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More and more people are seeking the tax and non-tax benefits a private or family foundation can provide and this rising trend in foundation giving is expected to continue. As the baby boomers inherit their parents' estates, this transfer of wealth is expected to increase charitable giving and foundation startups.
But what's so appealing about using a foundation as a gifting vehicle? The answer lies in both the emotional and tax-planning advantages these entities offer.
By its definition, a private foundation is a nonprofit organization that is usually funded by a single source, such as an individual, family, or corporation, and is managed by its own trustees or directors. It is established to maintain or aid social, educational, religious, or other charitable activities, primarily through grant making. A private foundation enables you to involve your children and grandchildren in your charitable giving, allowing them to play a role in your foundation's grant making. At the same time, it gives you the ability to maintain legal control over the foundation's assets.
Like many generous individuals, you are probably overwhelmed with requests for charitable donations. A private foundation can preserve your anonymity as you fulfill your own desire to contribute to the community and the causes that are most important to you.
Along with these non-tax benefits come some very compelling tax-saving opportunities as well. By establishing a private foundation, you can receive limited tax deductions on contributions, avoid capital gains tax on assets transferred to and sold by the foundation, avoid gift and estate taxes on assets you transfer to the foundation, and allow assets in the foundation to grow tax-free.
Starting and Managing Your Foundation
In order to maximize the benefits a foundation can provide, you need to structure your foundation in a way that best meets your financial and philanthropic needs. Foundations can be structured as trusts or nonprofit corporations; however, using the trust form may limit your flexibility in carrying out your intended charitable purposes. Since the trust must be irrevocable, neither you nor the trustee can modify its terms to meet changing circumstances.
In many states, a court proceeding is needed to modify the trust and the court may require you to prove that the modification is necessary because the trust's original purposes cannot be fulfilled.
Structuring your foundation as a corporation will give you greater flexibility because the certificate of incorporation and the by-laws may be easily amended if circumstances change. In states such as Delaware, where the certificate of incorporation is required to contain only the minimal information, even significant changes may be completed without court involvement. Such changes can be handled by an amendment to the by-laws approved by your foundation's corporate board of directors.
With the corporate structure, you can create additional flexibility by using multiple classes of members and directors and delegating various functions to committees to deal with a particular issue or transaction. This will allow you to combine control and flexibility in your foundation's decision-making process.
Get the Best Return on Your Investment
Once your foundation is established, you want to be sure that the organization you elect to support can successfully carry out your charitable intentions. As a donor, you provide a large portion of the revenue to nonprofit organizations. Your contributions, or lack of, can determine their growth, life, or death. You have taken on the task of supporting those organizations that perform the work that you believe to be important. However, your responsibility goes further than understanding the ethical purpose of the organization.
In this new age of philanthropy, today's donors expect nonprofit organizations to have the same financial health as for-profit businesses. But with over 700,000 nonprofit organizations in the U.S., how can you be sure the organizations you give to today will still exist tomorrow?
Start by taking a look at the organization's tax returns. Nonprofit organizations must file an annual tax return (Form 990), which is readily available to the public and is often posted on-line. You can find much of the information needed to make an informed decision on pages 1 and 3 of the tax return. When evaluating the organization, be sure to take a look at the financial ratios and financial trends to help you understand the organization's year-to-date progress and financial health.
By taking the time to understand an organization's past operating effectiveness, financial health, reasonableness of objectives, and ability to meet those objectives, you will have the peace of mind in knowing that your contributions will be spent wisely and the work you value will continue in the future.
With good tax and administrative advice, the burden on you and your family members may be minimal, so that you can focus on your foundation's grant-making process.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.