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Recent Commentary

Rate for Charitable Calculations Drops Again

Thursday, July 18, 2019
Rates / Tables / Statistics

In Rev. Rul. 2019-17, the Service announced the Section 7520 rate for August will drop 40 basis points to 2.2%. In general, rates for charitable calculations have decreased this year, reversing the upward trend in 2018. The average rate for 2018 was 3.3, while the average rate thus far for 2019 is 2.9.

Stock Redeemed From a CRT

Monday, November 1, 2010

A charitable remainder trust defers taxes upon the redemption of stock, assists in the gradual phase-out of stockholders, and allows for gifts to charity.

IRS Updates Applicable Federal Rates for August 2019

Wednesday, July 17, 2019
Rates / Tables / Statistics

The IRS has announced the Applicable Federal Rates for August 2019, including the Section 7520 rate of 2.2%.

Visual Planned Giving - Chapter 16 - Private Foundations and Donor Advised Funds

Wednesday, January 23, 2019

In the sixteenth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James discusses private foundations and donor advised funds ("DAF"), which hold money and distribute grants to public charities. They allow financial advisers to receive compensation for managing private charitable wealth. Private foundations hold more assets and make more charitable distributions than other planned giving vehicles. However, DAFs are growing rapidly, due to the relative ease of opening an account, and ability to distribute funds over time.

The Code presumes charitable organizations are private foundations, unless they can show they are public charities. A charitable organization can avoid private foundation status in three primary ways:

  1. It can carry out traditional charitable activities, such as operating a school, hospital, or place of worship.
  2. It can receive widespread financial support, which occurs when persons who individually give 2% or less of the total support ("small donors"), make up one-third of the charity's support. This is an objective, safe harbor. More subjective rules allow a charity to meet a 10% test, if it intends to receive more public support.
  3. It can receive one-third of its support from small donors, income from memberships and charitable operations.

Establishing a private foundation involves creating a legal entity, either as a corporation or trust, and filing Form 1023 with the IRS. Once granted, tax-exempt status is typically retroactive if the Form was filed within 27 months of the entity's formation. All private foundations require ongoing administration in the form of accounting, record keeping, state and federal tax filings, and minutes of meetings. Unlike other charitable entities, private foundations pay a tax on investment income at a 1.4% rate under the new TCJA. Typically, the foundation must distribute at least 5% of its net investment assets each year.

Deductions for gifts to private foundations are subject to lower income limitations. Instead of the 50% limit for cash contributions (now 60% under the TCJA), and the 30% limit for appreciated property, gifts to private foundations are limited to 30% and 20% of adjusted gross income, respectively. There is an exception for private "operating" foundations, which have the same income limitations as public charities. Private foundations file Form 990-PF, instead of Form 990 filed by other tax exempt entities.

Because private foundations are often controlled and funded by a single family, and not subject to the oversight of a public charity, the Code has strict rules designed to prevent insider benefits and ensure the accomplishment of charitable purposes. The Code refers to insiders as disqualified persons, and defines these individuals with broad strokes. Directors, officers, and trustees are disqualified persons, and so are donors who have given more than 2% of the foundation's total contributions in any one year. Additionally, the donor's ancestors, descendants, spouses, spouses of descendants, and any organization in which disqualified persons hold at least a 35% interest fits within this definition.

The self-dealing rules prohibit disqualified persons from selling, exchanging, leasing, transferring, or loaning money, goods, services, property, or facilities to the foundation, unless this occurs as a gift. These rules prevent even a bargain sale between the foundation and the disqualified person. Self-dealing transactions result in a 10% tax on the transaction amount for the disqualified person, and an additional 5% on the foundation manager. If the foundation does not correct the transaction within 90 days of an IRS notice, a second-tier tax of 200% on the disqualified person, and 50% on the foundation manager, applies. However, the foundation can hire a disqualified person to provide investment advice, legal, tax, accounting, banking, or administrative services, if compensation is reasonable. Moreover, the foundation can reimburse board members for the expenses of attending meetings. Private foundations also face penalties if they own too much of a corporation's stock, make overly risky investments, or make grants for non-charitable purposes, such as political campaigns.

Given the complicated rules surrounding private foundations, some donors opt for the simpler method of using a DAF. A DAF is a separate account, hosted by a public charity, from which the donor can make grant recommendations. The charity has legal control over the assets, and could choose to ignore the donor's advice. Functionally, this rarely happens if the donor recommends a valid charity, since the charity sponsoring a DAF does not want to discourage future gifts.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 16 and the entire book.