Philanthropic Adventures: Family Foundations 3:3 Tax Planning

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Philanthropic Adventures: Family Foundations 3:3 Tax Planning

Wednesday, November 15, 2006

Philanthropic Adventures
Philanthropic Adventures: Family Foundations Part 1:3 What Is Family Philanthropy?

Philanthropic Adventures: Family Foundations Part 2:3 Vehicle Selection

Philanthropic Adventures: Family Foundations Part 3:3 Tax Planning

Tax Planning And Vehicle Selection

The amount you can deduct for income tax purposes for gifts to family foundations varies depending on the type of foundation you choose. These rules are very complicated; however, they can be summarized as follows:

Gifts to donor advised funds and supporting organizations are treated the same as gifts to public charities. This means you can deduct up to 50% of your adjusted gross income for gifts of cash and 30% for gifts of long-term capital gain property. Also, in general, gifts of long-term capital gain property are deductible based on their fair market value at the time of the gift.

Gifts of cash to a private foundation are limited to 30% of your adjusted gross income and gifts of long-term capital gain property further reduced to 20%. It is also important to note that with the exception of publicly-traded stock, gifts of long-term capital gain property to private foundations are limited to the lesser of fair market value or your cost basis in the property.

Gifts at your death to any of the three vehicles do not produce income tax deductions, but are fully deductible for estate tax purposes without limit regardless of the type of foundation you select. This sometimes causes a client to use one vehicle (advised fund or supporting organization) while he or she is alive and another one vehicle when he or she is planning for gifts at death (private foundation).

Preformation planning should focus on you and your family's philanthropic objectives and then blend in your tax planning needs. For example, if you are interested in the idea of starting your own organization and your wealth is held primarily in nonpublicly traded stock, it would be recommended that you consider starting your family foundation as a donor advised fund or supporting organization (a gift of nonpublicly traded stock to a private foundation is deductible at cost basis only whereas a gift of such stock to a donor advised fund or supporting organization is generally deductible at fair market value).
Education, Resources, And Networking

There are a growing number of organizations that are working with families to create both formal and informal networks for discussions about common challenges and programs. There are many strategies that can be taken to meet other family foundations. Some clients attend meetings that local charities organize for family foundations. Other clients attend national conferences for family foundations. You will find that other family foundations are interested in sharing their experiences. It is highly recommended that you spend some time with other family foundation members to discuss how they operate before you move to far along in the process.

Grantmaking

Many new family foundations start-off by making grants to charitable organizations that your family members have long supported. At some future point, your family foundation may want to identify new giving opportunities. You will also need to decide whether you will accept applications from local charitable organizations as they hear about your family foundation.

Some clients discover the process of finding new charities to support is difficult, while other clients complain about how their giving has little focus and makes little difference. These are some of the challenges that all family foundations face.
Succession Planning

Succession planning is not a topic most clients consider when they are creating a family foundation. Although it is not a primary concern as you start your family foundation, it is an issue you will need to eventually discuss with other family members. A family foundation may be created to operate in perpetuity, or it may be created to exist only while the founder generation is alive (or somewhere in between). Succession planning generally depends on the next generation family members' interest in involving themselves in the foundation.

Many founders think the idea of a perpetual charitable entity is attractive. The problem is that family philanthropy becomes more difficult as the family grows in size and spreads out across the country. As time passes, and your family grows, many of your heirs in succeeding generations will not have known you personally, and therefore, will not have the personal connection you may desire to carry out your charitable largess. You should ask yourself if you would be interested in participating in a family foundation created by your great grandfather or great grandmother. If the answer is no, or maybe, then having a plan to close the family foundation, and for distributing the money to charities, may prove helpful to future generations.
Conclusion

As you can see, there are many factors to be considered in selecting which type of family foundation is best for you. It has taken you many years to create your wealth. Although it doesn't take that long to give a portion of it away, the decisions regarding how you do so take time and must be carefully weighed against their alternatives.

Given the fact there are less than three weeks left in the current tax year, it would be difficult for you to make a truly informed decision and for your advisors to create a private foundation or independent supporting organization. As a starting point, however, you may wish to consider meeting with the charitable organizations you currently support to find out the resources they offer in connection with the creation and management of family foundations. You may then want to make outright year-end charitable gifts to the organizations you wish to support that will optimize your income tax benefits for this year with a view towards formalizing the creation of your family foundation in the early part of next year.

Tags: Foundation Source, Adventure Philanthropy, Philanthropic Travel

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