Private Family Foundations
In recent years, several private foundations have gained prominence in the media, and raised public awareness of their causes. Foundations, including the Bill and Melinda Gates, are often created with one philanthropic goal in mind. However, as the grantors often realize, establishing your own foundation can often make smart money sense, as well.
Plus, your last name does not have to be Rockefeller or Getty to start your own.
The Role of the Foundation
A Private Family Foundation (PFF) is a separate entity, privately funded by you. It is created with the specific purpose of contributing to various charitable causes.
As a distinct, legal entity, The Private Family Foundation:
Any Private Family Foundation must be created with a charitable "intent." The Foundation is managed by a trustee or executive director that oversees the Foundation's investments and distributes the Foundation's assets.
You can even appoint yourself as the trustee of your own Foundation. This way, you maintain control over the assets contained in the Foundation. Instead of making a one-time gift to a public charity (and losing control of that gift), you can monitor your favorite charities. If one non-profit changes its focus, or if a more meaningful cause comes along, you can reallocate your Foundation's support.
Private Family Foundations have special tax advantages, because they are considered "charitable organizations" themselves. Because of this classification, any earnings on Foundation assets are tax-exempt, and can be distribute to the charities you choose.
If established properly, a private family foundation can often avoid capital gains taxes on highly-appreciated assets (see below). In addition, interest and investment earnings that are not slapped with an income tax can instead be used to help the charities or causes you support.
If you have highly-appreciated assets that you're holding to avoid steep capital gains taxes, a Private Family Foundation could help. Any appreciated assets that you transfer to a Private Family Foundation can be sold by the Foundation with no capital gains taxes. This is because of the Foundation's charitable status.
Second, you can get an immediate tax deduction for any money or property to grant to the Foundation. This deduction can equal up to 30% of your adjusted gross income (20% for appreciated property). Any income tax deduction not used in your contribution year may be carried forward over the next five years.
The valuation of these deductions depends on a number of things, including original cost and the type of property being transferred. (For more information on valuation, please request the PFF Special Report.)
Every dollar that you contribute to your Private Family Foundation means one less dollar that is included in your estate. Gifts that are regularly made to charities can instead be used to fund your PFF. And if you are in a higher tax bracket, that could ultimately save up to 46% in estate taxes.
Best of all, you can make such contributions to a Private Family Foundation without affecting the $12,000 annual gift tax exclusion or the current $1 million Gift Tax Credit .
Private Family Foundations have certain laws they must abide by, because they are a legal entity. For instance, by law, a Private Family Foundation must distribute at least five percent (5%) of its assets each year to public charities.
Let's suppose you leave $2,000,000 to your Private Family Foundation. The IRS says you must distribute at least $100,000 (or 5%) to recognized charities in order for the Foundation to qualify for its special tax advantages. Of course, you can select a higher payout if you choose. But five percent is the absolute minimum.
The annual payout is established when you first sit down with a qualified estate attorney who has experience working with large estates. And the difference between what the assets earn (e.g. 6% per year) and the mandatory payout can be put back into the Foundation.
You may arrange for your heirs and descendants to receive salaries as "employees" of your Foundation. Simply name family members as replacement trustees to succeed you after death or resignation.
Many Foundations pay their directors using the difference between their required distributions and their annual income. If your Foundation is earning 10% annually on its assets, but only paying 5% annually to charities, the difference can be distribute for legitimate expenses, including salaries for the directors of the Foundation.
While charities will definitely benefit from your Foundation, your children are deprived of the donated assets, after estate taxes are accounted for. To remedy this situation, some individuals also choose to establish a generation-skipping dynasty trust (like The Legacy Trust) to avoid estate taxes for up to three generations.
The Legacy Trust, which is an advanced type of dynasty trust, also acts as a shield for assets (subject to variations in state law). When properly drafted and implemented, the Legacy Trust can also help place assets outside your estate, outside the reach of creditors, judgments, malpractice and divorce.
The Legacy Trust can also provide a substantial benefit for your heirs, particularly through the use of cash-rich life insurance. After funding The Legacy Trust with annual gifts, it can purchase insurance payable to your heirs (as beneficiaries of The Legacy Trust). The children would then receive a lump-sum when you pass away, or you could have The Legacy Trust support grandchildren (or even great-grandchildren). All of these benefits are usually 100% estate tax- and income tax-free if structured properly.
Private Family Foundations can also be combined with Charitable Remainder and Charitable Lead Trusts. By doing so, you may able to draw a significant income for your lifetimes and earn significant tax savings, while still maintaining a large degree of control of your assets.
For free information on combining a Foundation with a Charitable Trust, please contact a SaveWealth Advisor.
As with any estate planning strategy, there are drawbacks. There are up-front legal costs that make it prohibitive for many estates under $2-3 million.
Your Private Family Foundation must also be legitimate, like a real business. You must keep books and records to show how you arrived at your decisions, and establish strict rules prohibiting self-dealing. Salaries must be earned, with enough documentation to show that work was actually performed.
There are also potential excise taxes, and significant penalties if the minimum 5% annual distribution is not adhered to. Nonetheless, after seeking professional tax advice, you may be able to meet your objectives through your own Private Family Foundation.
1. Bill and Melinda Gates Foundation
2. Lilly Endowment
3. The Ford Foundation
4. J. Paul Getty Trust
5. David and Lucile Packard Foundation
6. The Robert Wood Johnson Foundation
7. The Andrew W. Mellon Foundation
8. W. K. Kellogg Foundation
9. The Pew Charitable Trusts
10. The Starr Foundation
Source: The Foundation Center