Starting A Foundation? Better Get MovingAmey Stone
The charitably inclined have many good reasons to set up a private foundation, but one stands out this year. Donors of appreciated stock have been able to claim the full market value as a federal tax deduction, but that provision is expiring. As of Jan. 1, 1995, they can deduct only the stock's cost.
"It certainly takes away one of the biggest benefits of a private foundation," says Joseph Toce Jr., head of family-wealth planning at Arthur Andersen. For example, if you contribute 1,000 Microsoft shares that you bought on Jan. 2, 1990, this year, you would be able to deduct about $51,000 from your income taxes. Next year, though, you could write off only the purchase price of $9,650.
WILL CALL. That's too bad, since giving away appreciated stock is such a great way to endow a foundation. Because it is tax-exempt (except for maybe a 1% or 2% excise tax), the foundation keeps nearly 100% of the gift, while people in the top brackets get to cut their taxes by as much as 40% of the amount. That means the theoretical cost of giving stock worth $100,000 is $60,000. Otherwise, if you sold the same stock, you'd have to pay a 28% tax on any capital gains before you gave away the proceeds. If you held the stock until death, it might be taxed at as much as 55% in your estate.
Also, thanks to a provision in the 1993 tax bill that applies to all charitable gifts, you don't have to worry about the deduction from appreciated stock triggering the alternative-minimum tax--a separate set of tax rules that kicks in when wealthy people write off too high a percentage of income.
After this year, people will probably wait to endow foundations at their death through their wills. That way they can deduct the appreciated value for estate-tax purposes. "The charity won't see the dollars for many more years," says John Edie, the general counsel to the Council on Foundations.
And the donor won't get to enjoy many of the prime benefits of setting up a foundation. If you set aside the money during your lifetime, you not only get the income tax deduction, but also you can manage the investments inside the fund and decide how the money is disbursed. Most important, you get the pleasure of seeing the good your money is doing for causes you care about. If, like most people, you set up a foundation that makes donations to public charities, you decide which organizations get what and when. You can also set up a foundation to run enterprises as diverse as an arboretum or a nursing home.
Keep in mind that you can only give gifts of appreciated property equal to 20% of your adjusted gross income, while you can give 30% to public charities. But a recent Internal Revenue Service ruling confirmed that you can carry over any excess amounts that aren't deductible in 1994 and deduct them over the next five years.
Private foundations are highly regulated and have extensive reporting requirements. That means either a lot of work for you and your family or high administrative costs. For all the time and energy to be worthwhile, you should have at least $100,000 in startup funds, says Martin Greif, a tax partner at Goldstein Golub Kessler in New York. But you don't need to be a Rockefeller or a Ford.
INTRINSIC VALUE. For much less hassle--and a full deduction on appreciated stock after this year--you can give to a public charity. To have some control over how the money is spent, the best alternative to a private foundation is to set up a "donor advise" or "consult" fund through a community foundation, which manages and distributes donations to charities in a given area. The Council on Foundations can help you locate one near you. Another alternative: Fidelity Investments' Charitable Gift Fund (800 682-4438) lets you transfer cash into an account, take an immediate deduction, then disburse the money later, after it has grown in a select group of mutual funds.
There is also a new set of funds expressly designed to manage investments for private and community foundations. The Investment Fund for Foundations Investment Program (800 984-0084), which started in June, includes a choice of five pooled funds with minimums from $50,000 to $100,000. Along uith top money management, TIFF provides reports, statements, and payout options geared to the needs of foundations.
But all the trouble of running a private foundation is worth something in itself. It can bring together generations for a common goal, instill a philanthropic ethic in younger family members, and help perpetuate your name. If creating a foundation appeals to you for any reason, there's no time like the present.
NEED MORE INFO?
-- Council on Foundations (202 466-6512) is the place to start. It offers a number of publications, including First Steps in Starting a Foundation by John Edie ($45).
-- Foundation Center (800 424-9836) mainly provides information to grant-seekers but can also help those who want to create a foundation.
-- Indiana University Center on Philanthropy (317 274-4200) publishes a free catalog of books, tapes, and reports covering the gamut of charitable giving.