Philanthropy is an integral part of estate planning. Incorporating charity into wealth planning can not only be tax-efficient, but can benefit a cherished cause and perpetuate family ideals for younger loved ones. Engaging in a charitable activity as a family can help children learn empathy, responsibility and leadership, social engagement, teamwork, public speaking and persuasion, and business management including budgeting.
Charitable planning often requires more in-depth planning advice from a professional adviser. Most planning professionals provide recommendations that center around private philanthropy – private foundations, donor advised funds, and split-interest trusts such as charitable remainder or lead trusts. These private strategies tend to provide funding and/or support for other charities.
Charitably-minded individuals and families should also consider creating a public charity. Professional advisors often leave the creation of a public charity off the list of suggestions given to high net worth families. A private foundation is an admirable structure which can manage and invest assets for the purpose of funding other charities, while giving adult children or grandchildren an opportunity to participate in the distribution process. However, because private foundations are usually funded by a single individual or family, and thus are not very transparent, there are numerous safeguards put into place so that such foundations cannot abuse the tax-exempt category.
“Engaging in a charitable activity as a family can help children learn empathy, responsibility and leadership, social engagement, teamwork, public speaking and persuasion, and business management including budgeting.”
Public charities are supported by government agencies, other publicly supported organizations, self-governing boards and the general public. Such self-policing means that by contrast to private foundations, public charities are subject to less regulation and excise taxes and therefore can be less burdensome. A public charity will need to demonstrate that it receives at least one-third of its support from the general public. This can be done in two ways:
- Beginning in the sixth year, by showing that the for the past five years at least one-third of its support came from public or government contributions, or
- The charity can show that the sum of contributions, membership fees, and revenue from tax-exempt charitable activities is at least one-third of its total support.
Public charities engage in direct, charitable activity, such as churches, private schools, medical research, and homeless shelters – a nearly endless list of causes. Charities may also engage in direct or grassroots lobbying or other legislative advocacy, unlike private foundations. Even the tax return for a public charity is a lot less complicated than a private foundation. Creating a public charity can still offer all the same benefits to a high net worth family as a private foundation. The charitable cause can be selected by the family; the children from future generations can volunteer or be employees of the charity. More than 50% of the board of a public charity must be unrelated individuals, but that still leaves available positions for family members.
By serving on the board for the charity, future generations are able to maintain social standing, even as the family’s wealth is diluted over the generations. As time moves on, having the charity entirely controlled by the family may be less important to the cause that is being supported. Many charities grow to the size of global for-profit corporations, so there is no stigma of receiving less pay than comparable private positions, nor is it necessary or likely that the charity will remain small or simplistic. Based upon the qualification tests, up to 67% of the charity’s funding, a substantial portion can be received from the family or other non-general public sources. Donations to public charities are more tax-efficient because they can be deducted at a higher percentage of adjusted gross income (usually 50% of AGI compared to 30% for private foundation giving).
“By serving on the board for the charity, future generations are able to maintain social standing, even as the family’s wealth is diluted over the generations.”
Most successful individuals reach a point in their business career when they are ready to take a step back from their for-profit company, either by passing it to adult children or key employees or selling to a third party, and pursue a greater passion. That passion, whether curing cancer or working for world peace, should be nurtured and established. There are many ways to build charitable goals into a legacy, and creating a public charity should be considered as a strong option.