Several months ago we commented upon a method which was designed to reduce an individual’s federal estate taxes to zero. One of the key components of this type of estate plan is the organization of a family foundation. We have worked with a number of clients who have created family foundations, filed and received qualification from the Internal Revenue Service that the foundation is tax exempt as an organization described in Section 170 of the Code, and have commenced operation of the foundation. Some of the disadvantages of a private foundation established by a single family are that it must bear the administrative responsibilities, maintain proper records, make qualified distributions and, among other requirements, file appropriate federal and state information tax returns.
Since that article we have noticed that most of the mutual fund companies and a number of national brokerage firms have created a turn-key solution for making charitable contributions in a manner which is substantially similar to that available had the family established its own foundation. Typically, the mutual fund opens an account under terms and conditions which make the account restricted for charitable purposes. Further, administrative rules established by the mutual fund regulate the types of contributions which will be acceptable and the method of making charitable contributions. The minimum contribution varies depending on the mutual fund company.
The benefits include:
- an immediate charitable contribution tax deduction even if the fund defers distribution to the charity;
- no capital gain taxes on gifts of long-term appreciated stock;
- grants can be on your own timetable to any IRS-approved public charity;
- the contributed assets have the potential to grow in value, ultimately bringing more value to the charity; and
- the mutual fund offers consolidated record keeping and tax reporting.
The disadvantages include:
- the donor’s identity may be lost and not known to the charitable recipient;
- only certain types of assets and stock are acceptable, such as bonds, CD’s and publicly traded securities. Assets often not accepted include shares of family corporations, subchapter S companies, interests in real estate and personal property; and
- all contributions are irrevocable.
The trade off of administrative simplicity and lack of cost must be balanced against whether the charitable gift fund achieves the same objectives as are accomplished by the use of an individual family foundation. For those persons for whom a private foundation is not applicable, the charitable gift fund appears to represent an outstanding vehicle for maximizing income tax deductions, maintaining flexibility, and providing for charitable gifts now and in the future at virtually no administrative cost.
Please call Leslie Heffernen or me if you would like to discuss this type of charitable giving program.
— Mike Beausang