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Estate Planning: How to Set up a Private Foundation to Save Taxes

Posted by Concannon Miller on Tue, Dec 18, 2018

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Charity. Red Icon of Heart in the Hand Painted by Stencil on Wood. Grunge Background.Are you interested in setting up a private foundation?

With this approach, you make contributions to a foundation and get a charitable tax deduction just as you would with any qualified organization. Then, as the director, you decide which charities you want to make distributions to so you retain control of the assets.

There are several other advantages to a private foundation. Your future estate and income taxes are reduced because you no longer own the contributed property. The foundation can pay the directors a "reasonable" salary out of excess earnings. And after you die, your children and grandchildren can take over as directors and also be given a reasonable salary.

As a general rule, deductions for charitable donations of stock to a private non-operating foundation are reduced by the amount of gain that would have qualified for long-term capital gain if the stock had been sold at its fair market value. In other words, your write-off is limited to your basis in the stock and you get no tax benefit from the appreciation in value.

READ MORE: The New Tax Law & Your Estate Plan: Six Changes to Know

The Exception

However, there's a special exception to this rule: You can claim a deduction equal to the fair market value for donations of qualified appreciated stock.

For this purpose, "qualified appreciated stock" is publicly traded. Under the tax law, that means stock in a corporation for which "market quotes are readily available from an established securities market" -- an important distinction if you're interested in transferring shares.

Here's what happened in one case: John and Tate Todd formed the Todd Family Foundation. One week later, John transferred over 6,000 shares of stock in Bancorp., a Colorado corporation, to the nonprofit foundation. Although Bancorp was not publicly-traded or listed on any national or regional securities exchange, a price was arrived at by a placement agent who occasionally used the company's book value to quote prices to interested buyers.

The IRS disallowed the Todd's charitable deduction claimed for the transfer to the foundation because the Bancorp shares were not "qualified appreciated stock."

On these facts, the Tax Court agreed. It stuck to the strict letter of the law requiring "market quotations that are readily available on an established securities market." Result: John Todd's deduction was limited to his basis in the Bancorp shares of stock.

Establishing and managing a private foundation is a sophisticated maneuver that should only be done with the help of a knowledgeable estate planning adviser. In addition to the law governing the transfer of publicly traded stock, there are several other restrictions. Contact our Estate and Trust Services team to help ensure your wishes are carried out.

© 2018

Topics: Estate and Trust Services, Individual tax planning

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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