Foundations

This week the topics have centered around estate planning. Today, we will look at foundations and how they can fit into the plan. Foundations are legal entities that are classified as a non-profit organization. Foundations usually have charitable purposes that it is set up for, but the qualified definitions can be pretty loose as to the one or many purposes. A foundation may either donate funds and support to other organizations, or provide the sole source of funding for their own charitable activities.

The foundation can have a wide diversity of the way it is set up, organized, and run. But there are some common elements that include:

• Legal requirements followed for establishment
• Purpose of the foundation
• Economic activity
• Supervision and management provisions
• Accountability and Auditing provisions
• Provisions for the amendment of the statutes or articles of incorporation
• Provisions for the dissolution of the entity
• Tax status of corporate and private donors
• Tax status of the foundation

Most of these elements are defined in the document of establishment. In the US, these organizations are classified as 501(c)(3) for the purpose of the tax code. Internationally, they are usually defined as Private Interest Foundations. Each jurisdiction may have separate rules with respect to how legal matters of organization, reporting, and taxes are concerned.

Generally, foundations are not taxed because of their non-profit nature and charitable tendencies. They can be set up for the purposes of future heirs as well. This is where they can play a role in estate planning. For example, you can have a private foundation in the name your family with the resources and rules for every one of your descendants to be able to go to school at Harvard University. The foundation can make investments and hold the profits until one of your descendants is of age to go to Harvard. Then, it would pay the tuition, room and board, etc. so your offspring can have the best education available. (I beg your pardon if your alma mater is Yale or another educational icon.)

Obviously, this is only one example. The possibilities and purposes are almost limitless. There are a few rules this organizations must follow as to the structure, reporting, etc., but they are not very restrictive as to how the resources such as money is spent or used. Naturally, these organizations can not be involved in any illegal activity, or the resources will be seized or frozen.

Private foundations typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs. When a person or a corporation founds a private foundation frequently family members of that person or agents of the corporation are members of the governing board. This limits public scrutiny over the private foundation, which entails unfavorable treatment compared to community foundations.

The unfavorable treatment of private foundations compared to public charities including community foundations are as follows: (a) foundation must pay out 5% of its assets each year while a public charity does not; (b) donors to a public charity receive greater tax benefits than donors to a foundation; (c) a public charity must collect at least 10% of its annual expenses from the public in order to remain tax-exempt while a foundation does not.

For tax purposes, there are a few variants of private foundation. The material difference is between "operating" foundations and "grant-making" foundations. Operating foundations use their endowment to achieve their goals directly. Grant-making foundations, like the Bill and Melinda Gates Foundation, use their endowment to make grants to other organizations, which indirectly carry out the goals of the foundation. Operating foundations have preferential tax treatment in a few areas including allowing individual donors to contribute more of their income and allowing grant-making foundation contributions to count towards the 5% minimum distribution requirement.

The Tax Reform Act of 1969 defined the fundamental social contract offered to private foundations. In exchange for exemption from paying most taxes and for limited tax benefits being offered to donors, a private foundation must (a) pay out at least 5% of the value of its endowment each year, none of which may be to the private benefit of any individual; (b) not own or operate significant for-profit businesses; (c) file detailed public annual reports and conduct annual audits in the same manner as a for-profit corporation; (d) meet a suite of additional accounting requirements unique to nonprofits. Administrative and operating expenses count towards the 5% requirement.

As you can see, foundations can be just another tool used for estate planning. The key thing is to really think about not only your present situation, but also what you want for the future after you are no longer here. Your legacy can continue for generations, but it must be planned and set up properly. Choosing the right people to carry out your instructions properly is also very important. Choose wisely.

Righteousness and justice are the foundation of your throne; love and faithfulness go before you. Psalms 89:14 (NIV)

"I will show you what he is like who comes to me and hears my words and puts them into practice. He is like a man building a house, who dug down deep and laid the foundation on rock. When a flood came, the torrent struck that house but could not shake it, because it was well built. But the one who hears my words and does not put them into practice is like a man who built a house on the ground without a foundation. The moment the torrent struck that house, it collapsed and its destruction was complete." Luke 6:47-49 (NIV)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com