Your Very Own Charity
Instead of giving a lot of tax money to Uncle Sam after they die and letting Congress decide how to spend it, some people have discovered that they can set up their own charitable foundation, donate assets to it and maintain a lot of control over how the money is spent! The IRS does have certain restrictions on how the money is used: it obviously has to be charitable! Supporting religious, educational, cultural or similar activities are generally the requirements.
You can set up the foundation while you are living, or it can be established after you die. To qualify, a small percentage of the foundation's assets must be distributed to charity each year. But you can name whomever you wish to run the foundation - including your children - and the foundation can pay them a reasonable salary. You can be very specific about which charities you want to support, or you can leave that up to the directors of the foundation to decide, within the general IRS guidelines of course.
There are numerous tax benefits of setting up your own foundation, including the following:
- The assets you give to the foundation will be removed from your taxable estate. Every citizen can give $1,000,000 to their family without estate taxes; if you gave the excess to the foundation, for example, your estate will pay no estate taxes. Coordinated with life insurance or other leveraging techniques, you can still leave your family much more than the $1,000,000 exempt amount.
- There will be no capital gains tax on the assets that are sold by the foundation, so it's great for appreciated assets. This is one reason people set up private foundations while they are living, as a tool to move out of highly appreciated assets without losing a large portion to capital gain taxes.
- If you donate publicly traded securities to a private foundation, you can get a charitable income tax deduction for their full fair market value - up to 30% of your adjusted gross income. (The deduction is less than the 50% limit for standard charitable contributions because this is a private charitable foundation.)
The old saying is, "charity starts at home." That being the case, perhaps you would want to consider keeping the dollars you would otherwise have to pay tax on in the control of your family, in your own family foundation, perpetuating your charitable goals and values far into the future.
Charitable foundations are subject to vast amounts of regulation and must be established and operated within precise legal boundaries. This is definitely a type of planning that you "should not try at home" without the help of qualified professionals. It is definitely not for everyone, but for folks with larger estates, establishing your very own charity can be an incredibly powerful planning strategy.
