MISCHIEF MANAGED: Termination/Dissolution of a Charity Presented by Kellyn Tanaka, Merrill Lynch Wealth Management Amy Takahashi CPA, Esq. LLM Tax Legacy Tax Group a CPA Corp Hawaii Community Foundation Luncheon Seminar Feb 11, 2020
Heckerling Exhibit Hall
Marauder’s Map Opening Spell “I solemnly swear that I am up to no good”
Marauder’s Map Revised Spell
“I solemnly swear that I will do good”
What to Do When the Family Foundation Isn’t Working: Practical and Tax Consequences of Terminations, Divisions and Transfers
Original presentation by Carolyn “Morey” Ward at the 54th Annual Heckerling Institute on Estate Planning 6
Charitable Vehicles Donor-Advised Funds Private Foundations Public Charities
Feature
Donor Advised Fund
Private Foundation
Maximum tax deductibility of adjusted gross income (excess may be carried over 5 years)
Cash: 60% Public traded securities: 30% Nonfinancial assets: 30%
Cash: 30% Public traded securities: 20% Nonfinancial assets: 20%
Grantmaking
Donor makes grant recommendations
Donor has full control over and responsibility for grantmaking decisions
Investments
Donor generally chooses from investment portfolio options managed by the DAF sponsor
Donor can choose to direct investment management
Privacy
Donor has discretion to grant anonymously
Grant activity is a matter of public record
Private Foundation Subject to 1% or 2% excise tax on net investment income,
Required to make quarterly tax payments, Required to make annual distribution of at least 5% of asset sale, and File tax return (IRS Form 990-PF)
Life Cycle of a Family Foundation Making the Charitable Gift Mechanics − Public Charity, Donor-Advised Fund, Private Foundation Which Enterprise to use to Activate Charity − NonProfit, Trust, Corporation, Unincorporated Nonprofit Association Things that can go wrong − Liability for Board Governance, Trustee Fiduciary Duty − DO NOT create to employ the kids Terminate the Charity Distribute all assets to public charity(ies), Operate as a public charity, Distribute assets into a Donor-Advised Fund, Distribute assets to multiple foundations, Split into multiple foundations
Foundation Set Up Non-profit Trust Corporation Unincorporated associations
Causes of Terminations, Divisions, & Transfers Internal Conflicts Outside Pressures Administrative and Operational Burdens
Causes of Terminations, Divisions, & Transfers Internal Conflicts Preexisting relationship dynamics Generational differences Non-functional boards Intra-family disputes Board members’ activities outside of organization
Causes of Terminations, Divisions, & Transfers External Conflicts Conflicts of interest Reputational concerns State investigations
Causes of Terminations, Divisions, & Transfers Administrative / Operational Burdens Most common reason Minimum requirements Accounting Auditing Preparation of fed and state reports Need for legal counsel to address governance practice, regulatory changes, and complex issues Self dealing rules Minimum annual spending requirements Excess holdings of business enterprise Jeopardizing investments Acceptable limits of grant making
Techniques for Preventing Termination Careful consideration of selection of board members Train upcoming board members/next generation Create nominating process or review Add outside members from family foundation
Adoption of policies, procedures, and guidelines Good governance policies Conflicts of interest policies Guidelines that address expectations for board members
Form a committee to review particular transaction Seek disinterested advice Get a neutral third party facilitator/consultant Provide disinterested advice Assist with mediation
Termination of a Private Foundation Status Voluntary Involuntary
Termination of a Private Foundation Status Voluntary Board adopts Plan of Dissolution Transfer assets Provide notice to terminate foundation Statements sent to Attorney General and the IRS notifying intent to terminate private foundation status and detail taxes imposed & computation
Pay Termination tax (if applicable) Paid in full at time of filing statement Lesser of: 1) Amount of aggregate tax benefit, or 2) Value of net assets of foundation May be abated No termination tax if funds are transferred before notice is sent
File Articles of Dissolution with HI DCCA Provide AG w/ final asset transfer list File Final IRA Form 990-PF Select “Final return�
Termination of a Private Foundation Status Involuntary Willful acts or a willful and flagrant act Self-dealing, failure to distribute income, investments that jeopardize foundation’s charitable purpose, political expenditures, excess executive compensation
IRS notifies the organization Liable to pay the tax (penalty)
Options to Terminate a Private Foundation Distribute to other foundations or split into multiple foundations Distribute all assets to public charity(ies) Operate as a public charity Distribute assets into a Donor-Advised Fund
Map transfer / split other private
Options to Terminate a Private Foundation Transfer To Other Foundations or Split into Multiple Foundations
Transferee will inherit transferor’s tax characteristics Carryover of aggregate tax benefits such as “Substantial Contributor Status” which is inherited from transferor to transferee Liability for Chapter 42 Taxes Imposed on transferor before transfer OR as a result gets transferred with the assets to the receiving foundation
Applies to any significant disposition of assets 25% or more of FMV of net assets of the transferor
Map going to distribution to a public charity
Options to Terminate a Private Foundation Distribution to Public Charity Public charity in existence for at least 5 continuous years Private foundation has not committed either willful repeated acts (failures to act), or willful & flagrant act (or failure to act), giving rise to liability for tax Private foundation is not an operating foundation
No restrictions or conditions preventing transferee organization from freely distributing transferred assets Transfers all right, title, and interest in and to all of net assets No notice requirement No termination tax
Map operate as public
Options to Terminate a Private Foundation Operating as a Public Charity Voluntary Operating as public charity for 5 years Must notify IRS at beginning of 5 years Unlikely option Too many internal conflicts (change composition of board, operations,) to meet requirements of PC status No termination tax
Options to Terminate a Private Foundation Transfers to Donor-Advised Fund Benefits Allows mission to continue Absolve family foundation of administrative and managerial responsibilities Donors will be able to choose names of DAF Donors can remain anonymous Provides better contribution limitations for donors – charity deductibility rules
File form 990 PF & terminate under state law
Things to consider before setting up a foundation Will it be advantageous to avoid the “charitable impulse” to create a “family foundation”? 1. Using existing structures and considering opportunity issues and
anonymous giving 2. Giving in a trust for or adding to the endowment of one or more public
charities (Charitable Trusts) 3. Giving to existing private grant-making foundations
4. Giving to a donor advised fund (“DAF”)
Why do people give? Philanthropic Personalities? Motivations? Communitarians – “Doing good makes sense” Will often seek recognition for their charitable acts Investors – “Doing good is good business” Views giving as a good business transaction, doing good is good business Socialites – “Doing good is fun” Nonprofit support is a social activity, desire social recognition
Altruists – “Doing good feels right” Does not seek recognition Devouts – “Doing good is God’s will” Deep religious orientation Repayers – “Doing good in return” Pay back for previous receipt of life changing charity Dynasts – “Doing good is a family tradition” Family legacy to pass on wealth and support charitable activities
What do Foundations Receive? Arts, Culture (Giving USA 2017) Religion 31% Education 14% Human Services 12% Foundation Grants 11% Health 9% Public Society 7% Arts/Culture 5% International Affairs 6% Environ/Animals 3% Individuals ($8B)
($127B) ($59B) ($50B) ($46B) ($38B) ($30B) ($20B) ($23B) ($12B) 2%
and Humanities 5%
Environment / Animals 3% Individuals International 2% Affairs 6%
Public Society Benefit 7%
Religion 31%
Health 9%
Grant-Making Foundations 11%
Human Services 12%
Education 14%
What Do Foundations Give? Contributions by Donor Type
(Giving USA 2017) Individuals 70% ($287B) Bequests 9% ($36B) Foundations 16% ($67B) Corporations 5% ($21B) TOTAL CONTRIBUTIONS $410B
Individuals
Bequests
Foundations
Corporations
Marauder’s Map Closing Spell
“Mischief Managed”
MISCHIEF MANAGED:
Termination/Dissolution of a Charity The Immortal Charity Immortal adj. - living forever, never dying or decaying
Thank you for coming and for “doing good”