What Is the Difference Between a Private Foundation and a Public Charity?

An Estate Planning FAQ with Mary E. Vandenack.

Private foundations and public charities are both tax exempt entities under section 501c3 of the Internal Revenue Code. The differences are that a public charity qualifies for a little more in terms of tax benefits. If you make a contribution to an organization that qualifies as a public charity, there is a little bit larger percentage that you can deduct in certain circumstances. The limitations aren’t as significant on the private foundation. The public charity is typically one that benefits the public at large rather than a smaller group. The private foundation is more typically formed by a smaller group and benefits a smaller group of individuals.

© 2014 Parsonage Vandenack Williams LLC

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How Do I Form a 501c3 Public Charity?

An Estate Planning FAQ with M. Thomas Langan II.

A 501(c)(3) public charity is a non-profit organization that is exempt from federal income tax. These organizations must be organized and carried out for certain exempt purposes, which include charitable, educational, religious and scientific purposes.

There are several ways to create a 501(c)(3) entity. The most common way is to first form a non-profit corporation. This is typically done by filing articles of incorporation with your state’s Secretary of State. At this point you just have a non-profit corporation. In order to be tax exempt federally, you need to take the extra step of filing for exempt status with the IRS by filing Form 1023. The application must be complete and accompanied with the appropriate user fee.

If the application is approved, you then have a 501(c)(3) public charity and are subject to annual reporting requirements.

© 2014 Parsonage Vandenack Williams LLC

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What Is a 501c3?

An Estate Planning FAQ with Mary E. Vandenack.

501(c)(3) is actually a section of the tax code that provides for the ability of an entity to fit into certain parameters and claim tax exempt status. In the section 501(c)(3) there are actually quite a few different types of organizations that will qualify for tax exempt status. The type that most people are familiar with is the public charity, so the American Red Cross and organizations like that are typically tax exempt entities and are actually subject to certain types of taxes but they have a general tax exempt status.

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IRS Now Accepting Streamlined Form 1023-EZ

By M. Thomas Langan II.

The IRS is now accepting a new shorter tax-exempt application form intended to help small charities apply for 501(c)(3) tax-exempt status more easily. The form, 1023-EZ, is only 3 pages long compared to full form that is 26 pages. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible to use the form.  The IRS expects around 70% of all applicants will qualify to use the shorter form.  Form 1023-EZ must be filed online and there is a $400 filing fee.

The form can be viewed here: http://www.irs.gov/pub/irs-pdf/f1023ez.pdf

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IRS to Offer Simplified Tax-Exempt Application

The IRS has announced plans to offer a much simpler form for many charities to apply for tax-exempt status. Most charities that expect to have no more than $200,000 in annual gross receipts and total assets of less than $500,000 will be eligible to use the form.  Whereas the current Form 1023 is 26 pages, the draft Form 1023-EZ is only 3 pages. The IRS’s goal is to streamline the application process while also freeing up resources to concentrate more on compliance with established charities. The IRS is currently accepting comments on the draft Form 1023-EZ and is expected to begin accepting them later this summer.

The draft Form 1023-EZ is available at: http://www.irs.gov/pub/irs-dft/f1023ez–dft.pdf

© 2014 Parsonage Vandenack Williams LLC

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Reminder to Not Include Social Security Numbers on Form 990s

As the due date for filing Form 990 approaches for many nonprofit organizations, the IRS has issued a reminder to not include unnecessary personal information, including social security numbers, when completing and filing Form 990.  Because Form 990s are generally required to be publicly disclosed, any personal information contained it in will be available to the general public; therefore, filers should use caution and not include unnecessary personal information.  Form 990s are due by May 15^th for calendar year tax filers.

 The IRS notice can be located here: IR-2014-57

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PVWLaw Private Foundations Video

If you have the desire to be actively involved in a charitable mission over time, you may want to consider establishing a private foundation. Our new video will give you basic information on the 3 main types of private foundations and the rules to follow in order to ensure your foundation maintains its tax exempt status.

THE FAMILY FOUNDATION FOR CHARITABLE GIVING

Giving to charity is rewarding in many ways.  There are many approaches to making charitable gifts. The best approach for a particular individual is depends upon  the motivation for the charitable giving, the charities to be benefited, the type of charitable gift, and the size of the charitable gift.  Giving through a family foundation may enhance the rewards of charitable giving and create an ongoing legacy of charitable giving for a donor.

 

The family foundation makes sense for a donor who plans to make significant charitable gifts to more than one charity, desires to create a permanent fund for charitable giving, and wants the donor’s family to be actively involved in the charitable giving process on an ongoing basis.

 

An important benefit of charitable giving is that the donor can obtain significant tax deductions related to the donations.   The tax savings opportunities include income and estate tax deductions.   To the extent that assets remain in the family foundation, growth on the assets is tax-free, which avoids capital gains and estate taxes.

 

There are different types of family foundations for tax purposes.   Contributions to a family foundation are generally deductible but there are various limitations on contributions to a family foundation that do not apply to other types of charitable gifts.  There are various distribution requirements and excise taxes that apply.  A donor considering a family foundation should be well advised of the achievable tax benefits of each type of family foundation. 

 

While tax benefits are important to most donors, the family foundation is most often chosen by those who are interested in the non-tax benefits of this charitable vehicle.  The family foundation offers many non-tax benefits that cannot be achieved with other charitable gift techniques.

 

Many donors establish a family foundation to encourage family involvement in charitable giving. A family foundation offers the opportunity for family members to work together to benefit charitable causes.  Often, foundations are set up so that family members meet to discuss management of foundation investments and desirable charitable gifts.  The foundation may help perpetuate the family unit by creating the opportunity for ongoing interaction of a positive nature.

 

A family foundation may bear the name of the donor or his or her family.  The family foundation then serves as an enduring memorial to the founder.   The philanthropic efforts of the founder can continue beyond his or her life.  

 

The family foundation offers ongoing control and flexibility.  The foundation board can monitor charities change charitable beneficiaries when doing so makes sense.

Because there is significant expense and ongoing maintenance related to a family foundation, the foundation will make sense only for charitable donations of significant size.  There is no specific threshold as to the size of gift that makes sense.  Whether the approach makes sense for a particular donor depends on the overall facts of the donor’s estate and philanthropic desires.  The non-tax benefits must outweigh the ongoing cost and expense.

 

A family foundation is an excellent technique for achieving ongoing family involvement in the community.  A foundation may be funded during the life of a donor or upon the donor’s death.  The family foundation should be considered by any charitably inclined individual as part of the estate planning process.

 

 

© 2009 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com

CHARITABLE GIVING – Lifetime vs. At Death

Charitable Giving

 

Lifetime vs At Death

 

 

1.        Lifetime Giving

 

·                     You get to see the impact

·                     Control

·                     Income Tax Savings

·                     Estate Reduction

 

 

2.        Giving at Death

 

·                     Leaves a legacy

·                     Preserves principal while you are alive

·                     Estate tax benefits

 

 

3.        What is your Motivation?

 

·                     Give to society

·                     Benefit a cause/organization you feel strongly about

·                     Become involved

·                     Tax savings (income or estate)

 

 

 

1.      Lifetime Giving

 

Option #1 – Write a Check

 

·                     Easy

 

·                     Immediate

 

·                     Income Tax Deduction

 

·                     Removed from Estate

 

·                     You see the charity benefit while you are here

 

 

Option #2 – Donate Appreciated Asset

 

Example – You bought stock for $100.  It is now worth $10,000.  You donate to Do Good Charity.

 

·                     Simple

 

·                     Income tax deduction of $10,000

 

·                     Charity can sell without paying tax on the gain

 

·                     Asset is removed from your estate

 

·                     Possibilities – stock, real estate

 1.      Lifetime Giving

 

Option #3 – Transfer Life Insurance

 

·                     You have charitable deduction equal to “interpolated terminal reserve value.”

 

·                     Charity ultimately can receive face value.  (Consider lifetime transfer versus naming charity as beneficiary.)

 

·                     Additional payment of premiums by donor is additional charitable deduction for income tax purposes.

 

·                     Face value of life insurance is removed from your estate.  (Be aware of three year rule.)

 

 

          Other Options – can also be accomplished at death

 

Charitable Remainder Trusts

 

·                     Charitable Lead Trusts

 

·                     Private Foundations

 

·                     Charitable Gift Annuities

 

·                     Donor Advised Funds at Community Foundation

 

·                     Charitable Funds at Investment Firms

 

 

 

2.      Death Giving

 

Option #1 – Bequest

 

·                     Gift is made by Will

 

·                     Gift occurs after death

 

·                     Gift can be made to one or more charities

 

·                     Gift can specify an endowment fund

 

·                     Estate tax deduction

 

·                     You do need a will (or trust)

 

 

Option #2 – Name Charity as IRA Beneficiary

 

·                     IRAs are “double” taxed at death in the sense of being included in your estate and being subject to income tax as distributed.

 

·                     If an IRA is part of your estate and you desire to make a charitable gift at death, this is one of the most tax effective techniques.

 

·                     This approach is also SIMPLE.  All that is required is a beneficiary designation.

 

 

Additional Tax Effective Death Giving Options

 

·                     Interest on U.S. savings bonds

 

·                     Accounts receivable

 

·                     Deferred compensation

 

·                     Payments on installment obligations

 

·                     Death benefits from annuities

 

·                     Accrued royalties under a patent license

 

3.      Other Considerations

 

Income Tax

 

            Not all charities are the same –

 

·                     50% of AGI v. 30% of AGI

 

·                     Appreciated property – Full market value to 30% of AGI vs. Cost Basis up to 20%

 

·                     Unused contributions can be carried forward 5 years

 

 

Estate Tax

 

Federal Estate Tax applies at $1.5 million

 

·                     Nebraska State Estate Tax applies at $1 million

 

·                     Nebraska State Inheritance Tax – $10,000

 

 

Appraisals required for non-tax gifts over $5,000.

 

 

Delivery of gifts must be accomplished to obtain deduction.

 

© 2009 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com