CHARITABLE FAMILY FOUNDATIONS©
The NAFEP, PREMIER VII Family Foundation Trust
& PREMIER VIII Private Foundation
A Family Legacy of Charitable Acts..Continued (4)
Tax Strategies and Benefits:
1. For large IRAs, name a foundation as the beneficiary of the IRA. The IRA will pass to the foundation free of both income and death taxes when the account owner dies, saving up to 70% in taxes. For running the foundation, the heirs can receive reasonable salaries and expenses from the foundation. The foundation can either be created after the donor’s death, by providing for the foundation in the donor’s will or trust, or the donor may prefer to set up the foundation now to oversee its implementation and to give it a test drive.
Note: This “Tax Strategies” topic is not intended to be income tax or accounting advice, and is provided for informational purposes only. For income tax or accounting advice, you should seek the services of a competent professional.
2. For small or large IRAs, a strategy involving life insurance both inside and outside an existing foundation, and which is funded by taking the maximum withdrawals from the foundation creator’s IRA, can provide the following results: (1) Donation of the maximum IRA withdrawals to the foundation creates an offsetting tax deduction so that only a small amount of income taxes are paid on the IRA withdrawals, (2) the lost principal amount of the IRA can be replaced for the heirs with a relatively small life insurance policy (outside the foundation), and the death benefit of this policy goes to the heirs tax free, (3) a larger policy can be purchased by the foundation itself using the tax free IRA donations, leaving a large, tax free endowment on the donor’s death, and (4) when the inside policy pays off, the heirs may be paid reasonable salaries and expenses for running the foundation. This results in savings of up to 70% in taxes on the IRA.
3. In a variation of strategy 2 above, instead of using the IRA funds to purchase life insurance inside the foundation, the creator (IRA owner) can run the foundation now from the donated IRA funds, and receive income and expenses for doing so. This may allow a quicker depletion of the IRA, it removes the IRA from the donor’s taxable estate, and it allows a better, or at least a more managed income tax result for the donor’s IRA.
4. Use a foundation as an IRA supplement strategy. Many people wish to make larger, tax deductible contributions to their IRA than the law allows. But, extra cash can be donated to a foundation and is deductible up to the 30% and 50% limits. At retirement, the donor may actively run the foundation and receive reasonable salary and expenses for doing so. This strategy may not last for the donor’s entire life, due to failing health, but it can provide a fulfilling and effective retirement supplement.
5. For an immediate income tax deduction, donor’s can transfer a remainder interest in their primary residence, vacation home or family farm, retaining a life estate in the property (this strategy is not allowed for any other property). The donors retain full use and control of the property until their death. This strategy: (1) Removes the property from the taxable estate, (2) avoids probate of the property, and (3) creates a significant income tax deduction when the property is given. The older the donor, the larger the deduction will be. After the donor’s death, the foundation can sell the property without paying a capital gains tax. The donor’s heirs then run the foundation, receiving reasonable salary and expenses. (Note: This strategy allows a fairly limited tax deduction with the Premier VIII Private Foundation, due to deductibility limits on real estate gifts to a private foundation. The Premier VII Family Foundation allows a substantially larger tax deduction.)
6. In a variation of strategy 5 above, the donor retains a life estate in the primary residence or farm, but sells the remainder interest to the foundation. The payment to the donor may be either of a charitable gift annuity or cash. For this strategy to work the foundation must have a source of cash. This cash may be from other deductible gifts which the donor makes up-front to the foundation, or from gifts which the donor makes over time, to spread out the deductions. Or, the cash may come from gifts to the foundation made by the donor’s heirs or anyone else. This strategy allows the donor both an immediate tax deduction and a tax deferred income stream.
7. In a variation of strategy 6 above, donors may transfer any property to the foundation, including personal property, treating part of the property’s value as a gift and the rest as a sale to the foundation. In this case the donor completely gives up the property, rather than retaining a life estate. The sale amount is returned in cash or deferred payments, as in strategy 6. The donor may apportion the donated property as desired, treating any amount as an immediate, tax deductible gift and the balance as the sale amount. (Note: This strategy allows a fairly limited tax deduction with gifts of real estate to a private foundation, such as the Premier VIII. Other property types work OK with the Premier VIII. For real estate, the Premier VII Family Foundation allows a substantially larger tax deduction.)
8. A common strategy for deferring capital gains taxes on appreciated assets is the use of a charitable remainder trust (CRT) or a private annuity trust (PAT). The CRT must have a charity as its beneficiary. The PAT beneficiaries do not have to be charitable (in fact, they are usually the heirs of the PAT creator), but there are advantages to using a charitable beneficiary for a PAT in certain cases. The charitable beneficiary of either a CRT or a PAT may be a Premier VII Family Foundation. (Note: the Premier VIII Private Foundation will not work well in this strategy.) If the charitable beneficiary is a public charity, church, etc., the remainder interests of the CRT or PAT leaves the control and benefit of the family heirs. On the other hand, using a Premier VII Family Foundation as the beneficiary of CRTs and PATs allows the heirs to run the foundation and receive reasonable income and expenses.
9. The federal estate tax is scheduled to terminate at the end of the year 2009. But, for very large estates there will continue to be a death tax after 2009 due to the partial loss of step up in basis, and due to death taxes at the state level. A foundation may be named as a beneficiary for any “excess” amounts in an estate, amounts that otherwise would be subject to substantial death taxes in some form. But, all amounts left to the foundation will escape all forms of death and income taxes. The foundation can either be created after the donor’s death, by provisions in the donor’s will or trust, or the donor may prefer to set up the foundation now to oversee its implementation and to give it a test drive.