If you have amassed significant wealth, either through inheritance, hard work, wise investments, or all three, you may be considering your legacy. Like many people with significant assets (including Bill and Melinda Gates), you may have concluded that it's not necessarily in your family's best interests to inherit a large sum. Wealth can offer security, yes, but also a sense of entitlement and sometimes a lack of motivation, as heirs know they won't need to work for their living.
In addition to concerns about excess wealth leading your descendants to a profitless life of leisure, you may want to set your heirs the example of making a real difference in the world with your wealth. To this end, you may have considered creating a private foundation. A private foundation is a charitable organization, often established by a family or individual, to lend support to charitable causes.
Private foundations are overseen by a board of directors or trustees. This governing body receives charitable contributions, is responsible for investment and management of the foundation's assets, and making grants to worthy charities. The board also handles administrative responsibilities, including filing reports and tax returns.
If you have the wealth to create one, a private foundation can be a way to do enduring good for causes that matter to you while setting a good example for your descendants. Private foundations have advantages and disadvantages, which you will want to discuss with your estate planning attorney before committing to this undertaking.
You could, of course, just donate directly and generously to charities of your choice. Why go to the trouble and expense of creating a private foundation?
For one thing, the creation of a foundation allows you to organize and systematize your giving, targeting grants to charities you deem worthy. Having a foundation allows you to make tax-deductible donations to your family foundation while maintaining control of how those donations are used; as a board member of the foundation, you would have oversight of investment and management of funds, and how they are ultimately disposed of.
A foundation also expands your giving opportunities. As an individual, you are unable to claim a charitable donation for cash gifts to foreign nonprofits, non-charitable organizations, or individuals, regardless of their need or the worthiness of the cause. However, you can make tax-deductible donations to the family foundation. The foundation, if in compliance with IRS regulations and procedures, can make grants to those organizations or individuals.
If you, or family members, serve on the board of your foundation, you may be receive reasonable compensation for your time and services. Likewise, trustees and employees of the foundation and family members are generally entitled to reimbursement for the reasonable and direct costs of traveling to board meetings and site visits.
And, of course, there are tax benefits to a private foundation. When property that has appreciated is donated to a foundation, no capital gain is realized. In addition, if you donate appreciated stock in a publicly-traded company to the private foundation, you may claim a charitable deduction for the asset's full market value.
If you have sufficient assets to consider forming a private foundation, you may also be concerned about estate tax. The good news is that assets given to a private family foundation, as a general rule, are not subject to estate taxes.
Creating a private foundation has its downside, too. To begin with, there is a considerable time commitment involved, not to mention the expense, which includes legal and accounting fees. In addition, there are significant record-keeping and reporting requirements. The foundation should keep regular meeting minutes and thorough documentation of grants and the grant-making process. In addition, of course, the foundation will need to prepare and file state and local taxes.
Private foundations are also subject to fairly stringent regulatory requirements. Because of their private nature, these foundations are typically scrutinized more closely than public charities may be, and are required to distribute (in the form of charitable grants) a minimum of 5% of their net investment assets on an annual basis.
While private foundations do have tax benefits, there are also limitations. For example, there are lower deductibility caps for gifts made to a private foundation by an individual than for gifts made to a charity (30% of adjusted gross income for cash gifts and 20% for appreciated property when the gift is made to a private foundation, versus 60% and 30% respectively for gifts to a public charity).
Also, capital gain gifts made to a private foundation rather than a public charity (with the exception of publicly-traded stock noted above) are deductible only at cost basis, rather than at their full market value.
Depending on your goals, there may be alternatives to creating a private foundation, such as donor-advised funds, that will achieve your aims more advantageously. Before making a commitment of your resources, consult with a knowledgeable Ohio estate planning attorney with extensive experience in planning for significant assets.
You may also be interested in: