Archive for August, 2014

Ice-BagSeemingly out of nowhere it has become all the rage to video one’s self making a pitch for ALS and dumping a bucket of ice water over one’s head.  Celebrities?  Fuggedaboutit!  This ritual is virtually required for them to remain in the public eye.  Ordinary citizens?  Everywhere.  Even one of my more conservative and reserved partners has humiliated himself with this test.  And lest you think the insanity is limited to the United States – think again.  Just this morning I saw the two kids of an Australian Facebook friend of mine dump an entire cooler over her head.   While it may be a fleeting fad, it is certainly having an impact – according to the New York Times, between June 1st and August 13th, participants have shared more than 1.2 million videos on Facebook of themselves partaking in this somewhat odd activity and have mentioned the phenomenon more than 2.2 million times on Twitter. 


Basically, the “Ice Bucket Challenge” is a brilliant, grassroots marketing idea that originated earlier this spring before being tied to ALS.  It works like this – A “friend” challenges or nominates you to participate.  Once challenged, you have 24 hours to do the deed, video yourself doing so, and post it on a social media site like Facebook or Instagram.  If you don’t participate, well, you are then shamed into donating $100 to the cause.  If you do participate, you’ll probably give even more!  When you post your video, you then challenge others to do the same.  It’s not unlike a multilevel marketing scheme and it’s big time – check out this motley crew if you don’t believe me – former President George W. Bush, singer/songwriter Carole King, entrepreneur/philanthropist Bill Gates, athlete LeBron James, New Jersey Governor Chris Christie (come on, New York Governor Andrew Cuomo, where are you?), self-promoter Kim Kardashian, and fallen teen idol Lindsay Lohan.  The good, the bad, and the ugly – the list goes on and on, but at this point I’m tired of inserting hyperlinks about famous people.  I would embarrass some of my close associates, friends, and family who have participated, but I suspect that would not be much appreciated (although I did consider it Bob, Steve, and Sharon)! 

The serious part, of course, is the cause – raising awareness of the disease and the funds to fight it.  ALS is more commonly known as Lou Gehrig’s disease, a debilitating condition that attacks nerve cells and eventually leads to total paralysis and death within two to five years from the date of diagnosis.  30,000 Americans are afflicted with this condition, but prior to the challenge, public awareness was fairly low.  Now?  Well, the numbers don’t lie.  According to a recent press release from the ALS Association

As of Wednesday, August 27, The ALS Association has received $94.3 million in donations compared to $2.7 million during the same time period last year (July 29 to August 27). These donations have come from existing donors and 2.1 million new donors. The ALS Association is tremendously thankful for all of the generous support and awareness that this summer phenomenon has generated for the cause.

Wow!  Truly impressive!  Certainly, we can’t expect such a fundraising pace to keep up, but for now it is a shot in the arm for the ALS Association.

Yes, there are critics and cynics.  There always are.  And each of us has to decide for ourselves what causes we support and play a part in.  But the runaway success that the ALS Association has experienced underscores a very important point.  Donors must be engaged at a level that works for them in order for them to open up their wallets.  This silly little ice bucket ritual, made possible because of the social media revolution and cheap video, has gone viral and grabbed millions because it engages folks at a very basic level and makes them feel part of something far bigger than themselves.  It’s not the same as donating a bunch of money to a university and getting your name on a building, but it plays on the same emotions – the need for recognition and a desire for personal satisfaction.  Engagement can be built in many ways.  How about all the groups that sponsor some form of physical activity requiring sponsorship (fundraising) to participate?  In the past, I have participated in Team in Training, the Leukemia and Lymphonia Society’s approach to physical fundraising.  In my case, I rode in a “century” bike ride (100 miles).  Truthfully?  I signed up because I wanted to do the ride, and TNT/LLS seemed like a decent organization.  I wasn’t particularly connected to the cause.  TNT/LLS provided three months of on-the-road training and plenty of encouragement and camaraderie.  The fundraising commitment was fairly steep but I accomplished it and, guess what?  I am now a fan for life of LLS.  My awareness of blood cancers was raised while my desire for engagement was satisfied. 

In this hyper-connected and frenetically paced world, all organizations have to find ways to stand out and be noticed.  It’s not easy by any stretch.  Those who are successful know that it’s not just about raising money – it’s all about engagement.

Enjoy Labor Day 2014!

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The private foundation (PF) is a great tool for an individual or family that wants to be in the “business of philanthropy.” It provides a tax exempt shell within which to house assets to operate the business of philanthropy. It is a structure that survives the grantor and establishes the family as philanthropists for the ages.

It can also be a royal pain in the neck in terms of its care and feeding, with tedious initial and ongoing filings and returns, meetings and other documentation.

Today, we are going to outline the life cycle of a PF so that you can see a bit of what is involved and why I always say that PF’s are appropriate for those who want to be in the “business of philanthropy” rather than those who are looking to fund a charitable pocketbook. It is not meant to be exhaustive by any means. (Warning: Don’t attempt to implement any of this on your own!) Thank you to www.irs.gov for its great article “Life Cycle of a Private Foundation.”   Check it out for more detailed information including sample documents.

Starting Out and Applying to the IRS

  1. As basic as it sounds, the first thing to do is determine the type of foundation you want to establish: “private operating,” “exempt operating,” or “grant making.” Hint: most folks use “grant making” a/k/a “private non-operating” foundations.
  2. Draft and execute the proper organizing documents and bylaws so that the foundation will qualify as a §501(c)(3) organization. Typically, a PF is structured as a trust, corporation or association. Your attorney should be sure to include certain provisions that prohibit the foundation from engaging in behavior that could trigger the PF excise taxes under §§4941, 4942, 4943, 4944, and 4945.
  3. Obtain an employer identification number (EIN). Note that entity must be in existence first before applying for the EIN.
  4. Determine the registration requirements for the state(s) in which your foundation may be required to file. For more information, including how to determine in which states a foundation may be required to register, see the website of the National Association of State Charity Officials.
  5. Submit an application (form 1023) along with the user fee ($850) to the IRS to establish your tax exempt status. Such application should be filed within 27 months after the end of the month of legal formation and tax exempt status, if warranted, will be retroactively applied back to the date of formation.

Required Annual Filings & Ongoing Compliance

  1. Form 990PF – an onerous return in which, in my humble opinion, the required disclosures about the activity of the PF are primary and the numbers and excise tax calculation are clearly secondary. It is very important to note that, unlike virtually any other return with which you are familiar, the 990PF is a PUBLIC DOCUMENT which means that “private” foundations are anything but private.
    • Excise tax on net investment income – a basic 2% tax which can be reduced to 1% if certain conditions are met.
    • Possible excise taxes related to self-dealing, failure to distribute income, excess business holdings, jeopardizing investments, and taxable expenditures.
  2. Form 990-T – Unrelated Business Income Tax (UBTI) return, if required
  3. Employment tax forms, if the PF has employees
  4. State Filing Requirements – Example – in New York, Form CHAR500 must be filed annually along with a copy of the foundation’s Federal Form 990PF plus a filing fee.
  5. Substantiation and disclosure of charitable contributions – All grants are disclosed on the 990PF, giving potential readers (which can be anyone since the 990PF is a public document) full knowledge of what the PF has supported during the year.

Other Significant Events

  1. IRS audits may be field, office, or correspondence audits. As with audits of taxable entities, the results are subject to administrative and judicial appeal. They are about as pleasant as root canal without anesthesia.
  2. Termination of a PF
    • Voluntary termination by notifying the IRS and paying a termination tax.
      • The termination tax is equal to the lesser of the combined tax benefit resulting from the 501(c)(3) status of the organization or the value of the net assets of the organization
      • A foundation may also transfer its assets to another private foundation, commence voluntary termination, and pay no termination tax because it has no assets. In this case, the transferee acquires all of the aggregate tax benefits of the transferor associated with the transferred assets.
    • Involuntary termination for either willful repeated violations or a willful and flagrant violation of the private foundation excise tax provisions and becoming subject to the termination tax.
    • Transfer of assets to certain public charities
    • Operating as a public charity for a continuous period of 60 months after giving appropriate notice.
  • Administrative Headaches
    1. Trustee/directors’ meetings – to review performance, set policy, and approve grants. Minutes should be kept.
    2. Responding to requests for copies of the 990PF – Again, a public document that has to be provided to those who request it.
    3. Maintenance of a Website – optional
    4. Responding to requests for grants – even if the PF “opts out” of entertaining such requests, they still, somehow, find their way to the PF office and need to be addressed.

Again, this short outline is by no means exhaustive but it illustrates a few basic points. Here are the takeaways:

  • Starting a private foundation is like starting a for-profit business. There are ground rules and boundaries that must be understood and respected. It is best to go in with your eyes open.
  • A PF requires thought and ongoing attention. It is best used to advance a philanthropic agenda that is clearly stated and generally accepted by the founder and the governing board.
  • Because philanthropic agendas will change over time, it is best for founders to go in with an open mind and remain flexible, not tying up the PF with too many restrictions. If this is not possible, perhaps a shorter term, specific gift to charity may be more to the liking of the donor.
  • A PF should not be viewed as a charitable pocketbook. Its highest and best use is to engage in the business of philanthropy, the same way a private, for-profit company engages in the family business.

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Engaging in estate planning can be troublesome. It forces you to face your mortality. Those who are superstitious ascribe all kinds of evil consequences to the contemplation of death while the rest of us are just plain uncomfortable with the finality of it all.  But engage in such planning we must if we want to ensure that our estates – our legacies, really – efficiently pass to heirs and other beneficiaries in the manner and amounts we intend.

So, how to handle charitable giving?  Is it better to make such gifts now or at death?  Charitable bequests are often included in wills to fulfill existing pledges or to round out a lifetime of giving to favorite causes.  This approach is especially advantageous when there are no other “noncharitable” heirs involved, or when the estate owner wants to limit the amounts ultimately passing to these heirs.  Also, a testamentary transfer may be the only practical way to accomplish giving an entire estate over to charity, particularly if depleting the estate during lifetime effectively impoverishes the estate owner.

But what if there is a choice?  What if, during your lifetime, you can give away something, even a significant something, and not dangerously deplete the estate in so doing?  Are you better off giving at death or during life?

Obviously, there are pros and cons to each, and everyone’s situation is different.  But a general rule to follow is that lifetime charitable gifts are better than the exact same gifts made at death, both for tax and non-tax purposes.

  • Charitable gifts made during your lifetime are deductible for Federal income tax purposes.[1] This is the big one. Any gifts you make during your lifetime will save you income tax dollars at the federal level and possibly at the state and local level as well. There are lots of caveats to this, so speak to your tax advisor to get a sense of what the actual benefit may be for you. But as a rough example, consider that a New York City resident taxpayer in the top income tax bracket (and not subject to the alternative minimum tax) would save approximately 43 cents on the dollar in income taxes on a lifetime charitable gift. Not bad — a $50,000 charitable donation would effectively cost only $28,500.
  • But charitable bequests reduce your taxable estate, don’t they? Isn’t that effectively an estate tax deduction offering roughly the same benefit? Yes, such bequests do reduce your taxable estate. Continuing the example from the first bullet point, our hypothetical rich NYC taxpayer would save, at the top rate for estate taxes, approximately 57 cents on the dollar. But this savings is very deceiving – had he given away the same money during lifetime his estate would be that much less, and he will have effectively accomplished the same thing – and gotten current income tax deductions during lifetime to boot!
  • Charitable gifts made during your lifetime enable you to enjoy seeing the fruits of your giving. It can be as small as knowing that the shelves are stocked in the food pantry that you support or as large as seeing your name on a building on the campus of your alma mater – face it, many of us crave the “warm fuzzies” we feel when we support a cause, particularly when we see results or achieve personal recognition for our efforts. Certainly this is a non-tax benefit of lifetime charity, a guilty pleasure if you will, but one you can enjoy without having to admit it!
  • Lifetime giving patterns are a good indicator of your charitable intent and can be instructive for those who survive you. This is most important if you create a private foundation or some other charitable vehicle that will outlive you. Your surviving board members, often family, can view your lifetime actions as a roadmap of your values. Such a roadmap may help them continue your legacy in a way that, presumably, reflects your charitable intent.

Again, these are general rules which should be discussed and quantified with your tax advisor before implementation.  But the fact is, in most cases, charitable gifts made during lifetime yield better tax results and often more personal satisfaction for the donor.

[1] Subject to income and other limitations, including the type of contribution and the type of charity.

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