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How do Private Foundations Help with Estate Planning?

October 20, 2016

Interested in creating a charitable legacy while simultaneously saving tax? Consider the benefits of setting up a private foundation.

Are you charitably minded? Looking to gain more control over your charitable contributions and expand your philanthropic impact past your death? If this fits your personality and interests, then setting up a private foundation is an important part of your estate planning strategy.

Benefits of setting up a private foundation

What would be the “main” benefits of setting up a private foundation? How does reduction of your annual income tax liability and elimination of certain assets from your taxable estate sound? These are just a few benefits provided by creating a private foundation..

In addition to this, though....a private foundation will allow you to:

  1. Create a legacy dedicated to your humanitarian interests.
  2. Participate in the administration and management of charitable ventures.
  3. Oversee how your charitable funds are invested over time.
  4. Encourage others to join you in your efforts.
  5. Pass on wealth management tips for your children and grandchildren.
  6. Make lasting impressions in causes like education, poverty, and other needy areas.

So...How do I go about setting one up?

You need to decide whether you’d like to set up your private foundation during life, or direct that one be created upon your death (in your will).

  1. Setting up a foundation during life- If you are currently engaged in charitable giving and would like others to further your philanthropic legacy, setting up a foundation during life is your best bet. Creating one during life allows you to provide a smooth transition and training to those who will be in charge of the foundation after you pass. If set up during your lifetime, the foundation is very similar to a family business, you being the manager of this business.
  2. Setting up a foundation upon death- Don’t have the time or interest to get involved in charitable giving right now? Direct that a private foundation be created upon your death if you’re not ready for the responsibility of managing one. Incorporate your charitable wishes into a properly drafted estate plan, and designate trusted individuals to manage the foundation when you’re gone.

What assets should I contribute to my private foundation?

You’ll need to decide which of your personal assets you’d like to contribute to family members, and which you’d like to donate. However, some assets are better fit for charity than individual gifts, here are some tips:

  • Contributing a pension or individual retirement account (IRA) to a private foundation is more tax-efficient than contributing it to a family member.
  • The full value of the pension or IRA will stay intact if you designate a private foundation as your IRA beneficiary.
  • When the funds are received/distributed from the IRA or pension, the private foundation does not pay income tax.
  • You might consider donating appreciated publicly-traded stock to your private foundation if you manage it during your lifetime. By doing this, you can avoid paying the high capital gains tax (currently higher than the excise tax rate).
  • Real estate and tangible property can be contributed to a private foundation, too—Real estate donated to your foundation might be exempt from property tax, and by holding charitable property in your foundation, the foundation might acquire tax benefits as a result.
  • If the foundation wishes to sell the property in the future, it will only have to pay a 1 or 2 % excise tax on the net income. If you gift property to an individual, on the other hand, the individual will be forced to pay a much higher capital gains tax on the sale of the property.

Setting up a private foundation is an excellent way to create a charitable legacy, while simultaneously reaping income and estate tax benefits along the way. As you can see, a private foundation offers unique benefits that charitable gifts to public charities do not. Explore the benefits of a private foundation—it might be the right choice for you and your family.

Contact us for help getting started.

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