Assignment 5: Private Foundations Flashcards
1
Q
Private Foundations Basics
A
- Fund devoted entirely to charitable purposes
- Created, supportted and often managed by an individual or family
- Either created for a specific term of years to accomplish a particular purpose, or “in perpetuity”
- Created in trust or corporate form
- Governed and managed by trustees or directors
- Regulated by: IRS, secretary of state, state attorney general, franchise tax board
- Stringent reporting requirements
- 5% minimum distribution requirement
- AGI deduction limit restrictions as compared to public charities
2
Q
Private Family Foundation
A
- Popular with affluent families
- Provides maximum control over the assets and maximum flexibility
- May be used as a tool to share family values
3
Q
Size of Private Foundations
A
Some are huge (i.e. Gates, Ford, Lily = Billions)
Most are not so big
- of approximately 80,000 PF, two-thirds have endowmments less than $1M (median = $500,000)
- 79% of 987 PF in Foundation Source study have been in existence for fewer than 15 years
4
Q
Foundation share of private giving
A
Giving by Individuals…68% ($75.86B)
Giving by Foundations…18% ($292B)
Giving by Bequest…9% ($39.71B)
Giving by Corporations…5% ($20.05B)
5
Q
PF vs. DAFS
A
- Even though number of DAFs is growing, they still lag behind PF in asset size
DAF charitable assets ($121B in 2018)
v.
PF charitable assets ($872B in 2018) - Also total grant dollars from PF is twice as large as grant dollars from DAFS
DAF total grant dollars ($23B)
PF total grant dollars ($54B)
6
Q
PF Deductions
A
Deduction subject to:
- 30% AGI limitations for cash
- 20% AGI limitations for long-term capital gain property
Gifts of appreciated property to a private foundation (other than operating foundations) are deductive at the lesser of FMV or basis unless the property is “qualified appreciated stock
7
Q
PG Governance Requirements
A
- Succession plan
- Regular meetings of its board with records of board minutes
- Accounting, record-keeping systems
- Solid financial controls
- 990-PF must be filed annually and made available to the public
- Policies concerning conflict of interest, investment, travel and expense, record retention
8
Q
PF Grantmaking
A
- Process may be formal or informal
- Best to have some focus regarding giving so that grant requests can be limited to that focus
- Recipients should agree with grantmaker on “metrics” and reporting
- Impact becomes an issue: “Have we made anything better?”
9
Q
Expenditure Responsibility
A
- Generally, grants are made to public charities
- If a grant is made to an individual, then the foundation must insure that the grant is used appropriately = expenditure responsibility
- Expenditure responsibility requires: a pre-grant inquiry, a written grant agreement, grantee reports, separate account set-up to prevenet comingling of non-charitable and charitable funds. ER grants are reported on the 990-PF
10
Q
Grants to Foreign Organizations
A
- PFs can make grants to foreign organizations but special rules apply
- Equivalent determination: show that the foreign grantee is similar to a U.S. public charity
- Expenditure Responsibility: take steps to ensure funds are used according to grant agreement
- Give to a US-based “friends of” organization
- Give to a US-intermediary organization
11
Q
PFs and the Family
A
- Bring family together in common purpose, or give them something new to fight about
- Instill traditions of giving
- Involve children early
- Open the eyes of succeeding generations about community needs and how others live
- Second and third generation wealthy families have many complex entitities and may involve heirs in many roles, as they mature
- Can be a training ground in which heirs can learn to accept responsibility, gain financial literacy, and become skilled at working well with advisors and others
12
Q
Assets in Common
A
- As wealthy families evolve over generations, more and more of the wealth is in trust, with multiple beneficiaries
- Key assets, like vacation homes, are held in common
- Wealth creators need to be fiercely independent, but their heirs are increasingly inter-dependent
13
Q
PF as a Teaching Tool
A
- Family philanthropy, a family foundation, a DAF, or just giving together is an important way to teach inheritors collaboration, joint decision-making, financial responsibility, good citizenship, and concern for others
- Ideally, the experience should be fun and meaningful
- Great way to involve elders, as mentors of the grandchildren
14
Q
Philanthropy Advisors
A
- Strategic grantmaking
- Facilitate discussions among family members
- Identify/Execute giving opportunities
- Evaluate impact of grants
- Identify like-minded partners
- Coordinate with other advisors
15
Q
PF Rules
- Excise Tax
- Self-Dealing Rules
- Required Distributions
- Excess Business Holdings
- Jeopardy Investments
- Taxable Expenditures
A
- Exist to stem abuses from the past
- Rules make it very hard to use a foundation to hold small business assets or to have dealings back and forth between the donor, the donor family, donor-controlled entities, and the foundation
- This is a complex area of the law and qualified counsel is needed when a situation touches on these rules
16
Q
PF–Excise Tax
A
Section 4940 of the Internal Revenue Code imposes an excise tax on the net investment income (NII) of private foundations
- Previously, it was a complicated two-tiered tax rate
- Now it’s a new flat rate of 1.39% (Taxpayer Certainty and Disaster Tax Relief Act of 2019)
17
Q
PF–Self-Dealing Rules
A
A penalty tax may be levied on DISQUALIFIED PERSONS for engaging in prohibited acts of self-dealing with the foundation.
18
Q
Disqualified Persons
A
- Substantial Contributor (one who gives 2% or more of the total contributed gift to the foundation)
- Foundation manager
- Anyone owning 20% or more of an entity that is a substantial contributor
- A family member of any of the above
- An entity, 35% or more of which is owned by any of the above
