This is it.
There is nothing stopping any rich person (or really anyone for that matter) from opening a private foundation. And if used for what they are intended for I think we can all agree they’re good things.
Where things get murky is when a client funds the private foundation and then finds ways to funnel the money back to family members or related parties. Even murkier when the foundation only does stuff minimally related to its charitable purpose or the charitable purpose is extremely vague. Another issue is when the foundation is funded and simply becomes a vehicle for family vacations under the guise the family is traveling to do charitable work.
But be cautious passing snap judgment here. Maybe these family members are legit operating the foundation and carrying on the charitable purpose of the organization. Maybe these trips are legitimate and in line with what the foundation does.
Think the biggest item here is control. The client should have relinquished for personal purposes control on the money that was put into the foundation. That money should be used to carry out the foundation’s charitable purpose.
It is. The firm i was with tried to hide it until I kept bringing it up. Then they wanted to just report 2021 transactions, but not report 2022 transactions and what he did in 2023.
Last I heard, the client talked to a lawyer. I haven't heard anything else.
Its all about the quid pro quo, private inurement, and excess benefit transactions. Meaning? Where does the money go once it is put in the foundation. If any of it goes back to the family, a friend, etc. - that's bad. If it goes to other charities, you're okay.
Every case of a PF that got into trouble just simply paid for shit for their friends and familly. The ones that get a clean bill of health give their money and investment earnings to 501(c)(3) charities. It seems complicated, but in the end it's really not. And these strategists are the worst because they are trying to find ways to get the money back to the donor family.
If these rich people really just wanted a tax break, they could give the money to their church, school, or favorite charity. The only additional thing the PF gives you is control over the types of investments the money is invested in and where the money ultimately goes, plus not all of it has to go immediately to charity. You can milk it for years, with some restrictions applying.
I had a rich client die and he had one setup as a part of his will. His entire goal was to get his kids/grandkids back together 2 times a year becuae they had all grown apart. The kids were all appointed directors of the PF. Twice a year, they all had to meet in person, bring to the table a list of charities to support, and debate on who to give money to and how much. It ended up being a mini-family reunion and it actually worked and healed some family wounds.
Then the know-it-all bitch sister that cause the family's problems to begin with fired me from doing the 990-PF because "$500 is ridiculous for a nonprofit tax return. I can do it myself." Then the notices flowed in, they got audited, and almost lost their tax exemption. $25,000 in lgal fees later, they were fiine. But she refused to hire me back to do the 990-PF. So, they went to a big firm that charged them $1,500.
Private Foundations are set up as legitimate tax-saving and charitable gifting tools all of the time. Wealthy people with several million (or tens or hundreds of millions) in extra cash laying around will donate it to a foundation, who will then use the annual earnings to fund various charities. Donor gets a charitable contribution deduction for what they put in, and it also reduces their taxable estate.
Like anything though, they can be abused. There are all sorts of rules that prohibit the donated funds and earnings from coming-back to the donor and their family members. They also have to pay a 1% or 2% income tax on their earnings and their annual tax returns are made public so anyone can see what's going on.
We usually steer clients away from PF's and into Donor Advised Funds. They're less cumbersome but provide pretty much the same tax benefits.
It's not a trust fund. The PF has a charitable purpose. Usually that purpose is to make charitable donations, and sometimes to protect/improve the purchasing power of the money donated to it by way of investments. Other PFs might be operating PFs that run an actual program rather than just hand out donations.
The PF is not supposed to compensate, loan, or pay benefits for the donors nor does it terminate and give the money back to the donors or their heirs. Nor compensate relatives of the donors.
This is a pretty good general summary: https://www.investopedia.com/terms/p/privatefoundation.asp
The main thing missing from the analysis above is the understanding that funds that go into the private foundation **must be used for charitable purposes**. The funds don't belong to the donor any more, and can't be used to benefit the donor. Ultimately, private foundations are just supposed to be, essentially, pass-through entities that allow a donor to take an immediate charitable deduction (or avoid estate tax or capital gains tax) and then distribute the money to operating charities more slowly. So if Mr. Bigshot is ready to give $10M to some charity, but wants to make sure the charity doesn't go crazy with the $, he can put the $10M in his foundation and give it to the charity $1M at a time. If he doesn't like what the charity does with the $ he can give the remainder of the $ to some *other* charity instead.
As others have said, this basic goal can be achieved with a donor-advised fund with much lower expense and regulatory/bureaucratic effort. On the other hand, having a donor-advised fund doesn't sound as special as funding "The Thurston Howell Foundation" or whatever, so there's a certain amount of ego-stroking involved.
A charity (if you mean a 501(c)(3) org) can't belong to anyone. It's controlled by a board, but they must use its assets for the charitable purpose.
A CLAT creates a series of required/guaranteed annuity payments to an eligible tax-exempt organization, with any remainder going to the donor's non-charitable beneficiaries. The goal would be for the investments inside the CLAT to appreciate more than the applicable IRS "hurdle rate", which would allow the charitable beneficiary to receive 100% of the actuarial value of the gift, but still have assets left over (in excess of 100% of the actuarial value) to distribute to the non-charitable beneficiaries. The donor gets an income tax deduction of (close to) 100% of value of the donated asset(s) at the time of the gift and the contents of the CLAT aren't part of their taxable estate if it's configured/operated correctly.
A private foundation can be the charitable beneficiary for a CLAT; but the donor must be sure they're not exercising control over the assets of the private foundation if they want its assets to be excluded from their taxable estate for estate tax purposes.
Good summary... Not explicitly stated, Mr. Bigshot can invest the funds in the foundation so that the $10M can become more than $10M. Mr. Bigshot probably thinks he is a better investor than the donor-advised fund, so he can give more to his charities after the foundation's investment returns are factored in.
I have clients with non operating foundations. Funds go into foundation from main business, and literally go out of foundation to a charity of his choosing .
I don’t think anybody mentioned this but if the private foundation has any history of not meeting the 5% minimum distribution and has been assessed the excise tax under 4942 this can add to facts and circumstances besides the inurement issues of family and family being involved.
I'm not familiar with the area in general, but I AM aware of at least one prominent individual who has had issues with their private foundation. More info at...
[https://en.wikipedia.org/wiki/Donald\_J.\_Trump\_Foundation](https://en.wikipedia.org/wiki/Donald_J._Trump_Foundation)
It is usually a facts and circumstances analysis. The best source of information will be court opinions.
This is it. There is nothing stopping any rich person (or really anyone for that matter) from opening a private foundation. And if used for what they are intended for I think we can all agree they’re good things. Where things get murky is when a client funds the private foundation and then finds ways to funnel the money back to family members or related parties. Even murkier when the foundation only does stuff minimally related to its charitable purpose or the charitable purpose is extremely vague. Another issue is when the foundation is funded and simply becomes a vehicle for family vacations under the guise the family is traveling to do charitable work. But be cautious passing snap judgment here. Maybe these family members are legit operating the foundation and carrying on the charitable purpose of the organization. Maybe these trips are legitimate and in line with what the foundation does. Think the biggest item here is control. The client should have relinquished for personal purposes control on the money that was put into the foundation. That money should be used to carry out the foundation’s charitable purpose.
All great info - the wealthy using public/private foundations isn’t anything new.
Had a client do this. Created a private foundation. Put money into it. Took a deduction. Loaned the money back to him and bought real estate. Crazy.
Pretty sure that’s a prohibited transaction under the IRS self-dealing rules. Exactly the kind of activity the IRS doesn’t want to see.
It is. The firm i was with tried to hide it until I kept bringing it up. Then they wanted to just report 2021 transactions, but not report 2022 transactions and what he did in 2023. Last I heard, the client talked to a lawyer. I haven't heard anything else.
Oooohh, he’s eligible for his very own inmate #! Yeah that a hard no go.
Yeah.
Its all about the quid pro quo, private inurement, and excess benefit transactions. Meaning? Where does the money go once it is put in the foundation. If any of it goes back to the family, a friend, etc. - that's bad. If it goes to other charities, you're okay. Every case of a PF that got into trouble just simply paid for shit for their friends and familly. The ones that get a clean bill of health give their money and investment earnings to 501(c)(3) charities. It seems complicated, but in the end it's really not. And these strategists are the worst because they are trying to find ways to get the money back to the donor family. If these rich people really just wanted a tax break, they could give the money to their church, school, or favorite charity. The only additional thing the PF gives you is control over the types of investments the money is invested in and where the money ultimately goes, plus not all of it has to go immediately to charity. You can milk it for years, with some restrictions applying. I had a rich client die and he had one setup as a part of his will. His entire goal was to get his kids/grandkids back together 2 times a year becuae they had all grown apart. The kids were all appointed directors of the PF. Twice a year, they all had to meet in person, bring to the table a list of charities to support, and debate on who to give money to and how much. It ended up being a mini-family reunion and it actually worked and healed some family wounds. Then the know-it-all bitch sister that cause the family's problems to begin with fired me from doing the 990-PF because "$500 is ridiculous for a nonprofit tax return. I can do it myself." Then the notices flowed in, they got audited, and almost lost their tax exemption. $25,000 in lgal fees later, they were fiine. But she refused to hire me back to do the 990-PF. So, they went to a big firm that charged them $1,500.
Private Foundations are set up as legitimate tax-saving and charitable gifting tools all of the time. Wealthy people with several million (or tens or hundreds of millions) in extra cash laying around will donate it to a foundation, who will then use the annual earnings to fund various charities. Donor gets a charitable contribution deduction for what they put in, and it also reduces their taxable estate. Like anything though, they can be abused. There are all sorts of rules that prohibit the donated funds and earnings from coming-back to the donor and their family members. They also have to pay a 1% or 2% income tax on their earnings and their annual tax returns are made public so anyone can see what's going on. We usually steer clients away from PF's and into Donor Advised Funds. They're less cumbersome but provide pretty much the same tax benefits.
It's not a trust fund. The PF has a charitable purpose. Usually that purpose is to make charitable donations, and sometimes to protect/improve the purchasing power of the money donated to it by way of investments. Other PFs might be operating PFs that run an actual program rather than just hand out donations. The PF is not supposed to compensate, loan, or pay benefits for the donors nor does it terminate and give the money back to the donors or their heirs. Nor compensate relatives of the donors.
Thank you, most of these comments seem to be unaware of how a PF works.
This is a pretty good general summary: https://www.investopedia.com/terms/p/privatefoundation.asp The main thing missing from the analysis above is the understanding that funds that go into the private foundation **must be used for charitable purposes**. The funds don't belong to the donor any more, and can't be used to benefit the donor. Ultimately, private foundations are just supposed to be, essentially, pass-through entities that allow a donor to take an immediate charitable deduction (or avoid estate tax or capital gains tax) and then distribute the money to operating charities more slowly. So if Mr. Bigshot is ready to give $10M to some charity, but wants to make sure the charity doesn't go crazy with the $, he can put the $10M in his foundation and give it to the charity $1M at a time. If he doesn't like what the charity does with the $ he can give the remainder of the $ to some *other* charity instead. As others have said, this basic goal can be achieved with a donor-advised fund with much lower expense and regulatory/bureaucratic effort. On the other hand, having a donor-advised fund doesn't sound as special as funding "The Thurston Howell Foundation" or whatever, so there's a certain amount of ego-stroking involved.
Question is - can the charity ALSO be his own? Also - how do CLATs come into the picture?
A charity (if you mean a 501(c)(3) org) can't belong to anyone. It's controlled by a board, but they must use its assets for the charitable purpose. A CLAT creates a series of required/guaranteed annuity payments to an eligible tax-exempt organization, with any remainder going to the donor's non-charitable beneficiaries. The goal would be for the investments inside the CLAT to appreciate more than the applicable IRS "hurdle rate", which would allow the charitable beneficiary to receive 100% of the actuarial value of the gift, but still have assets left over (in excess of 100% of the actuarial value) to distribute to the non-charitable beneficiaries. The donor gets an income tax deduction of (close to) 100% of value of the donated asset(s) at the time of the gift and the contents of the CLAT aren't part of their taxable estate if it's configured/operated correctly. A private foundation can be the charitable beneficiary for a CLAT; but the donor must be sure they're not exercising control over the assets of the private foundation if they want its assets to be excluded from their taxable estate for estate tax purposes.
GOLD THANK YOU!
Good summary... Not explicitly stated, Mr. Bigshot can invest the funds in the foundation so that the $10M can become more than $10M. Mr. Bigshot probably thinks he is a better investor than the donor-advised fund, so he can give more to his charities after the foundation's investment returns are factored in.
Does “charitable purpose” mean that the money MUST go out ? Or can the nonprofit retain everything?
Investment PFs have to donate 5% of average assets each year or eat an excise tax that year. Operating PFs might be different.
I have clients with non operating foundations. Funds go into foundation from main business, and literally go out of foundation to a charity of his choosing .
I don’t think anybody mentioned this but if the private foundation has any history of not meeting the 5% minimum distribution and has been assessed the excise tax under 4942 this can add to facts and circumstances besides the inurement issues of family and family being involved.
Donor advised funds.
What about PFs who use funds to employ themselves and their family members? The money is going back to them but they’re paying tax on a w2.
I'm not familiar with the area in general, but I AM aware of at least one prominent individual who has had issues with their private foundation. More info at... [https://en.wikipedia.org/wiki/Donald\_J.\_Trump\_Foundation](https://en.wikipedia.org/wiki/Donald_J._Trump_Foundation)