• 2,000+ private foundation clients supported
• 6,700+ individual forms prepared (including 990PFs, state forms, federal forms, filings related to foreign holdings, etc.)
• Filed in 45 states
• 1,650+ K-1s processed

Our Specialized Expertise

Running a private foundation without running afoul of the IRS requires a thorough knowledge of complex, evolving rules and regulations. Our foundation tax experts provide proactive tax planning and meticulous preparation of thousands of private foundations’ returns.

Our team is made up of 12 tax accountants who prepare returns and make sure each foundation is compliant with IRS regulations. In addition, the team has four Tax and Legal Operations Specialists who help with the review process, corrections, manage the Tax Center on Impactfully, and more.

“Every year our tax team handles thousands of filings with increasing complexity and sophistication. Their knowledge, dedication and specialized expertise make it look easy while ensuring our foundation clients get accurate, timely returns.” – Chana Spielman, Tax and Legal Department Advisor

Our Innovative Tech

The Tax Center on Impactfully is designed for private foundation members to stay compliant and on top of their tax to-dos. When our clients log into Impactfully, they can see any outstanding notifications from the Tax Center at the top of the dashboard.

“I’m not a fan of doing taxes (understatement). I am very happy that Foundation Source provides the services to file on behalf of the foundation each year so that I can rest easy knowing that the foundation is providing a legitimate accounting to the government.”
– Chris Burns, The Reid Burns Foundation

Want To Learn More?
Learn about our private foundation tax preparation and filing here.

Questions In the Meantime?
We’re here to help! Schedule a call with us or reach us at 800-839-0054. Together, let’s #begiving.

The post 2024: Another Tax Season for the Books appeared first on Foundation Source.

Short on Time? Start with Our Infographic…

4 Tax Benefits of a Private Foundation
For HNW individuals who have a strong charitable interest, private foundations offer an opportunity to save in taxes while creating a lasting philanthropic legacy.

Want to Take a Deeper Dive? Check Out These Resources…

Tax Benefits of a Private Foundation
Foundations offer four attractive benefits to donors that can mitigate income, capital gains and estate taxes.

Advanced Tax Strategies for Private Foundations
Six sophisticated strategies for private foundations to reduce tax liability and preserve the value of their endowments.

Unrelated Business Taxable Income (UBTI) for Private Foundations
Learn more about the implications of generating excess UBTI from activities, investments or assets in a foundation.

The Conduit Election
This annual election offers two key tax advantages for contributions – higher AGI caps and an FMV deduction for certain appreciated assets.

Want to Master the 990-PF? Start Here…

The 990-PF: How to Reap Savings and Avoid Pitfalls
We’ve reviewed and prepared thousands of private foundation tax returns – here’s what we’ve learned.

You May Also Like…
For more advanced tax strategies of a private foundation, check out this white paper.

Questions in the meantime?
We’re always happy to talk about your giving goals! Contact us or call us 800-839-0054. Together, let’s #begiving.

The post 2024 Guide to Tax Strategies for Private Foundations appeared first on Foundation Source.

For a quick summary of the two proposals, click here.

ICYMI: 4 Tax Benefits of a Private Foundation
These top tax benefits of a private foundation can serve as a helpful primer for your conversations with clients who show a strong interest in charitable giving.

Learn More About How We Support Advisors
Schedule a call or reach us at 800-839-0054 to learn how we can best support your clients who are passionate about giving. Together, let’s #begiving.

The post Breaking Down New Tax Proposals That Could Change Private Foundation Rules appeared first on Foundation Source.

• One of the many items addressed in the 2024 Greenbook is a concern regarding private foundations making grants to DAFs to satisfy their annual 5% payout requirement.
• Per the Greenbook, the current administration feels that it is not appropriate for a private foundation to satisfy its distribution requirement by making a distribution to a DAF in which the foundation has advisory privileges because there is no requirement for the DAF to make a further distribution of funds for a charitable purpose within any set period of time.
• Note, however, that the proposal set forth in the Greenbook does not explicitly limit the application of the proposed rule to DAFs over which the granting private foundation has advisory privileges.
• To address the concern of a private foundation satisfying its 5% payout requirement by making a grant to a DAF, the Greenbook piggybacks off the rules currently applicable to “private foundation to private foundation” grants. Such rules limit the potential for funds to move back-and-forth between entities where they could sit indefinitely and never get into the hands of an active charity.
• Under current law, when one private non-operating foundation grants to another private non-operating foundation, only one of the two foundations may count the distribution of the grant funds towards meeting its 5% payout requirement. For the grantor foundation to do so, the grantee must agree to: (i) spend down the funds for charitable purposes by the end of its next tax year, (ii) refrain from counting its expenditure of the funds towards satisfying its own 5% payout requirement and (iii) provide evidence to the grantor private foundation that the grantee private foundation has met these requirements.
• The Greenbook proposal would prohibit a private foundation from counting a grant to a DAF towards meeting the 5% payout requirement unless (a) the sponsoring organization spends down the grant funds for charitable purposes by the end of the following taxable year and (b) the private foundation maintains adequate records or other evidence showing that the sponsoring organization has made such distributions within the required time frame. While this is similar to a proposal in the Greenbook for fiscal year 2023, the current proposal further provides that the sponsoring organization can’t satisfy the above spend-down requirement by making grants to another DAF.

Expenses for Certain Disqualified Persons

• As background, all officers, directors, and trustees are “disqualified persons” by virtue of their position as a foundation officer, director, or trustee. A person can also be classified as a disqualified person by being a “substantial contributor” to the foundation, even if the contributor doesn’t serve the foundation in any capacity. Finally, note that disqualified persons also include the family members of officers, directors, trustees, and—notably—substantial contributors.
• Under this proposed rule, if you have a foundation officer, director, or trustee that’s not a substantial contributor—and not a family member of a substantial contributor—then the compensation paid to such person (or the reimbursement of such person’s expenses) will continue to count towards satisfying the 5% payout requirement. However, if the person receiving compensation (or reimbursement for expenses) is a family member of a substantial contributor, then the amount paid (or reimbursed) won’t count towards satisfying the foundation’s 5% payout requirement. The self-dealing rules would not change, so a foundation could still pay reasonable compensation to (and reimburse the expenses of) an affected disqualified person. However, the amount paid won’t count towards satisfying the foundation’s minimum distribution requirement.
• While this proposal does not explicitly apply to disqualified persons who themselves are substantial contributors, it seems as though the administration may have intended to treat such persons the same as those who are family members of substantial contributors.
• While non-family foundations wouldn’t be impacted by this proposal, family foundations with working and compensated family members would be. While this proposal wasn’t included in the Greenbook for fiscal year 2023, it was part of the Accelerating Charitable Efforts (ACE) Act. Although the ACE Act was introduced in the Senate in 2021 and House of Representatives in early 2022, it never became law.

The post Greenbook 2024 appeared first on Foundation Source.

• Increased income tax rates
  • Individuals to 39.6% (ordinary) and long-term capital gains (LTCG) and dividends for taxpayers with adjusted gross income (AGI) of more than $1 million
  • Increase in corporate tax rate from 21% to 28%
• Gifts, bequests, trust distributions as capital gains realization events
  • Loss of capital gains“step-up”
  • Gifts and certain trust distributions as realization events
  • 90-year trust realization event
  • $1 million exclusion

THE POTENTIAL IMPACT ON CHARITABLE GIVING

• The top marginal individual income tax rate would increase from 37% to 39.6% for taxable income in excess of the top bracket threshold—as tax rates rise, the value of itemized deductions also rises.
• For taxpayers with AGI of more than $1 million, long-term capital gains and qualified dividends tax rate would increase to match the proposed ordinary income tax rate. For a taxpayer with income in excess of $1 million, rates would jump from 20% (or really 23.8%, including the net investment income tax) to 39.6% (or really 43.4%, including the net investment income tax).

2. The House Ways and Means Proposal

• Return of proposed estate tax changes instead of capital gains tax
  • Accelerate “sunset” of current estate tax levels (effectively dropping in half from $11.7 million to about $5.5 million)
  • No mention of loss of “step-up” or gifts/distributions as realization events
• Income tax changes
  • Highest personal rate to 39.6%; capital gains rate to 25% – 3% surcharge for in come over $5 million
  • Corporate rate to 26.5%
  • Changes to certain cross-border tax rates and rules
• Changes to grantor trusts (pulled into taxable estate)
• IRA changes
  • Increased required minimum distribution for high-income taxpayers with large balances ($10 million plus, and can never stay over $20 million)
• In terms of charitable giving, like with the Green Book proposals, higher taxes lead to a more valuable deduction
• Estate taxes
  • Brings a lot more people into the estate tax net
  • Eliminates a lot of common planning for reducing estates (e.g. grant or trust planning) – Eliminates valuation discounts
  • Makes gifts to charity and certain charitable lead trusts far more valuable

3. The ACE Act

Co-sponsored by Senators Angus King (I-ME) and Chuck Grassley (R-IA)

• Private foundations would no longer be allowed to count grants to DAFs towards meeting the annual minimum distribution of income requirement (MDR) if the private foundation retains advisory privileges.
  • Note: This is not a concern for a terminating foundation or for a foundation that grants to a DAF account over which the foundation has not retained advisory privileges.
• Private foundations would no longer be able to count administrative expenses (for example, payroll, travel, and other similar expenses) of certain insiders towards meeting the MDR.
  • Note: This limitation is targeted only at insiders who are family members of a foundation’s substantial contributors. The payroll and expenses of non-family members would still count towards satisfying the MDR.
  • Note: This rule would still allow foundations to pay salary to and cover the expenses of the targeted insiders—these expenditures would not be taxable expenditures. However, such expenditures would not count towards satisfying the MDR.
• Private foundations that choose to sunset within 25 years would pay no excise tax. However, if such a foundation makes prohibited grants to related foundations, or it opts not to sunset at the point in the future when it is required to do so (after not paying excise taxes for 25 years), the foundation would have to pay the IRS any taxes it saved because of this tax break.
• Private foundations would pay no excise tax in any year in which it satisfies a voluntary 7% payout requirement determined by reference to the value of the foundation’s assets on the first day of the tax year.
• A private foundation that uses DAFs to avoid “tipping” of the public charity status of a donee may no longer be able to do so, as distributions from DAFs will be treated effectively as distributions from the private foundation.

THE POTENTIAL IMPACT ON DAFS

• For non-community foundation DAFs, generally, the legislation would allow a current charitable deduction for cash or marketable security gifts to a DAF only if such gifts are distributed by the DAF to charities within 15 years of the first contribution to the fund and all advisory privileges terminate.
• There are narrow exceptions to these rules for DAFs that are set up at community foundations, but the exceptions apply only for amounts donated up to $1 million or there is a 5% MDR on the individual qualifying community foundation donor-advised fund.

The post Philanthropy in Transition appeared first on Foundation Source.

If appreciated stocks are contributing to your client’s bottom line, one tax-effective strategy is to contribute up to 20% of their adjusted gross income (AGI) to a private foundation in the form of highly appreciated, publicly traded stock held for at least a year.

If your client were to sell these securities, they could have tax liability arising from long-term capital gains. If they’re in the highest marginal tax bracket, the effective long-term capital gains tax rate would be 23.8% (taking into account the 3.8% net investment income tax). However, if they were to take that stock and donate it to their foundation, they’d be eligible to get a fair-market value deduction and avoid the substantial capital gains tax.

UNLIKE OTHER CHARITABLE SOLUTIONS, THE FUNDS CONTRIBUTED TO A PRIVATE FOUNDATION STAY UNDER YOUR CLIENT’S DIRECT CONTROL AND YOUR FINANCIAL MANAGEMENT

Example: Let’s say Mary Smith, who is in the highest marginal tax bracket, bought stock for $100,000 five years ago, which has since appreciated to $1M. If she were to sell the stock for its current value, her capital gains exposure would be $214,200 ($900,000 gain at 23.8% = tax bill of $214,200), leaving $785,800 for her personal benefit. If, instead of selling the stock, she donated it to her private foundation, her foundation’s tax rate would be, at most, its 1.39% excise tax. The resulting tax bill would be $18,000, leaving $982,000 for charitable purpose under her direct control.

Make a Combined Donation of Stock and Cash

Alternatively, Mary could combine her donation of highly appreciated stock with a cash donation.

Example: Let’s say Mary’s AGI is approximately $5M. Her AGI maximum is therefore $1M for stock (20%). If she were to donate cash, she’d be permitted to donate up to 30% of her AGI—an additional 10%. She could therefore donate that same $1M of highly appreciated stock used in the previous example along with an additional $500,000 in cash. Assuming she has no other limitations (this example is exclusively for illustrative purposes), she would be eligible for a deduction of up to $1.5M. Meanwhile, her private foundation would only pay a 1.39% excise tax on the stock’s gain of $900,000, resulting in a tax bill of $18,000 and a $982,000 endowment for her foundation.

Donate Other Types of Appreciated Assets

Private foundations can be funded with a wide variety of assets. And unlike other giving vehicles that require liquidation of donated assets, private foundations can continue to hold them. These assets could include:

• Publicly traded securities
• Alternative assets, including private equity
• Real estate
• Tangible assets (art, jewelry, collectibles)
• Intangible personal property (copyrights, patents, royalties)
• Life insurance and annuities
• Cryptocurrency

Note that not all contributions are treated the same with respect to cost basis and deductibility. Whereas cash donations are deductible up to 30% of AGI, assets are generally deductible at the lesser of cost basis and fair market value (with the exception of certain publicly traded stock, as mentioned above) for 20% of AGI. Any contributions that exceed the applicable AGI caps can be carried forward for up to five years. And if your client has a charitable remainder trust, they can name their foundation as the beneficiary.

Additional Benefits of Private Foundations

Tax savings aside, private foundations offer nearly endless capabilities for investors to engage in philanthropy. Here are just some of the things one can do with a foundation:

• Make grants to non profit organizations – nationally and internationally
• Makegrants directly to individuals in times of emergency or hardship
• Issue loans to nonprofit organizations that are aligned with the foundation’s mission
• Create and run charitable activities (e.g., a camp for children with special needs; a shelter for victims of domestic violence)
• Establish scholarship/award programs for individuals
• Invest in for-profit companies that are aligned with the foundation’s mission

Additionally, private foundations afford investors the opportunity to build a meaningful legacy of giving and to unify their families through philanthropy.

(Almost) Immediate Gratification

Because Foundation Source can establish a new private foundation in less than a week, you don’t have to wait to lock in your client’s tax savings. They can get started on their philanthropic legacy right away! Schedule a call with us or reach us at 800-839-0054 to learn more about the important benefits of a private foundation.

The post Reducing the Tax Liability of Appreciated Assets appeared first on Foundation Source.

The personal charitable deduction for donating appreciated capital assets to a private foundation is typically limited to the donor’s cost basis. However, an exception exists for donations of “qualified appreciated stock,” generally allowing donors of publicly traded stock a fair-market-value deduction. An abbreviated definition of “qualified appreciated stock” is stock of a corporation for which market quotations are readily available on an established securities market. The stock must be held for at least one year, such that its sale would give rise to long-term capital gain. This exception does not apply to any other type of security, even those that are publicly traded, like bonds, publicly traded partnerships, and options. Additionally, the IRS has signaled that they won’t consider restricted stock to be qualified appreciated stock if the foundation can’t sell the donated stock because of holding period requirements.

2. Step Up the Foundation’s Cost Basis in Capital Assets

A private foundation is unable to carry forward capital losses to future years. Rather than allowing losses to disappear forever, a foundation can sell its appreciated capital assets and offset the resulting capital gains with the unused capital losses. Further, the foundation may immediately repurchase the capital asset because the “wash sale” rules apply only to capital losses, not capital gains. This strategy has the effect of providing stepped up basis for appreciated capital assets. Since the private foundation excise tax does not differ between short- and long-term gains, there is no downside to restarting the holding period.

RATHER THAN ALLOWING LOSSES TO DISAPPEAR FOREVER, A FOUNDATION CAN SELL ITS APPRECIATED CAPITAL ASSETS AND OFFSET THE RESULTING CAPITAL GAINS WITH THE UNUSED CAPITAL LOSSES.

3. Maximize the Donor’s Personal Charitable Deductions

Except for contributions of cash and qualified appreciated stock, contributions of appreciated assets to private foundations are generally limited to cost basis. That said, a foundation can make the so-called “conduit” election for any tax year to permit donors the foundation’s donors to treat donations made in an election year as though they had been made to a public charity. If the conditions are met for making a conduit election, donors of appreciated long-term capital assets, such as real property, are allowed a fair market value deduction and may benefit from higher adjusted gross income (AGI) percentage caps. These conditions require a foundation to (1) have satisfied its 5% annual minimum distribution requirement (MDR) for the year in which the conduit election is made (the election year), (2) satisfy next year’s MDR by the end of the election year, and (3) disburse the full value of all property and cash donated to the foundation in the election year within two and a half months after the close of that year. These conditions are often too onerous to be practical. But if a foundation has accumulated excess distributions carryover over its past five tax years, it can apply those carryovers in lieu of actual granting to satisfy the conduit election requirements. Excess carryovers are created when a foundation pays enough grants and qualifying expenses in a tax year to satisfy that year’s and the following year’s MDR. The excess carryovers from a given tax year can satisfy a future year’s MDR for up to five years, after which any unused carryovers expire. The charitable rollover rule allows those aged 701⁄2 and older to make tax-free charitable donations from their IRAs to private foundations making the conduit election, up to $108,000 per year (for 2025), and count it towards meeting their required minimum distribution.

4. Preserve Endowment with Program-Related Investments

Many foundations choose to satisfy their MDRs by making Program-Related Investments instead of or in addition to traditional grants. A Program-Related Investment (“PRI”) is essentially a charitably motivated investment that often takes the form of a zero or low-interest loan, secured or unsecured, to another charitable organization but can also take the form of a loan guarantee or even an equity investment if certain conditions are met. In the year a foundation makes a PRI loan or other qualifying investment, the funds advanced are treated as though they were traditional grants for purposes of satisfying the MDR. Repayment of the loan principal or recovery of the investment in a given tax year will increase the MDR on a dollar-for-dollar basis in the next tax year. Making PRIs permit a foundation to “recycle” its assets by making new PRI loans or other qualifying investments with funds that were repaid or recovered. By contrast, when a foundation makes a grant, the foundation never expects to recover those grant funds. An often overlooked tax benefit of PRIs is the exclusion of the value of all PRI assets when a private foundation calculates its MDR. For instance, suppose that a foundation invests $1 million in blue chip stocks.

The value of that stock will add roughly $50,000 (5% of $1 million) to the foundation’s MDR. By contrast, if the foundation makes a $1 million PRI loan or other qualifying investment instead, the foundation’s ownership of that investment won’t add a dollar to the foundation’s MDR.

MAKING PRIs PERMIT A FOUNDATION TO “RECYCLE” ITS ASSETS BY MAKING NEW PRI LOANS OR OTHER QUALIFYING INVESTMENTS WITH FUNDS THAT WERE REPAID OR RECOVERED.

5. Consider the Potential Liquidity Dilemma Posed by Certain Investments

Non-productive investment assets that do not generate income, such as a vacant lot or building, increase the foundation’s MDR by roughly 5% of the asset’s value, but do not provide the means to satisfy the increased MDR. For example, land worth $2 million will add roughly $100,000 (5% of $2 million) to the foundation’s MDR. If the land produces no rental income to help satisfy the MDR, the foundation may lack sufficient cash or other liquid assets to do so.

6. Eliminate Capital Gain with In-Kind Grants

If a foundation sells a significantly appreciated capital asset, it will recognize a capital gain and be taxed at the usual 1.39% tax rate. Instead of selling the appreciated asset, a foundation can make an in-kind grant of that asset directly to a charity, thereby eliminating the capital gain. The value of the appreciated asset at the time of the grant will be treated as the amount of the grant for purposes of satisfying the foundation’s MDR.

The post Advanced Tax Strategies for Private Foundations appeared first on Foundation Source.

YOUR FOUNDATION CLIENTS

Your clients continue to govern their foundations, set strategy, and make all granting and investment decisions. They will continue to work with you and their existing wealth advisor and attorney.

YOUR FIRM

You’ll gain access to the foundation’s reconciled asset and transaction data through our online platform. We do all the “behind-the-scenes” administrative work while your firm maintains its role as the primary tax advisor and preparer for the foundation. We make it easier for you to:

• Calculate quarterly excise taxes
• Prepare and file federal returns (990-PF and related filings) and state filings

HOW WE HELP

While supporting you as the foundations’ tax advisor, we also provide all the other services that are required to keep foundations running smoothly and compliantly on a day-to-day basis. Your clients will be supported by a dedicated Private Client Advisor who will serve as the primary contact and coordinate all services provided by Foundation Source.

Foundation Source Services Include:

ADMINISTRATIVE SUPPORT

Our professional staff handles the details that keep your clients’ foundations running smoothly, so they can focus on their philanthropic goals. We take care of the following:

• Grant processing and disbursements
• Expense processing
• Active compliance monitoring of foundation activities
• Tracking the foundation’s progress toward meeting its 5% minimum distribution requirement
• Foundation accounting and reconciliation
• Coordinating with you to facilitate your tax work

SPECIALIZED ONLINE TOOLS

Every foundation gets access to Impactfully, a secure, web-based “command center” that centralizes administration. Developed specifically for the needs of private foundations, this award-winning technology platform simplifies foundation control, communication, and collaboration. Designated foundation members get instant access and total transparency into foundation activities. Features include:

• Individually customized viewing rights and granting permissions
• An integrated database and specialized tools for charity research and grantmaking
• Online tracking, and reporting, including investment balances across all accounts

PHILANTHROPIC ADVISORY SERVICES

Foundation Source Philanthropic Directors are experienced professionals who are available to provide philanthropic advice to the foundation via periodic phone consultations. If the foundation requires more extensive support, our Philanthropic Directors can provide in-depth, custom engagements.

FOUNDATION CREATION

If a client doesn’t already have a foundation, but is thinking about establishing one, we are happy to work with the family’s attorney to coordinate services. Alternatively, we can provide the foundation entity and file IRS Form 1023 for recognition of exempt status. We’ll also provide articles of incorporation, bylaws, and investment, expense, and conflict of interest policies, which can be modified by the foundation.

In Summary

We have decades of experience supporting private foundations. We know that foundations and their needs come in all shapes and sizes. Our goal is to take the time to understand your practice and your clients, so we can help forge the best path forward. In the end, your clients want to make a difference with their philanthropy… and it’s our mission to help them do just that.

The post Your CPA Practice and Foundation Source appeared first on Foundation Source.

The post The Advisors Guide to Charitable Conversations with Clients appeared first on Foundation Source.

Entrepreneur with a Cash Buyout Offer

Craig was a serial entrepreneur who, in recent years, had developed and operated for-profit career colleges through a privately held corporation. After several years of operating the colleges successfully, Craig received an all-cash offer to sell the colleges to another company in a similar line of business. This opportunity presented Craig with a dilemma: should he contribute stock of the corporation to his family foundation prior to executing an agreement to sell the stock to the buyer, or should he sell the stock and make a cash contribution to his foundation?

After consulting with his tax advisor, Craig concluded that selling the stock and making a cash contribution to his foundation was the optimal choice for two reasons. First, had he contributed the privately held stock, he would only have been allowed to claim a charitable contribution deduction for his adjusted basis in the stock, and not its fair market value as reflected in the sale price. Second, from his foundation’s standpoint, although gifts of stock are not treated as excess business holdings for 60 months from the date of the gift, the foundation eventually would have to sell most of the stock to fall within the excess business holdings limits and avoid a violation, even if the anticipated sale did not close.

Had the privately held corporation been structured as an S corporation, another important consideration would be that any distributive share of net income from the S corporation received by the foundation would be treated as income from an unrelated trade or business, which is taxed at the for-profit rates, and a subsequent sale of the stock likewise would be treated as a taxable gain under the unrelated business income tax rules.

By creating a private foundation, a seller may avoid or reduce taxes while retaining control over all or a portion of the sale proceeds to be used for future charitable grants or activities.

CASE STUDY #2

Professional with a Stock Buyout Offer

Rachel was a successful architect who, after many years of association with other firms, established her own architectural firm that she operated through an S corporation of which she was the sole stockholder. After several years of successful operations and expansion of the business, Rachel was presented with a once-in-a-lifetime opportunity to sell her company to a publicly traded real estate investment trust (REIT). The transaction was structured to qualify as a tax-free reorganization because Rachel received the stock of the REIT in exchange for 100% of the stock of her S corporation. After a short lock up period of six months, she was free to dispose of the stock by sale or gift.

After consulting with her tax advisor, Rachel decided to make a contribution of the REIT stock to her newly- formed family foundation. The stock she received from the REIT qualified as long term capital gain property because her holding period for the S corporation stock was tacked onto the holding period for the REIT stock. Equally important from Rachel’s standpoint was the fact that the S corporation stock was converted, tax-free, into publicly traded stock and, therefore, when she contributed the stock to her family foundation, she obtained a charitable contribution deduction for an amount equal to the fair market value of the stock rather than one that was limited to the stock’s adjusted basis.

CASE STUDY #3

Real Estate Investor with No Immediate Buyer

George, now deceased, was a co-founder and 50% owner of a limited partnership that constructed and purchased commercial office buildings for investment purposes. George’s partner, who is unrelated to George, owns the other 50%. As part of his estate planning, George made a bequest of a 30% profits interest in the partnership to his family foundation and the balance to his children and grandchildren. Because his estate received a step-up in basis upon his death, his estate obtained an estate tax deduction for the fair market value of the partnership interest. And because more than 95% of the partnership’s revenue was in the form of rents from real property, the foundation was permitted to retain ownership of the partnership interest under the excess business holdings rules generally applicable to private foundations. Although the foundation couldn’t sell its partnership interest to George’s family members because of IRS rules prohibiting certain transactions with insiders, the foundation could always sell its interest to an unrelated third party or have its interest redeemed by the partnership.

CASE STUDY #4

Landowner with Cash Buyout

Emily retired from a successful career as an attorney and purchased, debt-free, a house and barn on 200 acres of land not far from a city on which to run an organic produce farm. After 20 years, having saved enough from her previous career and from the farming business to retire comfortably even without the proceeds from the sale of the farm, Emily decided to give up farming and move closer to her children. Since Emily purchased the farm, the rural area surrounding it had become more suburban, so she had received a number of attractive offers to sell the farm for residential development for much more than her original purchase price. Although Emily and her children believed strongly in educating the public about organic farming, they did not have the time or resources to turn the farm into a charitable farm education center. Instead, Emily supported a number of such organizations that already existed. She hoped to increase her donations to those and other organizations promoting organic farming and to engage her children in her philanthropic efforts.

After consulting with her tax advisor, Emily decided to create a private foundation with herself and her children as directors and donate the farm property to it, rather than selling the farm and donating the after-tax sale proceeds. Because the property was donated and not sold, no capital gains tax was due on the significant appreciation in the value of the farm property. Thus, Emily was able to direct the farm’s full fair market value to her charitable endeavors and receive a charitable contribution deduction in the amount of her cost basis in the farm property. Despite being limited to her original cost, the charitable deduction was as large as Emily could have used given her diminished income level as a result of her retirement. Due to its tax-exempt status, when the foundation subsequently sold the land, it was subject to minimal tax on the sale proceeds and was able to devote the net proceeds to its charitable mission.

CASE STUDY #5

Artist with Need to Sell Over Time

Steve had a long career as a commercially successful contemporary artist. He received significant income from the sale of his original works and royalties on licensed reproductions. Over the years, he had retained a large collection of his own works worth over $20 million with a tax basis of close to zero. Steve was terminally ill and wanted to use the value of his art for two purposes: to support his one child, Bill, and to provide financial awards to young artists. Steve was justifiably concerned that the value of his art might decline after his death as it ceased to be as contemporary and he was no longer around to promote it. Steve also knew that the value of his art would be greater if individual pieces were sold gradually over time rather than all at once.

Steve considered simply leaving the art and royalties to his son, but that would have resulted in a very large estate tax liability, which could have only been paid by quickly selling a substantial part of the collection, likely at a discount. Instead, Steve’s advisors worked with him to set up an estate plan under which he would leave $10 million of his art and $1 million of royalties (well within the federal estate tax exemption amount) to Bill. He quickly set up a private foundation that would receive the rest of his estate, $10 million of art and $1 million of bonds. The foundation obtained approval from the IRS for a program of making financial awards to young artists.

Thanks to this proactive planning, after Steve’s death, no estate taxes were due. Son Bill received a stream of taxable royalties, but he was able to reduce the taxes by selling some of his father’s art tax-free (because of the basis step-up caused by the art’s having passed through Steve’s estate) and giving the proceeds to the foundation. If Bill needed more income, he could have kept the proceeds of art sales for himself or, if he was managing the foundation, it could have paid him a reasonable salary for doing so. The foundation could strategically promote Steve’s art (incidentally helping to maintain the value of Steve’s art in Bill’s hands) by making gifts or loans to museums for exhibit and making essentially tax-free sales of Steve’s work to raise funds to make awards to young artists. If Steve’s work increased significantly in value over Bill’s remaining life such that Bill could not pass all of it on to his children without an estate tax, Bill could repeat the same strategy using the same foundation in his own estate plan.

CASE STUDY #6

Executive with Suddenly Valuable Stock Options

Patricia was a long-time executive at a public company. Over the years, she had been granted non-qualified stock options (NSOs) to purchase 100,000 shares of her company’s stock at $20 per share. Although the stock had never traded at more than $20 per share, the stock suddenly increased in value to $50 per share, due to the profitability of a new product line. Patricia wanted to capture the run-up in the stock’s value and—since she didn’t need it for retirement—decided to donate it to her private foundation.

With her tax advisor, Patricia considered several alternatives:

• Contributing the NSOs themselves to the private foundation
• Exercising the NSOs, immediately selling the stock acquired upon exercise, and donating the after-tax cash proceeds from the sale to the foundation in the same tax year
• Exercising the NSOs, selling only as much stock as needed to cover taxes on the exercise, holding the remaining stock for at least a year to obtain long-term capital gains treatment, and then donating it to the foundation
• Exercising the NSOs and donating other appreciated property of a similar value to the foundation in the same year as the exercise in order to offset the tax triggered by the exercise

Although some types of stock options cannot be transferred by law, and many stock option plans do not allow transfers or only permit them to family members, Patricia’s company’s NSO plan permitted transfers to charity. However, Patricia ruled out donating the NSOs to the foundation after her tax advisor pointed out that when the foundation exercised them, she—and not the foundation—would owe ordinary income tax on the exercise. For this reason, it was preferable for Patricia to exercise the NSOs herself under one of the other three alternatives. (Patricia’s tax advisor explained that under each of the alternatives, she would owe ordinary income tax on the difference between the exercise price and the value of the stock received upon exercise.)

Patricia ultimately decided to immediately donate to her foundation $3 million of publicly traded stock that she had obtained in a divorce settlement 15 years before and in which she had a low basis. She received a charitable contribution deduction for the fair market value of the stock (thus avoiding tax on the significant gains built up in the stock), which o set the taxes she owed on her NSO exercise and resulted in a larger donation to her foundation than would have been the case under the other alternatives.

As these case studies illustrate, thoughtful tax planning can help philanthropic-minded individuals achieve their charitable objectives when they are looking to monetize a major business asset.

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