Be Careful When Discussing The Merits Of Private Foundations
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You hear it pretty regularly: If you want to make large tax-deductible charitable donations and yet maintain complete controlmaybe even providing salaries for your kids–then you should set up a private foundation. Like most broad statements of this sort, it contains both some truth and some falsehood.
The truth, of course, is that private foundations can be wonderful planning tools for clients with substantial assets and major donative intent. These charitable organizations can be created, funded and controlled by a single individual or that individuals family.
In fact, many parents use private foundations as a way to train their children in the responsible management of money and philanthropy. As a general rule, private foundations can give donors great flexibility over the application of charitable gifts through the years.
However, along with this flexibility comes limits. Thats where the falsehood can come in. Contrary to what some people may say or imply, there are real limits to exploiting private foundations for your own, non-charitable purposes. In response to a raft of perceived abuses, Congress has placed multiple restrictions on the use of private foundations.
Lets take a look at some of the things that you had better remember when discussing private foundations with your clients.
A private foundation is a charitable organization. To qualify for favorable tax treatment, a private foundation has to be the real thing. It isnt a family piggy bank. To that end, a private foundation must generally distribute at least 5% of its investment assets each year for charitable purposes.
Failure to make these distributions can result in substantial excise taxes. That means that you cant use the private foundation to hoard assets solely for your familyyou really must spend a portion of the foundations assets for charitable purposes every year.
There are substantial excise taxes levied on self-dealing. Self-dealing is defined as participating in a "prohibited transaction" with a "disqualified person."
The term "disqualified person" covers a large group of people related to the foundation. For our purposes, just know that it includes the donor and the donors family.
"Prohibited transactions" include selling or leasing foundation property, loaning assets, and furnishing goods, services, or the use of the foundations facilities. The rules cover direct and indirect transfers of foundation property. This rule is meant to be broad.
All that being said, this rule makes it very difficult for a client to use the private foundations assets for his or her family. Mind you, there are exceptions for the payment of reasonable compensation to a family member.
