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Private Family Foundation Tax Benefits

Overview Of Private Foundations

Private Foundations 2: PFs vs. Public Charities

INTRODUCTION

A private foundation is a charitable corporation or trust which receives financial support from a limited number of sources. A private foundations charitable activities most commonly consist of making grants or contributions to other charitable organizations which are themselves engaged directly in charitable work. For example, a private foundation might make a grant to a hospital, a community fund agency or an educational organization. Most private foundations are subject to a requirement that they make a minimum amount of distributions each year. Some private foundations themselves directly carry on charitable activities and are not subject to this distribution obligation.

Private foundations are exempt from income tax but most are subject to a one or two percent excise tax on investment income. Private foundations are also subject to other types of excise taxes meant to insure that the activities, distributions and investments of the foundation are directed toward charitable activities.

Contributions to private foundations are generally tax deductible by the contributor. Special rules govern the amount that may be deducted. These rules take into consideration the donors adjusted gross income and the nature of the property contributed.

ORGANIZATION AND GOVERNANCE OF A PRIVATE FOUNDATION

TAX BENEFITS

Income Tax Exemption

THE ADVANTAGES AND DISADVANTAGES OF A PRIVATE FOUNDATION

ACTIVITIES

MANDATORY DISTRIBUTIONS

EXCISE TAXES

Taxes on Self-Dealing

How Does A Private Foundation Work

If a private foundation is right for you, then Ren can get you started. Well help you determine if your goals are suited towards an operating or non-operating private foundation.

Operating foundations are directly involved in operating a charitable project or enterprise such as a museum, zoo, or library in a continuing and sustaining manner. Rather than making grants to other organizations, they spend the majority portion of their investment income on their own charitable projects.

Non-operating foundations dont usually run their own programs, but instead give back by making grants to public charities, individuals, and organizations. Non-operating foundations are required to make an annual distribution equal to roughly 5% of their prior years average net investment assets. Distributions that count toward this requirement include grants to charities, certain related expenses, and, with the exception of investment expenses, necessary and reasonable administrative costs.

While private foundations offer a large degree of control for their donors, they require heavy involvement in the foundations granting strategy. As a donor, you will need to help operate the foundation, including hiring staff and investment managers, managing grantmaking, and fulfilling all reporting requirements.

Ren can help you initiate the process of establishing the foundation, file for tax-exempt status, make the initial contribution of assets and manage other required administrative documents.

Is It The Right Fit

Before establishing a private foundation, the following items should be taken into consideration in determining if a private foundation would be a good fit for you.

  • A private foundation is established as its own legal entity. The founder can appoint its own board of directors or trustees.
  • Legal and financial control remains within the family if the board or trustee so chooses.
  • A private foundation may hire and compensate staff, including family members, to provide professional services to the foundation as long as it is a reasonable compensation.
  • A private foundation may grant out all its assets into a donor-advised fund.
  • A private foundation must file an IRS Form 990-PF annually which lists assets, contributors, and grantees. The private foundation tax returns are available for public inspection. State filings may also be required.
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    Private Family Foundations And Estate Planning

    In addition to the general benefits and challenges related to Private Family Foundations, there are also issues to keep in mind concerning foundations and estate planning. If an individual or family is interested in charitable giving, they can create a Private Family Foundation during the donors lifetime by testamentary disposition. Donors can then make tax-deductible contributions to the foundation which will, in turn, be distributed to grant recipients. Private Family Foundations can also be created at death by a bequest from the donors will or trust the foundation will receive funds as a primary or secondary beneficiary.

    What Is A Public Charity

    Year End Considerations: Donor Advised Funds &  Private Foundations

    Public charities include a wide variety of charitable organizations, including hospitals, schools, churches, and organizations that make grants to others. Charities that primarily make grants are commonly referred to as public foundations. Most of these foundations are publicly supported charities, meaning they receive their funds from multiple sources, which may include private foundations, individuals, government agencies, and fees they charge for charitable services they provide. Some foundations are public charities because they meet at least one of the IRS tests for qualifying as a public charity. One kind of public charity, known as a supporting organization, is recognized by the IRS as charitable simply because of its legal relationship to one or more other public charities. A community foundation is yet another kind of public charity. In some cases, corporate foundations are set up as public, rather than private, foundations.

    The IRSs Compliance Guide for Public Charities provides an overview of the compliance requirements public charities must meet in order to stay tax-exempt.

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    Canadian Tax Credits For Family Caregivers

    In Ontario, only 3% of caregivers receive any form of supplementary income. Examples of this type of income include social assistance or welfare, child tax benefits, workers compensation or tax credits and deductions. The 3% is a startling number when one takes a moment to consider the time, effort, and money required to care for somebody with a disability. When a family caregiver misses out on these tax credits and other forms of assistance, it means that their budgets are often stretched beyond their means. The benefits and tax credits that they could be eligible to receive are essential for offsetting expenses like medications, therapy and even non-medical expenses such as the cost of transporting people they care for to and from appointments with their doctor.

    It is also worth noting that many caregivers have made one of the greatest sacrifices of all they have stopped working in order to stay home and care for a disabled loved one. So, on top of the extra expenses resulting from the needs of the disabled family member, they also have to deal with a significant loss of income. This can be more than just overwhelming it can be downright crippling for many families. If you are a caregiver and you would like to know more about tax credits and benefits, the following three options are the best place to start.

    Capital Gains Tax Savings

    In addition to the tax deduction on income tax donations to private foundations, donors might also be able to avoid paying capital gains tax when they donate highly appreciated assets to an individual foundation. If, for instance, the donor donated appreciated stocks to a foundation, they are entitled to an income tax deduction of the fair market worth of the asset. If the foundation decides to sell its stock, it will only pay the nominal tax on excise of 1.39 percent on the capital gains.

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    Are Contributions Made To Foundations Tax Deductible

    Contributions made to public and private foundations may be deducted from the donors federal income tax if the donor is an individual or corporation. The amount of the deduction is subject to certain limits under federal tax law.

    Generally, gifts to public charities receive more favorable tax treatment than gifts to private foundations. For example, charitable cash donations are deductible at up to 50 percent of the taxpayers adjusted gross income when given to public charities, but the same gift to a private foundation is deductible at a rate of only 30 percent of AGI.

    The best resource for finding out if you can take a charitable tax deduction and the applicable limits is the IRS website, www.irs.gov, and IRS Publication 526, as well as your tax and other professional advisors.

    Private Family Foundation Defined

    Private Foundations 4: Insider Benefits

    The phrase Private Foundation first appeared in the IRS Code in 1969, as a type of charity qualifying as tax exempt, under Section 501. In a general sense, Private Foundations are independent legal entities which support outside charities, or run charitable programs of their own. Private Foundations are typically controlled by one source, whether that be an individual, a family, or a company. The bulk of the foundations income comes from investment assets which are tax deductible. A private foundation can hold assets including: cash, publicly traded securities, private equity, real estate, tangible property , intangible property , or annuities. The foundations income or assets are then spent on grants to other charitable organizations.The phrase Family Foundation is not a legal term, and, therefore, it does not have a precise legal definition. But approximately two-thirds of private foundations are, in fact, family foundations or family managed.

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    The Tax Benefits Of Creating A Private Foundation

    As the April 15th filing deadline draws closer and were all thinking about how to maximize our tax savings and reduce our liability for next year, one idea you might want to consider is to set up a charitable vehicle, such as a private foundation. Not only will you be able to fund charitable causes for many years to come, but you can realize significant tax benefits.

    Suppose you have currently under-performing highly appreciated stock that you dont want to sell because of the capital gains implications, or perhaps you have an under-diversified portfolio thats doing little for you. If you establish a private foundation, you can donate those appreciated and unproductive assets to it, sell them in a tax-advantaged environment, and reinvest the proceeds for a higher return. The subsequent investment earnings can then be used to make grants to charities.

    Establishing a private foundation may make it possible for you to:

  • Reduce your income tax for every year in which you make a contribution
  • Avoid capital gains taxes, depending on the characteristics of assets contributed
  • Increase the foundations assets through tax-advantaged growth and compounding
  • Reduce or eliminate potential estate taxes.
  • Lets examine these opportunities and benefits in turn:

    Income Tax Savings

    Capital Gains Tax Savings

    Estate Tax Savings

    Assets that are contributed to a private foundation are excluded from your estate and therefore not subject to federal or state estate taxes.

    The Pension Benefits Guarantee Fund

    If you belong to a defined benefit pension plan and your employer becomes insolvent or bankrupt, there may not be enough money in the pension fund to pay all of the pension benefits that were promised to you. The Pension Benefits Guarantee Fund may then apply to guarantee payment of certain benefits from your pension plan.

    The PBGF is a special fund that was established by the Government of Ontario to cover pension benefits for certain defined benefit pension plans if they are wound up, because the employer is insolvent and there is a funding shortage.

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    What Is A Foundation

    In the nonprofit sector, the term “foundation” has no precise meaning. The Council on Foundations defines a foundation as an entity that supports charitable activities by making grants to unrelated organizations or institutions or to individuals for scientific, educational, cultural, religious, or other charitable purposes. While foundations are often primarily engaged in grantmaking activities, some may engage in their own direct charitable activities or programs. When thinking about foundations in the charitable context, it is helpful to see how the IRS describes private foundations and public charities. Visit the Charities and Nonprofits section of the IRS website at www.irs.gov.

    The IRS classifies all 501 organizations into two distinct types: private foundations and public charities.

    Recordkeeping Reporting And Public Disclosure

    Private Foundations Excise Tax Rates

    The foundation should maintain separate bank accounts, books, and records, including minutes of board of directors meetings, and must otherwise respect the foundations legal form.

    The foundation may be required to file normal payroll tax withholding and reporting forms if it has employees and pays wages.

    The foundation must file a federal income tax return, Form 990PF, annually with the IRS. The foundation may also be required to file a copy of Form 990PF, and/or other reports with the state.

    The foundation must also provide copies of Form 990PF to anyone who requests them, and other forms of disclosure may be required.

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    Two Types Of Private Foundations

    The IRS classifies every section 501 organization as either a private foundation or a public charity. A private foundation is typically controlled and funded by an individual or family: The Bill & Melinda Gates Foundation is a well-known example. A private foundation is also subject to more-stringent tax laws and regulations than public charities. There are two types of private foundations:

    • Operating foundations are directly involved in operating a charitable project or enterprise such as a museum.
    • Non-operating foundations serve their charitable purpose primarily by making grants to charities. Although they can operate programs, that isnt their primary purpose.

    Non-operating foundations are the most common type of private foundation, and they can be organized in a variety of ways. For example, a non-operating family foundation typically represents the assets and interests of a single family, while an independent foundation, such as the Ford Foundation, is managed independently from the benefactor, the benefactors family or a corporation.

    Engaging Family In Philanthropy

    A private foundation provides ample opportunities for teaching children and young adults about giving back while making philanthropy a family affair. Here are five of the most important benefits of a private foundation for families:

    1. They help instill values and traditions: Involving the next generation in your philanthropy is one way to ensure that your familys charitable legacy endures. The process of working together as a family can instill philanthropic values that last a lifetime. Moreover, because private foundations are often established to exist in perpetuity, handed down from one generation to the next, your foundation can produce generation upon generation of individuals who are committed to making a difference.

    2. Maintain family ties: In our increasingly geographically dispersed society, the family foundation can be the glue that maintains connections as family members move to pursue college and start careers and families across the country or even the globe. Foundation meetings and regular opportunities for collaboration provide a non-Thanksgiving reason for the family to get together, talk, and share how they might make a difference.

    For more information, read How to Engage Your Children

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    Defined For Tax Purposes A Private Family Foundation Is A Charitable Organization That Is Not A Public Charity It Is A Separate Legal Entity Organized As A Nonprofit Corporation Or A Trust Created By A Single Individual Or Family Private Family Foundations Do Not Receive Donations From The Public But Are Funded By Family Members And Related Persons Or Entities Only

    A private family foundations primary purpose is to make grants to charities, and usually does not engage in charitable services itself . Because of its charitable purpose, the foundation is given the same tax-exempt status as Section 501 public charities. Donors receive an immediate income tax deduction in the year they contribute property to the foundation , avoid capital gains tax on contributions of appreciated property, and reduce their taxable estates. The foundation, however, must pay excise tax on net investment income.

    The main advantage of a private family foundation is that the donors control how contributions are invested, and how grants to charities are made. Typically, grants are directed to the donors community or areas of interest .

    Though a private family foundation can provide great personal satisfaction and tax benefits, there is a significant downside. Foundations must be organized and operated according to specific sections of the Internal Revenue Code, follow special rules and requirements, and maintain many administrative functions. Violations can result in taxes and harsh penalties against the foundation, its donors, and others.

    Summary:

    Private family foundations are typically founded by high net worth individuals and families who want to maintain a high degree of control over their charitable legacies, and are willing to assume significant costs and responsibilities, and adhere to strict rules and requirements.

    The Benefits Of Starting A Family Foundation

    Private Foundations 1: What are PFs and DAFs?

    Have you ever considered starting your own private family foundation? For those who have causes, you are passionate about, creating a family foundation gives you the opportunity to benefit the people, places, or things you care about most, and in a way that speaks to you. Not only can you benefit others, but there are benefits for you as well.

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    Should You Start A Private Foundation

    If you regularly donate large sums of money, you might be wondering whether you should start your own private foundation. Perhaps you see a social need that hasnt been met, or perhaps the prestige associated with running a charitable foundation in your own name intrigues you.

    The most common type of foundation is the grant-making foundation. This is a not-for-profit organization primarily funded by an individual, a married couple, a family, or a corporation. The private foundations assets are called an endowment, which is invested to generate income for the foundation. The endowment is used to fund its operations and make grants.

    While private foundations can be time-consuming and expensive, the thousands of individuals, families, and corporations who have established them believe these sacrifices are worthwhile.

    Tax Benefits Of A Private Foundation

  • Assets contributed to a private foundation can grow in a tax-advantaged vehicle, and you can pass control of the assets to future generations to continue your philanthropy.
  • The donor will receive an immediate income tax deduction for their contributions to the foundation even though the gifting to charitable organizations can be made over time. Cash donations are deductible up to 30% of your adjusted gross income and appreciated assets are deductible up to 20% of your adjusted gross income.
  • Donors may be able to avoid paying individual capital gain taxes by donating highly appreciated assets to a private foundation. The donor would receive an income tax deduction for the fair-market value on the date of contribution. When the foundation sells the stock in the future, it will only pay an excise tax of 1.39% on the net capital gain.
  • The IRS requires that private foundations meet an annual 5% minimum distribution requirement based on the previous years net average assets.
  • The donor can exclude the assets contributed to a private foundation from their estate. For high-net-worth individuals who have a strong charitable interest, private foundations offer an opportunity to avoid paying estate taxes while creating a lasting philanthropic legacy.
  • Another charitable vehicle you may be interested in establishing is a donor-advised fund. Learn about its potential tax benefits here.

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