Life Cycle of a Private Foundation and Beyond

Life Cycle of a Private Foundation and Beyond Weighing the Options of a Private Foundation or a Donor Advised Fund.

June 12, 2019 Hilo, Hawaii

Key Questions to Ask • Type of charitable endeavor • Desired level of “control”/involvement • Existing organizations serving the purpose • Anticipated source of funds • Privacy • Costs/fees/maintenance • Intended duration • Tax deduction

❖ JONES

FAMILY – Broad charitable interests (cancer, environment) – Interested in employing son – No fundraising – Family legacy

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501(c)(3) Charities Public Charity

Public

TYPES OF PUBLIC CHARITIES Per se public charities (schools, churches, hospitals) Publicly Supported

Supporting Organization

Private

Private Foundation

TYPES OF FOUNDATIONS Private Operating

Private Non-Operating “Grantmaking”

Public Charity or Private Foundation?

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Alternative: Charitable Gift Fund/Donor Advised Fund • What is it? Flexible, tax efficient, and personalized way to receive an immediate tax benefit and support your favorite charity.

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Alternative: Charitable Gift Fund/Donor Advised Fund ADVANTAGES ▪ ▪ ▪ ▪ ▪ ▪

Immediate Tax Advantage Lower costs Ease of Administration Anonymity Different regulatory rules Flexibility – Donate now, Give later

DISADVANTAGES ▪ No Donor Control ▪ Grants to qualified charities preferred ▪ No reimbursement for fundraising expenses ▪ Cannot employ individuals or make grants to individuals ▪ Limited legacy planning

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Creation & Tax Exemption Private Foundation • Choice of entity • • • •

Corporation Trust LLC Unincorporated associations

• Application for Tax Exempt status 1023 • State income tax & general excise tax exemptions

Donor Advised Fund • Simple agreement between donor & public charity • No tax exemption application required • No state filings required 7

Private Foundation ❖ JONES

FAMILY – Broad charitable interests (cancer, environment) – Interested in employing son – No fundraising – Family legacy 8

Operations - Issues • 2% excise tax on net investment income (I. R.C 4940) • Self-dealing (I.R.C. 4941 & 4967)/Intermediate Sanctions(I.R.C. 4958) • Taxes on failure to distribute income – 5% minimum (I.R.C. 4942) • Excess Business Holdings (I.R.C 4943) • Taxes on jeopardy investments (I. R.C. 4944) • Taxable expenditures ( I.R.C 4945 & 4966) 9

Operations- Common Pitfalls ❖Personal pledges ❖Buying tables at charity events ❖Compensation

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Operations – Prohibited Payments 1.

2.

3.

4.

5.

Lobbying/Legislative activities Political campaign activities Grants to individuals w/o IRS approval Grants to other entities other than public charities (expenditure responsibility required).

Expenditures for noncharitable purpose 11

Operations - Contributions CONTRIBUTION

PRIVATE FOUNDATION (NOT TO EXCEED % OF ADJUSTED GROSS INCOME)

PUBLIC CHARITY (NOT TO EXCEED % OF ADJUSTED GROSS INCOME)

Cash Property Stock

30% 20% Full Fair Market Value Deduction

60% 30% Full Fair Market Value Deduction

Real Property

Cost Basis

Full Fair Market Value Deduction

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Private Foundation - Challenges •Succession •Keeping close to mission •Expenses

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Choices on Termination 1. Distribute all the assets to a public charity 2. Donor Advised Fund 3. Field of Interest fund 4. Scholarship Fund For more information: https://www.hawaiicommunityfoundation.org/professionaladvisors/give-now 14

Private Foundation – Termination • • • • • •

Board adopts plan of dissolution Notice to the AG and payment of termination tax Notice of dissolution to and payment of all creditors File Articles of Dissolution with Hawai‘i DCCA Provide AG w/final asset transfer list File Final IRS Form 990 PF showing no assets.

For more information https://www.hawaiicommunityfoundation.org/professional-advisors/othertools 15

Donor Advised Fund vs. Private Foundation HCF Donor Advised Fund

Private Foundation

Creation

Hawai‘i Community Foundation prepares a simple “Instrument of Gift” to be signed by donor

A corporation or trust must be created and tax-exempt status obtained from Internal Revenue Service

Grantmaking

Donor and/or committee participation in grantmaking permitted, limitations on selection of scholarship recipients; HCF expenditure responsibility required for certain grantees

Grantmaking done by board and/or paid staff; expenditure responsibility required for certain grantees- Board responsibility

Charitable Deduction for Appreciated Assets

Generally full fair market value, subject to 50% Adjusted Gross Income (30% for Long-Term Capital Gain property)

Depending on type of asset, may be limited to cost basis, subject to 30% AGI (20% for LTCG property)

Fiduciary Responsibility

Hawai‘i Community Foundation’s Board of Governors bears fiduciary responsibility

Foundation directors or trustees bears fiduciary responsibility

Investment of Assets

Investment advisor and asset allocation options depend on size of Fund- donor recommendations permitted

Investment in certain kinds of assets is prohibited; management by directors or trustees

Administration

HCF staff handles all administrative requirements

Volunteer or paid staff responsible for administrative requirements

Distribution Requirement Reporting Requirements

None

5% minimum distribution requirement under excise tax rules

No separate reporting required, included in HCF’s 990 and annual independent audit

Annual detailed reporting required (investments, grants, trustee fees, salaries, public 990 PF tax return)

Taxes

None

Up to 2% excise tax imposed on the net investment income and realized gains, in addition to other excise taxes

“Self Dealing” Regulations

Not applicable

Self dealings transactions are strictly regulated and generally prohibited and may face stiff penalties

Publicity

Donor preference – donor may remain anonymous because there is no public disclosure requirement

Certain disclosure required in tax return and annual report; Tax return is public record

Disclaimer Neither the Hawai`i Community Foundation nor its representatives engage in the practice of law. The purpose of this presentation is for educational purposes only in regards to the subject matter covered. It is being provided with the understanding that the authors are not engaged in rendering legal, accounting or any other professional services. Due to the rapidly changing nature of the law, information contained in this presentation may become outdated.

Thus, this presentation should not be utilized as a substitute for your own research and analysis to update the information and ensure accuracy. If legal advice or other expert assistance is required, the services of a professional should be sought.

The authors specifically disclaim any liability, loss or risk incurred as a result of the use and application, either directly or indirectly, of any advice and information contained in this presentation, whether or not negligently provided. All examples, illustrations, tips and recommendations are suggestions only, and changes must be made depending on the specific circumstances in each case.

Any federal tax advice contained in this communication (including any attachments or enclosures) is not intended and cannot be used for purposes of avoiding penalties imposed by the IRS or to promote, market, or recommend to another party any tax related matter(s) addressed herein. Š 2019 Hawaii Community Foundation

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