Florida Estate Planning Lawyer Blog
There are at least seven options for family philanthropy, each of which has its own
strengths and weaknesses from tax, regulatory, and personal perspectives. Some are extremely complex while others are simple.
1. Private Foundation According to the IRS in 2006 65% of the 80,000 private foundations had assets of less than 1 million dollars. Biggest reason for forming a foundation is control over the assets and expenditure.
Advantages: 1) Charitable deduction for the gift. 2)Distributions to individuals and foreign charities. 3) Control of charitable distributions 4) Control of administrative and investment management decisions. 5) Memorializing the family. 6) Endowing the family’s charitable priorities while maintaining long-term flexibility. 7) Platform for family philanthropy. 8) Visibility and influence for family members. 9) Protection of assets from personal bankruptcy
Disadvantages: 1) Lower annual gift limitations. 2)Limitations on the value of some contributed assets. 3) Excise taxes on income 4) Costs of creation and ongoing management. 5) Investment restrictions. 6) Potential for personal liability. 7) Complicated rules and procedures
2. Type III Supporting Organization: A supporting organization (SO) is a separately-established public charity that makes distributions to or for one or more public charities. Since the SO exists solely to support the public charity, it derives its “public” tax-exempt status from its nexus to those charities rather than from meeting the public support tests on its own.
Advantages: 1) Full benefit of public charity deduction rules 2) Supporting organization administrative role 3)Supporting organization grantmaking role.
Disadvantages: 1) Supporting organizations under Congressional scrutiny. 2) Public status at risk with certain transactions. 3)Burden to establish support status 4) Less control than with private foundation 5) Ongoing Congressional involvement 6) Limits on payments to family members or related parties 7) Type III SOs subject to as yet to be determined mandatory distributions 8) Limits on family business holdings in Type III SOs
3. Donor Advised Funds A donor advised fund is created by making a charitable gift to a publicly supported charity to create a segregated fund over which the donor or named individuals reserve the right to make non-binding recommendations to the sponsoring charity on the charitable entities to receive the funds. In the past, traditional community foundations and Jewish community foundations were the primary sponsors of donor advised funds. Over the last fifteen years, however, commercially sponsored donor advised funds have become popular. Under the legal definition established under the Pension Protection Act of 2006, a donor advised fund has the following three characteristics:
• A fund identified by reference to one or more donor contributions;
• Which is owned and controlled by the publicly supported (sponsoring) entity; and
• Over which the donor(s) has a reasonable expectation to advice on distributions or
investments for the amount (because of his status as donor).Advantages 1) Funds managed by charitable sponsor/manager. 2) Staff resources support grantmaking. 3) Anonymous giving possible
Disadvantages 1) Loss of control 2) Institutionalized nature of fund may extend for only one or two generations below the donor 3) New limitations and requirements for charitable deduction. 4) Limitation on distributions from the advised fund. 5) Limitation on holdings through application of the excess business holdings rule. 6) Penalties for taxable distributions. 7) Penalties for more-than-incidental benefit distributions. 8) Penalties for excess benefit transactions
4. Charitable Lead Trust A charitable lead trust is an irrevocable trust that creates an income, gift, and estate tax charitable deduction for the present value of amounts irrevocably set aside for one or more charities over the term of the trust. When there is greater than a 5% probability the assets will be returned to the grantor at the end of the trust term, it is treated as a grantor trust. The donor is entitled to a charitable income tax deduction for the charitable portion in the year of gift but is taxed on the undistributed income and gains in the trust over its term. When the trust is structured to distribute the assets to family members or other individuals at the end of the trust term, the donor is entitled to a gift or estate tax deduction for the charitable portion of the transfer and the trust is taxed as a complex trust, responsible for payment of taxes on undistributed income.
Advantages 1) Platform to combine personal and charitable goals. 2)Current environment attractive to lead trust gifts. 3) Short-term foundation substitute 4)Short-term foundation substitute. 4) • Long-term philanthropy funding mechanism
Disadvantages 1) Complex trust tax rates. 2)Prohibited transaction rules apply. 3) Donor involvement limitations when lead trust funds private foundation
5. A “Charitable” Revocable Trust A “charitable” revocable trust is simply a revocable trust used for family philanthropy. The Donor funds the revocable trust with dollars that will be used to make charitable gifts. The trust adopts by-laws and operating procedures that bring the family together as trustees or an advisory board for the purpose of making distributions. And the donor – without creating an expensive, irrevocable structure- can engage in the process of teaching younger generations about philanthropy, engaging the family in philanthropic impact, and benefiting the community. In addition, the donor can add a testamentary provision that distributes any remaining assets to a donor advised fund, a private foundation, or any of the other philanthropic entities discussed here to perpetuate that giving.
Advantages: 1) Control and use of assets during life. 2)Platform to engage and train family members. 3) Little or low cost to create 4) Flexibility in determining charitable form at death. 5) Income, gift, and estate tax charitable deductions. 6) Discount and defer transfers to heirs
Disadvantages: 1) There is no immediate charitable deduction for assets transferred to the trust. 2) Assets set aside for charity not protected
6. Partnership With the Charity Sometimes donors do not need to create a separate entity, especially when charitable interests are focused narrowly on a single charity. In these instances, the donor may want to engage family members to fund a program over a defined period of time (or lifetime) or may want to create a permanent endowment using family members to provide ongoing advice and counsel.
Advantages: 1) Public charity tax benefits. 2) Achieving specific results and controlling the terms. 3) Flexibility to stop funding. 4)Louder voice. 5) Meeting goals.
Disadvantages: 1) No tax disadvantages. 2) For short-term projects, no ongoing pool of funds. 3) Potential lack of family interest.
7. Informal or Kitchen Table Philanthropy
Advantages: 1) Direct engagement with and training of family. 2) Flexibility. The arrangement is as flexible as the donor’s goals and objectives. 3) Ability to adjust annual contributions based on convenience, the economy, and need. 4) Ability to “test drive” and determine priorities
Disadvantages: 1) Temporary structure. 2)Avoids experience with administration