Taxation: Charitable Foundations

-Charitable Foundations

For most of us, the thought of forming a charitable foundation is the furthest thing from our mind. But if you have already taken care of your family, and your primary purpose in life is to keep money away from the governments, maybe you should consider what movie stars, pro athletes and former Presidents often do.

A few years ago, I was watching a charitable golf tournament between two of the best players of their time, the famous Tiger Woods and the almost as famous, Sergio Garcia. The event was a big deal because the players were one on one and playing for prize money for charities. 

The announcer mentioned several times the winners proceeds were to be sent to the charity of the player's choice, the amount doesn't matter, maybe a million dollars, maybe a few hundred thousand, but I do remember the beneficiary charities.

Sergio was playing for the American Cancer Society, a noble cause indeed. Tiger was playing for the "Tiger Woods Foundation".  When I heard that, I immediately applied for the tax consultant position to Sergio Garcia because it was clear Tiger already knew what he was doing, and had competent help, Sergio needed me. He didn't call back. His loss.

The question isn't why wouldn't Sergio have his own foundation, but what is the benefit to Tiger?

A charitable foundation is an organization set up by a donor in order to do real charitable work. The reason the donor is interested in the first place is that he has a lot of money and is of the mindset that the government has placed obstacles in his way at just about every turn, and yet he was still able to take very good care of his family - and darn it, I will keep as much from them legally as I possibly can.

At this point, he has concluded that his family really needs nothing else, or maybe he chooses to give them nothing else, but instead would prefer to personally direct as to whom the beneficiaries of his wealth will be. He reasons that if he doesn't form this charitable foundation, the government will seize much of his property at death and do whatever it is they do with our money when we aren't looking. Write "refund" checks to others I suppose.

He could avoid taxes by making large charitable donations to already established charities, but he would not be able to have a direct influence over the spending once those checks are cashed. With his own foundation, he would have the right to dictate its ultimate destination. While he decides who should benefit, his assets are no longer eroded by capital gains or income taxes on the earnings, as they would have been in his personal account.

Donations to your own foundation are tax deductible from your modified Adjusted Gross Income (basically total income). The limit is 50% for cash, but appreciated securities have a limit of 20%. 

To simplify, this means that if you have income of $1 Million dollars, and donate $500 thousand to your private foundation from your money market account, you deduct $500K as a charitable tax deduction (Look at the Clintons tax return - they are very generous donating to the Clinton Foundation).

If you have appreciated stock for which you paid 100K but is worth 500K and you donate that, you get to deduct it all, and don't have to pay capital gains taxes.  - but you can't deduct it all right away. Your 500K deduction is limited to 20% of AGI but the rest can be carried over for 5 years. So of the 500K donation, you can deduct $200K the first year, $200K the second and $100K the third, given identical income and no other donations.

If it carried forward more than 5 years you will lose that excess part of it. There is a slightly more complicated combination approach, but bottom line is maximum contribution cannot exceed 50% of your income with any overage carried forward.

So - giving some money to your own charitable foundation for charitable distribution how you see fit, might be better then just mailing off checks to Uncle Sam.



Sometimes you waited too long, and so don't really have the annual income to benefit as much from large current donations because the limits of 50% of income are too low for the amount you want to consider in relation to your income. Here we can do a little estate planning and save after death. Estate taxes can take a huge chunk of cash form a sizeable estate, so planning with charities can go a long way towards doing what you want, which is two fold: First, keeping money away form the government, and second doing good charitable work even after you've died. (Maybe in that order, maybe not)

Trusts are usually used testamentary fashion to generate an estate tax deduction and plan the future donations. There are basically three methods.  A Charitable Remainder Trust offers the most deduction, but there is a light version for donations, the Lead Trust. Both are "Split interest" arrangements.

Split interest means that the interest in the donated property is divided between two or more beneficiaries, one of which is not a charity. In the case of a Charitable Remainder Trust, the donor, upon his death, transfers property to a trust for the purpose of eventually benefiting a pre-selected charity, in the meantime it usually benefits a one or more family members.


Remainder Trust

In the case of a Charitable Remainder Trust, the donor, upon his death, transfers property to a trust for the purpose of eventually benefiting a pre-selected charity, in the meantime it usually benefits a one or more family members. The selected charity is the "Remainder" entity. Maybe your foundation?

For the donation to be deductible from the estate, no more than 5% can be transferred to a beneficiary annually. And that distribution cannot last more than 20 years. So - if the kids needs all the dough, no go. Since the REMAINDER goes to charity, it is deductible.

The flexibility in a foundation is also beneficial for keeping the money flowing to family members down the generational line, though to a relatively small degree. Charitable foundations can be formed testamentary, in which the loins share of the earnings from the foundation be retained in the trust with a chosen beneficiary receiving up to 5% of the earnings for up to 20 years. After 20 years, the entire property must pass to a charity.


Charitable Lead Trust 

Opposite of the Remainder Trust. The "Lead" entity here is the charity, so since the non-charitable family members are the primary remainder beneficiaries rather than the charity, generally receiving the biggest piece of the pie at the end of the term. The Lead trust does not offer as much tax savings simply because the charity is not the primary beneficiary and so the deduction must be calculated using future value formulas. 

So if you have a ton of money, and are not sure what to do with it, -  but you are certain you don't want to give it to the government when you take that eternal dirt nap, consider a charitable foundation.