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Strategic Source Online July/August 2005
The Numbers Are In – Charitable Giving Rises 5 Percent
Two hundred fifty billion was contributed to charitable organizations in 2004, of which the Tsunami catastrophe amounted to less than one-half of one percent of the total. A substantial portion of the Tsunami relief was actually given in 2005, so we expect the numbers to increase in that year, estimated between $1.5 billion and $2.5 billion. The statistics were compiled by the Center on Philanthropy at Indiana University for the Giving USA Foundation, which has been publishing its reports for 50 years. The breakdown of the source of the funding remains fairly consistent, with lifetime giving by individuals approximately 75.6% of the total, and deceased individuals, through their bequests, giving an additional 8%. The balance of the support comes from corporations (4.8%) and foundations (11.6%). It should be remembered, however, that most of the nearly 70,000 foundations were formed by individuals, sometimes during their lifetimes and sometimes at death. Remarkably, between 70% and 80% of households make a gift to one or more charities in the year. Personal giving represents about 1.9% of income before taxes and 2.2% of disposable income (income after taxes). Contributions to religion remain the largest recipient of philanthropy (35.5%). Interestingly, contributions to religion from foundations drop considerably (to around 14%). Giving to foundations was around 9.7% of the total ($24.0 billion). In 1978, the giving to foundations was $1.61 billion (equivalent to $4.66 billion in 2004 dollars). On a per capita basis in 2004 dollars, the growth has increased 400%.
A deal is in the works to increase the lifetime exemption to between $5 million to $8 million for each decedent, together with continuing the step up in basis, which enables the inheritor to enjoy a new cost basis equal to the value of the asset at the decedent’s date of death. The tax rate may drop as well, perhaps to 15% from the current 48%. It would also include making the change permanent, eliminating the language that sunsets estate tax repeal after 2010. The deal is being worked out between Senator Jon Kyl (R-AZ) and the ranking Democrat in the Senate Finance Committee, Max Baucus (D-MT). They need 60 votes to move this process along. The House, which voted to repeal the estate tax, is not likely to receive sufficient support from the Senate.
Battle Continues Between Foundations and Bank Trustees
In a case watched by many foundations and charities, The Superior Court of Pennsylvania, in a 9-0 decision, blocked Wachovia Bank from increasing its fees for management of a charitable trust. The perpetual trust holds $132 million and provides support for medical research and college scholarship. The Bank sought to receive back compensation of more than $5 million for several years which it felt it was under-compensated. The court concluded that the Bank was bound by the deal it had made and could not go back and seek to change that deal after the fact. It had the right, the court found, to resign, and chose not to do so. This seemed to suggest that the fee was sufficient after all. The case may be appealed to the State Supreme Court.
Can I Pay My Child For Running My Foundation?
We are asked often if and how much a family member or other individual can be paid to serve as executive director or foundation president. The answer has been and remains yes, but with several conditions to remember. First, if your foundation is a California nonprofit corporation, then the Board must consist of a majority of “disinterested” directors, who are usually non-family and are not receiving compensation as officers or employees. Second, the compensation must be reasonably commensurate with the services provided, determined by independent directors, after consideration of the background, skill, time, and effort of the employee, as well as cost of living in the community, level of responsibilities, and a review of the compensation provided by other foundations in similar circumstances. Don’t be confused by compensation to board directors for services rendered in that policy making capacity, with compensation as an employee for the day-to-day operations and administration. Don’t try to mask board fees for staff or management compensation. It won’t work for payroll tax purposes, and it won’t work for reasonable compensation purposes. Some statistics might be helpful. The Association of Small Foundations (“ASF”) reported in its 2004-2005 Foundation Operations and Management Survey Report, that 53% of responding ASF member foundations have paid staff. This was a total of 529 foundations, located throughout the U.S. Before relying on the statistics, however, one should be very cautious, since the relevance will depend on the factors cited above, as well as location. Relying on a national survey is not sufficient to meet an appropriate due diligence test. Foundations under $500,000 (18 responded), reported that about 18% employed a staff person (who could, of course, be a family member), with 61% of those indicating that the individual worked part-time (less than 30 hours a week). Foundations between $500,000 and $999,999 (16 reporting) indicated that 24% had a staff person, with 69% indicting that the individual was part-time. Most of the paid staff were also on the board, though a few foundations in this size group reported a CEO not on the board. The ASF survey indicated that most foundations of this size group paid the part-time CEOs on an hourly basis. The average rate for foundations under $500,000 was $31.08, and the median was $28.85 (7 foundations reporting). For foundations between $500,000 and $999,999, the average rate was $66.07, and the median was $48.08 (7 foundations reporting). Caution: The small number of reporting foundations, and the geographical dispersion makes these numbers interesting, but statistically unreliable. For another look at the compensation issues, we invite you to review the compensation survey conducted by IFF Advisors, Inc., in 2002, representing 130 foundations in California. Overall administrative expenses are also very interesting. In a recent letter to the editor of the Chronicle of Philanthropy (June 9, 2005 at page 51), the chairman of the ASF Board and its CEO wrote that the “typical million-dollar foundation that belongs to the Association of Small Foundations, which we head, spends $11,400 on administration and investments, plus excise taxes of about $1,100, about 16% of revenue”. This equates very favorably to the costs of a similar size donor advised fund at the Minneapolis Foundation, which its CEO reported spends about 20% of revenue for similar expenses, assuming an 8% return.
The Internal Revenue Service ("IRS") and Treasury have issued new guidance on charitable deductions for donated cars. These rules implement the requirements of the American Jobs Creation Act of 2005, which limited the deduction to the actual sales price of the vehicle when sold by the charity, and required donors to get a receipt from the charity acknowledging the gift, in order to claim the deduction on the donor's personal tax return. There are some exceptions to the sales price rule, which are outlined by the IRS.
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