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Strategic
Source Online
November 2004
Planning Ideas: PART TWO: Five More Common Foundation Mistakes
This is the second half of a list of planning ideas, presented by Jeffrey D. Haskell, Senior Vice President, Foundation Source, whose article appeared in Trusts and Estates in April, 2004. For even more detail, you will want to read the entire article by Mr. Haskell.
- Calculating the minimum distribution requirement. Private foundations are required to distribute a minimum of 5% of the foundation’s average value of its investment assets for the previous year. The distribution must be made within twelve months of the following year. The value is computed based on the monthly average of the securities, savings and checking accounts. There are special rules that relate to valuation of real estate and certain other assets. The 5% requirement is reduced to the extent of reasonable expenses related to the charitable activities, other than investment expenses, such as office supplies, telephone charges, consulting fees, certain legal and accounting expenses, training and professional development.
- Grants to individuals. Many foundations mistakenly believe that grants may not be made directly to individuals, without prior approval by the IRS. This is not accurate. Grants made to relieve suffering may be made without advance approval, provided the grant is made on objective and nondiscriminatory basis; the foundation complies with basic record keeping; and the terms of the grant do not require the recipient to spend the funds in any specific way. There are different rules with regard to scholarships.
- Compensating directors and officers. Directors and officers are generally prohibited from receiving any economic benefit from the foundation. However, such individuals may receive compensation for services rendered to the foundation, provided it is reasonable. The determination is based on the individual’s qualifications, experience, responsibilities, duties, and time committed. The compensation must be weighed in light of the foundation’s size, complexity, and available staff, and compared with compensation paid by similar organizations within the community and nationally. The foundation should have periodic independent review of the compensation by professionals knowledgeable in the area.
- Dealing with unrelated business taxable income. Unrelated business taxable income
is typically income that is considered unrelated to the charity’s (or foundation’s) exempt purpose, and thus is taxable to it. Thus, certain activities of a nonprofit that generate income may actually be taxable, even though the organization is tax exempt. What is often overlooked is that income earned by a charity or a foundation from an asset that was acquired through debt (e.g. margin account in securities or mortgage on investment real estate) is also considered unrelated and taxable. The tax rate is the same as applied to a for-profit corporation.
- Making a grant to a second private foundation. While many foundations have a policy against making a grant to another private foundation, the tax law permits it. However, the rules are that when one foundation makes a grant to another, and the recipient or grantee disburses the funds, only one of those organizations may count the distribution as apart of its 5% payout requirement. In order for the granting foundation to count the distribution in its 5% requirement, the grantee foundation must make a special election on its annual return not to count the disbursement of the proceeds in its 5% payout and it must disburse all the proceeds by the end of the following fiscal year.
IRS Update: Donor Managed Investment Account
The IRS has issued a private letter ruling (not yet published) which allows donors to manage the investment of their contributions after making a gift to charity. It’s been called the “Donor Managed Investment Account,” and enables donors or their financial advisors to participate in the investment process following the gift. The theory is that the investment strategy of the donor may be more successful than that utilized by the charity, and the charity will ultimately be the beneficiary of this alternative strategy. At some milestone (perhaps after a set number of years), the fund will be released to the charity for its endowment or other use. The charity is the sole beneficiary of the gift, and the donor has given up all ownership or interests in it. The donor cannot retain any substantial rights in the contributed party, but the management responsibilities or authority to not, apparently, constitute a substantial right.
Remember that this is a private letter ruling and cannot be used as authority by other taxpayers, but it does give an indication of current IRS thinking.
Legislative Update: Congress Approves $146 Billion Tax Cut
A $146 billion tax cut was enacted into law last month, and, despite the fact that the IRA charitable rollover provision was approved by the Senate 92-3, the House 339-65, the provisions did not make it into the new Act. The differences between the House and Senate versions of the IRS charitable rollover bill have not been reconciled and has not even gone to committee. This bill will enable taxpayers to rollover funds in their IRAs directly to charity, without recognizing any income.
 National Public Radio:
Congress Approves $146-Billion Tax Cut
Continuing Education: New Certificate Program in Foundation Management
Fielding, a premier distance education provider and IFF Advisors, one of the largest and most experienced foundation consulting companies in the nation, have created a program that offers a unique mix of face-to-face and online discussion, covering the full range of traditional management issues, including organizational design and governance, grant making, asset management, and administration, as well as the often thorny and unfamiliar challenges of families working together in a shared enterprise.
The first module will be held on January 23, 2005, in Santa Barbara.
Fielding Graduate Institute: Register Today!
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