CENTRAL ARIZONA ESTATE PLANNING COUNCIL Being a Philanthropist; - PDF document

CENTRAL ARIZONA ESTATE PLANNING COUNCIL Being a Philanthropist; Donor Advised, Private Foundation or ? Presented by: Charles D. Fox IV cfox@mcguirewoods.com 1 Introduction Review current charitable giving environment. Review advantages and disadvantages of the different types of charitable organizations to which an individual can give. 2 1

Review factors in making determination 3 2013 Charitable Giving Total $335.7 billion: $14.7 billion Increase from 2011 Individuals -- $234.3 billion Bequests -- $25.5 billion Individuals contribute 69.8 ₵ of each dollar given to charity 4 2

Availability of Tax Deduction Gift Tax—No Limitations Estate Tax—No Limitations Income Tax—Two Limitations – Percentage Limitations – Valuation Limitation 5 Percentage Limitations Affect amount that can be deducted in a given year 6 3

Valuation Limitations Gifts of appreciated property Certain circumstances Deduct basis (not fair market value) 7 Percentage Limitations What type of property? – Cash – Appreciated property Who is recipient? – Public charity – Private foundation 8 4

Contribution Base Adjusted Gross Income Computed without regard to NOL carryback 9 Contribution Base Adjusted Gross Income Computed without regard to NOL carryback 10 5

Public Charity Private Foundation Cash 50% 30% Capital Gain 30% 1 20% 2 Property •1. Step down possible •2. Automatic reduction to basis 11 Substantiation Requirements Record keeping Appraisals 12 6

Choices for Philanthropist Direct gifts to charity Supporting organizations Donor advised fund Private Foundations 13 Direct Gifts to Charity Simple Often Advantageous from an income tax perspective Can be made for restricted or unrestricted purposes Depending upon the amount, can negotiate terms for the use of the gift 14 7

Public Charities Organizations that engaged in activities that are inherently public in nature – Churches – Schools, Colleges, and Universities 15 Public Charities (continued) Organizations that receive one-third of annual support from donations from general public Supporting Organizations: – Support one or more public charities 16 8

Three Requirements of Supporting Organizations Support one or more public charities Operated, supervised, or controlled by one or more public charities No control by one or more disqualified persons 17 Supporting Organizations Type I (operated, supervised, controlled by public charity or charities it supports) Type II (supervised or controlled in connection with a public charity or charities it supports) Type III (operated in connection with public charity or charities it supports) 18 9

Type III Supporting Organization Type III supporting organization is responsive to, and significantly involved in the operations of, the publicly supported organization Subjective test of Pension Protection Act of 2006 19 Requirements for Type III supporting organizations –Notification to supported organization –Cannot support foreign organizations 20 10

Requirements for Type III supporting organizations –Distinquish: Functionally Integrated Type III Non Functionally Integrated Type III 21 Distribution requirements: -Non functionally integrated Type IIIs -Do not apply to functionally integrated Type IIIs (Type III supporting organization that is not required to make required distributions and whose activities are related to or performing the functions of or carrying out the purposes of supported organization) 22 11

Provisions of 2012 Final and Temporary Regulations Distribution requirement for non-functionally integrated Type III Supporting organizations: Greater of: (1) 85 percent of adjusted net income; or (2) Minimum Asset Amount (3.5% of non- exempt use assets over in previous tax year) 23 Type III Supporting Organization Responsiveness Test Supporting Organization must be responsive t to the needs or demands of the supported organization. Officers, directors or trustees of the supported organization have significant voice in (but not control of) the supporting organization. 24 12

Private Foundations Overview Any organization that Is not able to establish that it is a public charity or a supporting organization. Most family and corporate foudnations. Sources of funding: Direct gifts Gifts from trusts such as charitable lead trusts. Subject to greater IRS scrutiny 25 Structure of Private Foundation: Corporation Trust 26 13

Restrictions on Private Foundations Excise taxes – Tax on net investment income – Self dealing – Minimum distribution requirements – Excess business holdings – Jeopardy investments – Taxable expenditures 27 Compliance Costs Application for tax exempt status (Form 1023) Annual Information Return (Form 990) State Filings: – Attorney General – Annual Corporate Reports 28 14

Donor Advised Fund Fund or account: – Separately identified by reference to contributions of donor or donors – Owned or controlled by a sponsoring organization – Donor has advisory privileges on investment and distribution of account 29 Donor Advised Funds Tax on taxable distributions: – Distribution for other than exempt purpose – Failure to exercise expenditure responsibility Taxes on prohibited benefit Compliance Costs Fees Imposed by Sponsor 30 15

Factors for consideration of choice of charitable donee 31 Donor’s willingness to relinquish control over management, investments, or grantmaking. Donor’s relationship (or lack thereof) with one or more public charities. Amount of assets to be contributed to charitable donee. 32 16

Availability of investment management. Nature of assets to be contributed to charitable donee. Limitations on income tax charitable deduction associated with gifts of certain types of property to private foundation. 33 Potential application of excess business holdings rules to assets to be contributed . Donor’s desire to have family involvement on board and length of time of involvement. Donor’s desire for charitable donee to employ family members. 34 17

Donor’s current need for an income tax charitable deduction without certainty of ultimate charitable donee. Donor’s desire to use the charitable donee as a vehicle for coordinated family philanthropy. Donor’s desire to use the charitable donee as a training vehicle to promote good stewardship and investment management among younger generations of the family. 35 Donor’s expectation that funds may be raised from third parties (i.e., the general public). Donor’s desire for future generations to have a vehicle to continue the family’s philanthropic tradition. Donor’s desire for anonymity or privacy (in connection with funding or in connection with grants awarded). 36 18

Tax on investment income. Minimum distribution requirements . Donor’s expectations that charitable donee will carry on a direct charitable activity, such as operation of an art museum. 37 Donor’s desire to defer funding until death. Donor’s desire to use planned giving vehicles, such as charitable remainder trusts or charitable lead trusts to fund the charitable donee. Donor’s willingness to bear cost and burden of administration, tax filings, and management of charitable organization. 38 19

Nature and location of anticipated grantees of charitable donee. Donor’s desire for charitable donee to make scholarship grants to individuals. Donor’s desire for grantmaking support and advice. 39 Characteristics of Charitable Donees 65703080.1 40 20