that the Private Foundation is a good means for continuing family involvement in
philanthropy as officers and directors of the Foundation, after the death of the original wealth builders. Such a
Foundation can be a means for keeping the family together, enhancing communication and fulfilling various
philanthropic goals and desires of succeeding generations. In many cases, the members of succeeding
generations have already been provided for, either by ancestors or their own efforts. The Private Foundation
compliments their lives using a philanthropical organization as a method of continuing control over wealth,
without outright ownership. This is contrasted with leaving large sums to the state and federal government in
the form of estate, gift and income taxes, or leaving the funds to public charities for their direct management
and expenditure.
What are the negatives of Private Foundations? The positive aspects of Private Foundations can also be
viewed as negative. It is necessary to maintain a separate organization, with its formalities and tax reporting
requirements. The IRC imposes special annual reporting requirements on Private Foundations, and
requirements that the organization distribute at least 5% of its net investment asset on an annual basis. In
making these calculations, certain deductions are allowed, but the basic idea is that minimum charitable
distributions are required each year, and that a complete set of books and records be maintained to make
sure that the IRC requirements are being complied with.
Because of the accounting and reporting requirements for Private Foundations, and the complexities of the
law, we generally advise clients that a minimum of $1 million in investments is required to justify the expense
of operating the organization. Other advisors put the minimum amount as high as $2 million.
Large Estates. The Private Foundation can and should be the "workhorse" of tax, family and financial planning
for families with significant wealth. It can be the means for maintaining the control of large amounts of capital
in private hands, rather than the hands of government or a public organization.
The Private Foundation is an ideal compliment to planning with Charitable Trusts, Charitable Remainder
Trusts or Charitable Lead Trusts, established to achieve specific objectives. The Private Foundation can
provide income tax deductions for lifetime contributions and afford another means for avoiding capital gain tax
on appreciated assets.
The Private Foundation as a beneficiary of a Charitable Remainder Trust provides for family control of wealth
after the individual life beneficiaries are deceased. Where a Charitable Lead Trust is employed to pass
assets to succeeding generations, leveraging the estate tax lifetime exclusions, the Private Foundation is an
ideal recipient of the annual charitable payments.
A popular example of the Charitable Lead Trust for wealth transfer was the well publicized Will of Jacqueline
Onnasis, which purported to establish a Charitable Lead Trust for 20 or 25 years, with the assets passing to
her descendants at the end of that period of time. Adjusting the period of years and the percentage payout to
the charity can reduce the taxable amount passing to descendants to zero or almost zero. During the payout
period, charitable payments can flow into a Private Foundation to build endowment, or to distribute as the
family members decide.
IRA-type assets. A Private Foundation offers intriguing planning potential for families with extremely large IRA’
s or other types of qualified retirement plans, where maximum income tax burden exists, as well as estate tax
liability. All professional advisers are aware that the combined estate tax and income tax can take 80% or
more of the assets in qualified plans. Using a Private Foundation as a beneficiary of these plans, either
directly, or in combination with CharitableTrusts, offers an intriguing vehicle to avoid the income tax liability,
maximize investable assets, and retain family control and involvement with the accumulated capital. These
savings and family continuity are strong reasons for utilizing the Private Foundation in the plans for wealthy
families.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| January 2003 PRIVATE FOUNDATION - GOOD OR BAD? by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |