December 2017 Newsletter
UTILIZING PRIVATE FOUNDATIONS AS AN ADVANCED ESTATE PLANNING TECHNIQUE
There are many tools, techniques and plans that can be utilized to personalize your estate plan. Many individuals approach estate planning with the sole objective of reducing their overall tax liability. There are other individuals who consider charitable giving during their estate planning. Setting up a private foundation can help with both these goals. Private foundations can allow for you to make a meaningful philanthropic impact of creating a charitable legacy that supports causes that are important to you and your family. By definition, a private foundation is a non-government, non-profit organization established either during life as a corporation or trust or at death by incorporating the nonprofit organization into and as part of your estate planning documents. Their creation allows you the ability to create a formal philanthropic legacy for your interests, control the funding, investments, timing and use of your charitable funds, make an impactful and lasting change in society, give back to organizations that may have helped you and your interests such as schools, colleges and universities, hospitals, medical research organizations, churches and religious organizations, museums, and certain social service organizations, encourage others to give back, and even teach your family how to financially manage wealth more effectively.
Private foundations offer a much more fulfilling experience than simply writing a check to charity. Foundations can donate or make grants to national or international charities, hospitals or medical research organizations award scholarships at schools or universities, and can involve other family and friends in the management of the foundation. Private foundations are created with charitable intent but also have beneficial income, gift and estate tax benefits that flow from being a qualifying charitable organization. With only a required distribution of 5% of assets and income per year, this can allow for long term investments and the benefits of continuity and consistency. The private foundation structure can ensure that the founder’s charitable vision will live on, well past the founder’s lifespan.
For those who are already engaged in charitable giving, it may be best to set up the foundation during life. Setting up the foundation during life allows for training for those who will manage the foundation later after death. It allows for the ability to designate the philanthropic goals and functions much like a family business. Different generations including children and grandchildren can work together towards a common goal and learn the important skill of wealth management and philanthropy. Creating the foundation during life also allows for relocation of support if there is a change of focus to something more meaningful to the Trustees or Board of Directors of the foundation. However, a well planned estate plan may allow for the creation of a private foundation at death. Trusted individuals will be designated to manage the foundation after your death and you won’t need to make the commitment of arranging for the foundation now.
When it comes to funding a private foundation, some assets are better suited than others. Assets that are characterized as income in respect of a decedent will give rise to income tax liability and are better suited as charitable contributions. For example, distributing a pension, deferred compensation, or IRA to a private foundation at death is more tax-efficient. The full market value of the pension, deferred compensation, or IRA is included in the taxable estate of the taxpayer/owner when left to an individual beneficiary. Additionally any withdrawals of funds by a beneficiary are reported as income and thus taxed a second time. This double taxation, estate and income taxes, could substantially diminish the inheritance of up to 85%. A private foundation, however, pays no income or estate tax and therefore 100% or the full value of the pension, deferred compensation, or IRA is kept intact.
During life contributing cash to a foundation is deductible up to 30% of the adjusted gross income. Gifts of appreciated, publically-traded stock to a private foundation enables you to obtain a full fair market value income tax charitable deduction without reducing the amount that can be used by the foundation by the capital gains tax payable. Gifts of appreciated property to a private foundation, such as stock and real estate, are deductible up to 20% of adjusted gross income and the donor is entitled to a 5-year carryover in excess of the percentage limitations following the year of contribution. In contrast, if you transfer appreciated stock or real property to an individual during your life, the recipient of your gift pays a much higher capital gains tax on the sale of the appreciated property. Additionally, contributions given to a foundation do not affect the $14,000 annual gift tax exclusion or the current $5.45 million federal estate and gift tax exemption.
There are other tangible assets that should be considered to be donated to a foundation. For example, if your foundation is dedicated to supporting fine arts, you might want to donate your collection of paintings rather than having it sold and dispersed. If your foundation is engaged in promoting the development of new techniques for sustainable farming and you own farm land, you might want to donate that land to your private foundation. In other words, planning with an experienced tax advisor is mandatory to determine which assets to use to fund a private foundation to avoid any potential pitfalls.
With the proper guidance and estate planning, a private foundation can be a very important tool and technique in your personal wealth and/or philanthropic planning. If you have charitable intentions now or in the future, creating a private foundation will provide you with not only income and estate tax benefits, but also with many intangible benefits. These include wealth management opportunities, family engagement in philanthropic matters, and the ability to work on long-term, public good, charitable projects to carry out your or your family’ charitable intentions. You can create a lasting legacy. These unique benefits are not afforded to you by simply making an outright charitable gift to public charities.
An experienced Philadelphia estate planning attorney at Pozzuolo Rodden, P.C. can help you to assess your personal wealth and goals to determine whether a private foundation is a technique to preserve your wealth, your family’s charitable legacy and your control of the timing and use of your charitable funds.