private foundations and donor advised funds
DESCRIPTION
A review of private foundations and donor advised funds taken from the book Visual Planned Giving (2014)TRANSCRIPT
![Page 1: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/1.jpg)
Private Foundations & Donor Advised Funds
Professor Russell JamesTexas Tech University
![Page 2: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/2.jpg)
Private Foundations & Donor Advised Funds
1: What are PFs & DAFs?
![Page 3: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/3.jpg)
Private foundations (non-operating)and donor advised funds hold money and distribute grants
![Page 4: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/4.jpg)
78%
14%
5% 3%
Assets
81%
3% 14%
2%
Charitable Distributions PrivateFoundations(non-operating)
CharitableRemainderTrusts
Donor AdvisedFunds
Charitable LeadTrusts
Private Foundations are the Dominant Charitable Planning Vehicles
Combining 2010 data from IRS Statistics of Income (PF, CRT & CLT) and National Philanthropic Trust (DAF)
![Page 5: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/5.jpg)
![Page 6: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/6.jpg)
![Page 7: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/7.jpg)
Psychology’s “terror management theory” suggests a defense to mortality reminders
is to create symbolic immortality (one’s name, impact, story will live on)
![Page 8: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/8.jpg)
Dead
• Josiah K. Lilly (1948)
• Edsel Ford (1943)
• Robert Wood Johnson II (1968)
• W.K. Kellog (1951)
• Andrew W. Mellon (1937)
• John D. Rockefeller (1937)
Alive
• Lilly Endowment
• Ford Foundation
• Robert Wood Johnson Foundation
• W.K. Kellog Foundation
• Andrew W. Mellon Foundation
• The Rockefeller Foundation
![Page 9: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/9.jpg)
The rules of a private foundation can be permanent
This differs from leaving an inheritance or
company where later generations make all rules
![Page 10: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/10.jpg)
A private foundation allows donor and descendents to control the foundation
assets and charitable payouts indefinitely
![Page 11: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/11.jpg)
A private foundation can transmit values by involving descendents in specific charitable causes for many generations
![Page 12: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/12.jpg)
or Charitable Trust
Under state law create a…
Obtain federal tax exempt status Initial Application
1023 Annual filing
990-PF
Create a Private Foundation
Flexible; lower UBIT rates
More founder control; foreign operations eliminate deductibility for corporate donors
Nonprofit Corporation
1.
2.
![Page 13: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/13.jpg)
Private foundations can be large, but most aren’t
26%
39%
28%
4% 3%
Asset Size: Non-Operating Private Foundations
$1 under $100,000
$100,000 under $1MM
$1MM under $10MM
$10MM under $25MM
$25MM or more
Source: IRS Statistics of Income for 2010. Domestic Private Foundations: Number and Selected Financial Data, by Type of Foundation and Size of End-of-year Fair Market. Excluding those not reporting any assets
![Page 14: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/14.jpg)
Foundation board• Often the donor and close family members
• Can establish rules for succession
– Descendents who meet certain criteria
– Unequal voting rights allowable
– Junior board for minors advising on small gifts
![Page 15: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/15.jpg)
Private Foundations & Donor Advised Funds
1: What are PFs & DAFs?
![Page 16: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/16.jpg)
Private Foundations
2: PFs v. Public charities
![Page 17: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/17.jpg)
Three types of charitable organizations
Public charity
Supporting organization
Private foundation
![Page 18: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/18.jpg)
Public Charity
• Publicly supported
OR
• Operates ongoing traditional charitable activity (e.g., hospital, church, school)
Private Foundation
• Default if charity not a public charity or supporting organization
![Page 19: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/19.jpg)
Typical private foundation
• Funded by one person, family, or corporation
• Makes grants, rather than directly running charitable activity
• Expenditures funded by investment income
![Page 20: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/20.jpg)
Typical private foundation
• Funded by one person, family, or corporation
• Makes grants, rather than directly running charitable activity
• Expenditures funded by investment income
Traditional charity (e.g., operates church, hospital,
school)
![Page 21: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/21.jpg)
Typical private foundation
• Funded by one person, family, or corporation
• Makes grants, rather than directly running charitable activity
• Expenditures funded by investment income
Publicly-supported
charity
At least 1/3 of total support1
from small donors2
1 Includes gifts and investment income over last 4 years. Large unusual gifts from outsiders can be excluded. 2 Gifts from those giving ≤ 2% of total support and any support from government
![Page 22: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/22.jpg)
At least 1/10 of total support1
from small donors2
Typical private foundation
• Funded by one person, family, or corporation
• Makes grants, rather than directly running charitable activity
• Expenditures funded by investment income
operated to attract new
public or government
support
Smells like public charity
“facts and circumstances”
that it is a public charity
1 Includes gifts and investment income over last 4 years. Large unusual gifts from outsiders can be excluded. 2 Gifts from those giving ≤ 2% of total support and any support from government
![Page 23: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/23.jpg)
Typical private foundation
• Funded by one person, family, or corporation
• Makes grants, rather than directly running charitable activity
• Expenditures funded by investment income
At least 1/3 of total support1 from memberships + charitable operations + small donors2
No more than 1/3 of total support1 from investment income
1 Includes gifts and investment income. Large unusual gifts from outsiders can be excluded 2 Includes support from government
Public charity by receipts
![Page 24: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/24.jpg)
Private Foundations
2: PFs v. Public charities
![Page 25: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/25.jpg)
Private Foundations
3: Tax rules
![Page 26: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/26.jpg)
Tax rules for private foundations
![Page 27: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/27.jpg)
Tax on net investment income
• 2% tax on net investment income
• Drops to 1% If charitable grants ≥ assets X (avg. % payout in the last five years) + 1% of net investment income
![Page 28: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/28.jpg)
Gifts to private foundations also have lower income-based deductibility limits
![Page 29: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/29.jpg)
Current Value: $25
1990 Paid $1
Long-term capital gain (special election)
Tangible personal property
(“unrelated” use)
CashOrdinary income
property
Inventory Short-term capital gain Public
Charity
Public Charity
![Page 30: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/30.jpg)
Current Value: $25
1990 Paid $1
Long-term capital gain (no special election)
Tangible personal property
(“related” use)
CashOrdinary income
property
Inventory Short-term capital gain
Public Charity
Private Foundation (non-operating)
![Page 31: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/31.jpg)
Current Value: $25
1990 Paid $1
Long-term capital gain (any)
Tangible personal property (“related” or “unrelated” use)
Current Value: $25
1990 Paid $1
Private Foundation (non-operating)
Private Foundation (non-operating)
![Page 32: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/32.jpg)
Private Foundations
3: Tax rules
![Page 33: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/33.jpg)
Private Foundations
4: Insider benefits
![Page 34: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/34.jpg)
Charitable Purposes
To protect charitable distributions, many transactions are prohibited or penalized
Insider Benefits
![Page 35: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/35.jpg)
• Self-dealing
• Failure to distribute income
• Excess business holding
• Investments that jeopardize charitable purpose
• Taxable expenditures
Insider Benefits Charitable Purposes
![Page 36: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/36.jpg)
IRS punishments for transactions that break the rules include:
• Initial tax (10%-30%)
• Additional tax if transaction not corrected (25%-200%)
• Revoking exemption
![Page 37: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/37.jpg)
Who is an insider (A.K.A. a “disqualified person”)?
Insider Benefits Charitable Purposes
![Page 38: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/38.jpg)
Insider or “Disqualified Person”• Officer, director, trustee, or any employee with
responsibility for the act
• Ancestor, spouse, descendent, or spouse of descendent of above
• Corporation, trust, or partnership owned 35% or more by above
• Substantial contributor >2% of all
contributions from foundation startto end of tax year (+>5K total contributions)
Grantors of a charitable trust automatically qualify
![Page 39: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/39.jpg)
• Self-dealing• Failure to distribute income
• Excess business holding
• Investments that jeopardize charitable purpose
• Taxable expenditures
Insider Benefits Charitable Purposes
![Page 40: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/40.jpg)
Self-Dealing
• Sell, exchange, lease, transfer or loan money, goods, services, property, or facilities to a disqualified person
• Paying a government official
![Page 41: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/41.jpg)
Bargain sale
Suppose a disqualified person is willing to sell a $200,000 property to the foundation for $10,000?
![Page 42: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/42.jpg)
Bargain saleSuppose a disqualified person gives a $200,000 property (with a recent $12,000 mortgage) to the foundation?
(Payment of the insider’s debt is a benefit, but allowed if debt is 10+ years old)
![Page 43: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/43.jpg)
Self-Dealing Penalty• Disqualified person taxed 10% of transaction (+5% tax
on foundation manager who knowingly participates)
• Must correct in 90 days of IRS notice else disqualified person taxed 200% (+50% tax on foundation manager)
![Page 44: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/44.jpg)
Free gifts to the foundation of money, property, or use of money or property are allowed
![Page 45: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/45.jpg)
Foundation can hire an insider to perform necessary professional or managerial services (called “personal services”) if compensation is reasonable• Investment advice• Legal work• Accounting/tax services• Banking• Administrative assistance
The Council on Foundations’ Foundation Management Report contains compensation information for various positions
![Page 46: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/46.jpg)
Reimbursements of reasonable and necessary expenses such as meals and travel• Travel to foundation board meetings for board
members (and junior board members who perform some functions in that role)
• Travel to grantees or potential grantees sites to investigate current or potential awards
![Page 47: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/47.jpg)
Private foundations allow for unlimited multi-generational,
nearly tax-free (1%-2%) control of wealth,
with ongoing ability to provide insider
travel and employment for
professional/ management
services, and limiting charitable activities to founder’s desires
![Page 48: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/48.jpg)
Private Foundations
4: Insider benefits
![Page 49: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/49.jpg)
Private Foundations
5: Distributing income
![Page 50: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/50.jpg)
• Self-dealing
• Failure to distribute income• Excess business holding
• Investments that jeopardize charitable purpose
• Taxable expenditures
Insider Benefits Charitable Purposes
![Page 51: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/51.jpg)
The foundation must distribute at least 5% of non-charitable net assets under its control by the end of the following tax year
![Page 52: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/52.jpg)
Non-charitable net assets excludes charitable assets and assets not yet
under foundations’ control
No charitable assets:used for charitable purposes,
such as paintings on loan to a museum, or office
furniture used to manage the foundation
No assets not yet under foundation’s control: a right to receive property after death, after
estate administration, or after payment of a pledge
![Page 53: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/53.jpg)
5% payout is reduced by investment
tax and unrelated business
income tax
![Page 54: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/54.jpg)
Administrative expenses for grant-making or fundraising (but not
investment management) also count as charitable
expenditures towards the 5% minimum required
payout
![Page 55: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/55.jpg)
5% can be spent on grants to charity including designated purpose funds, but NOT to
• Another non-operating foundation
• Charity controlled by the foundation or disqualified persons
• Donor advised funds
![Page 56: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/56.jpg)
Buying or improving assets used directly in charitable purposes also
count towards 5%
![Page 57: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/57.jpg)
Can the foundation postpone payouts to save up for a big gift?
![Page 58: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/58.jpg)
Yes. If…
• It is for a project better accomplished through set aside than by immediate payout (e.g., constructing a building)
• Pay out within 60 months of first set-aside
![Page 59: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/59.jpg)
If the foundation makes a big gift, will the amount above 5% carry over to future
years?
Yes. Gifts above 5%
can carry forward for up to
5 years.
![Page 60: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/60.jpg)
• Foundation pays a tax of 30% of required amount not distributed
• Additional 100% if not corrected in 90 days of IRS notice
Penalty for Failure to Distribute
![Page 61: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/61.jpg)
Private Foundations
5: Distributing Income
![Page 62: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/62.jpg)
Private Foundations
6: Investments
![Page 63: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/63.jpg)
• Self-dealing
• Failure to distribute income
• Excess business holding• Investments that jeopardize charitable purpose
• Taxable expenditures
Insider Benefits Charitable Purposes
![Page 64: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/64.jpg)
What’s the problem with excess business holdings?
![Page 65: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/65.jpg)
• Donor still controls the business even though he has taken a charitable deduction
• Donor decides if any profit is distributed to the foundation
• Donor controls his (and other’s) compensation at the business
Foundation
![Page 66: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/66.jpg)
Foundation + Insiders
20%
Add If Another Has Effective
Control15%Others
65%
A private foundation cannot own more than 2% if the foundation and all disqualified persons combined own more than 20% of a company (35% if someone else has effective control)
![Page 67: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/67.jpg)
• Charitable function such as a school or hospital
• Business run by unpaid volunteers or selling donated items
• Business for beneficiaries /employees such as a museum cafeteria
Full ownership of a charitable business is allowed
![Page 68: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/68.jpg)
Full ownership is allowed if business is passive – simply collecting dividends, interests, royalties, or real estate rent without leverage
![Page 69: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/69.jpg)
Time to dispose of excess business holdings• 90 days if foundation buys• 5 years if foundation
receives as a gift [and can request extension for another 5 years if unusual circumstances]
![Page 70: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/70.jpg)
• Foundation pays a tax of 10% of highest business holdings above maximum
• Up to 200% if not corrected in 90 days of IRS notice
Excess Business Holding Penalty
![Page 71: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/71.jpg)
• Self-dealing
• Failure to distribute income
• Excess business holding
• Investments that jeopardize charitable purpose• Taxable expenditures
Insider Benefits Charitable Purposes
![Page 72: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/72.jpg)
Crazy investment gambles can
jeopardize the charitable purpose
![Page 73: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/73.jpg)
Nothing is automatically
disqualified, but special attention given to options, margin trading,
short selling, commodity
futures, oil/gas interests
Jeopardizing investments are excessively risky in the context of entire portfolio
(“fails to exercise ordinary
business care and prudence”)
![Page 74: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/74.jpg)
High risk investments are allowed if they are primarily charitable •Needy student loans
• Low-income housing
•Urban renewal
![Page 75: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/75.jpg)
• Foundation pays a tax of 10% of the jeopardizing investment (manager pays 5%, up to $10k)
• Another 25% if not corrected within 90 days of IRS notice (manager pays another 5%, up to $20k)
Jeopardizing Investment Penalty
![Page 76: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/76.jpg)
• Self-dealing
• Failure to distribute income
• Excess business holding
• Investments that jeopardize charitable purpose
• Taxable expenditures
Insider Benefits Charitable Purposes
![Page 77: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/77.jpg)
Taxable expenditures
• Non-charitable purposes
• Political campaigning or lobbying (except non-partisan research)
• Grants to individuals except – Travel, study, or similar if IRS
approves non-discriminatory award process
– Grants to impoverished persons or disaster victims
– Prizes/awards to recognize achievement with no restrictions on use of funds
![Page 78: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/78.jpg)
• 20% of the taxable expenditure (manager pays 5% up to $10k if no reasonable cause)
• Another 100% if not corrected within 90 days of IRS notice (manager pays another 50%, up to $20k)
Taxable Expenditures Penalty
![Page 79: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/79.jpg)
Private Foundations
6: Investments
![Page 80: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/80.jpg)
Private Foundations
7: v. Donor Advised Funds
![Page 81: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/81.jpg)
What if creating a private foundation is just too much hassle?
![Page 82: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/82.jpg)
Donor Charities
The Donor Advised Fund
Donor’s DAF
$
$
Sponsoring charity has legal ownership of DAFs
$
Gifts are to a public charity, because charity
has legal ownership
Charity follows donor advice, otherwise no one would give again
$
![Page 83: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/83.jpg)
Donor advised fund• No minimum payout• Minimal setup &
administrative expense• Expected control of grants• Investment management
sometimes allowed• Legislatively new• High income limits &
valuations• No tax on earnings
Private foundation• 5% minimum payout• Significant setup &
administrative expense• Legal control of grants• Investment management
always allowed• Legislatively stable• Low income limits &
valuations• 1% or 2% tax on earnings
![Page 84: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/84.jpg)
End of year DAF contributions pull forward deductions
Many use DAFs as a short-term conduit to take an earlier tax deduction for expected future gifting to charities
![Page 85: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/85.jpg)
DAF Limitations• No benefits (grants, loans, compensation, or indirect benefit) to
donor, family, or organizations 35%+ controlled by these. Ex: no major donor event tickets
• No excess business holdings (same rule as private foundations)
• No distributions to private foundations (rare exceptions) or individuals
![Page 86: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/86.jpg)
Private Foundations
7: v. Donor Advised Funds
![Page 87: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/87.jpg)
Help me
HERE
convince my bosses that continuing to build and post these slide sets is not a waste of time. If you work for a nonprofit or advise clients and you reviewed these slides, please let me know by clicking
![Page 88: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/88.jpg)
All slides are taken from the
book Visual Planned Giving
Available from Amazon.com
![Page 89: Private foundations and donor advised funds](https://reader035.vdocuments.mx/reader035/viewer/2022081401/55942dc01a28abfe1e8b4673/html5/thumbnails/89.jpg)
Private Foundations & Donor Advised Funds
Professor Russell JamesTexas Tech University