Awarding grants is a primary way for private foundations to accomplish their charitable goals. It’s also an oft-used way to meet annual distribution requirements to avoid an IRS-imposed penalty of an excise tax. However, this area of nonprofit activity can be ripe for misstep and noncompliance because some grants are prohibited. Further, others require heightened diligence to steer clear of trouble.
Taxable expenditures
Taxable expenditures for non-charitable purposes are not considered qualifying distributions, including:
Scholarships to individuals for travel or study are considered grants. However, grant-making plans need prior approval from the IRS and must include certain provisions, such as monitoring the performance of the grantee.
It is in the best interest of private foundations to exercise expenditure responsibility by setting in place a formal set of policies and procedures for grant-making. This document and its provisions, among other things, should:
Ensure that grant funds are spent solely for grant purposes
Obtain full and detailed reports from the grantee on how grant funds are spent
Make full and detailed reports to the IRS with respect to such grants
When it comes to high quality policies and procedures, you can and should avoid the time, energy, and monetary costs of DIY Internet templates. Set the foundation up for success when you enlist an attorney well-versed in nonprofit law to draft a document (or set of documents) and implement with an effective, engaging board/staff training. The benefits of investing in a qualified attorney to craft your important policies (like those related to grant-making) are numerous; the right attorney will put your organization’s best interests first, saving you resources in the long run.
It’s important to note that the info in this post is, at best, a mere outline of just one of the complex regulations governing private foundations. If you want to learn more, don’t hesitate to contact me as I offer a free consultation. You can also download my free, no-obligation nonprofit formation guide if you’re thinking about topics like this the pre-formation phase of the foundation’s life cycle.
Pi (π) is the ratio of a circle’s circumference to its diameter. Pi is a constant number, meaning that for all circles of any size, Pi will be the same. (It’s also a great day to deliver pie to Gordon Fischer Law Firm…any kind will do!)
Like geometry, in estate planning there are many variables, and some constants, too. Ironically, one of the constants in estate planning is change. And as your life and circumstances changes, your estate plan needs to change too.
Change & Your Estate Plan
Let’s assume you’ve gone to an estate planning lawyer, and you have (at the very least) the six “must have” estate planning documents. That’s great, well done. (You can read all about these six documents here.).
But remember you also need to keep these documents updated and current.
Major Life Events
If you undergo a major life event, you may well want to (re)visit with your estate planning lawyer, to see if this life event requires changing your estate plan through different provisions, tools, and strategies.
What do I mean by a major life event? Some common such events include:
The birth or adoption of a child or grandchild
Marriage or divorce
Illness or disability of a spouse or beneficiary
Purchasing a home or other large asset
Moving to another state
Large increases or decreases in the value of assets, such as investments
If you or your spouse receives a large inheritance or gift
If any family member or other heir dies, becomes ill, or becomes disabled
Launch or closure of a business
This is just a short list of life events that should cause you to reconsider your estate plan; there are many others.
Changes in goals
It’s not just life changes, though. It may be that your overall goals for your estate plan have changed over time. You may want to change the amounts of inheritances. As your financial situation changes, you may want to increase or decrease, your charitable bequests.
And, it’s not just changes in your own life you need to think about, either. Congress, the Iowa legislature, and the courts are constantly changing the laws. When the rules change, so too must your estate plan.
To illustrate when estate plans should be updated, let’s look at the Donor Family. Jill and Dave have been married for 25 years and have four grown children. They executed a common-sense estate plan a few years ago.
Since that time, the Donors have gone through many changes, as you would expect, and as all families have. Should Jill and Dave update their estate plan to reflect changes in their family’s circumstance? Consider the following:
Divorce
One of the Donor kids filed for a divorce from his wife. Jim and Carol need to update their estate plan since they decided they now want to exclude the ex-spouse as a beneficiary.
Jill’s uncle passed away and left her a great deal of money. The Donors need to determine how this inheritance will affect their current plan and future estate tax liability. The Donors may want to be more generous to their favorite charities. They may want to talk to their estate planning lawyer about charitable giving through a planned gift, such as a charitable gift annuity or charitable remainder trust.
Our example couple’s youngest child recently announced that she and her spouse are expecting their first child. Jill and Dave must update their estate plan to provide for the new grandchild.
Major changes in health
The Donor’s youngest child was in a serious car accident, which resulted in severe disability. He can no longer work and is receiving government disability benefits. The Donors will want to seriously consider setting up a special needs trust. This type of trust will allow a beneficiary to receive inheritances, without it being considered income by the government for qualification purposes.
Jill and Dave recently bought a vacation home in Arizona. The vacation home may well be affected by Arizona laws. In any case, the Donors’ estate plan should reflect this new asset.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2017/03/toa-heftiba-239004-unsplash.jpg34565184Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2020-03-14 18:30:022020-05-18 11:28:34Happy Pi Day: The One Constant in Estate Planning is Change
When forming a nonprofit organization, at some point founder have to weigh the merits of the public charity versus the private foundation. Both are classified by the IRS as 501(c)(3)s. There are indeed benefits and challenges to the structure of both nonprofits, but private foundations can be subject to stricter oversight and need to meet different requirements to retain compliance. Because all the different aspects of a private foundation can be difficult to parse out together, it’s helpful to break it down. We’ve covered self-dealing and now it’s time to explore the payout requirement for private foundations.
Qualifying Distributions
Unlike public charities, private foundations are required to spend a minimum amount—called a qualifying distribution—for grants, administration, and other charitable distributions every year, or pay a penalty. The amount of the qualifying distribution is equal to 5% of the fair market value of the foundation’s assets during that year.
The following are considered permissible for qualifying distribution payments:
Grants
Costs of all direct charitable activities
Program-related investments and loans
Administrative expenses necessary for the conduct of its charitable activities
Asset purchases for carrying out charitable activities (such as furniture or computers)
Program-related investments and loans
If a private foundation fails to make a qualifying distribution, the IRS imposes a hefty penalty (a 30% excise tax) on the funds a private foundation fails to distribute.
An important caveat to the qualifying distribution requirements is that a foundation may elect to set aside funds for up to 5 years for certain major projects. Furthermore, excess qualifying distributions may be carried forward for a period of five tax years immediately following the tax year in which the excess was created.
Foundation managers should be aware that while the penalty is imposed on the foundation, individuals may also be charged penalties on the grounds s/he failed to exercise fiduciary duties.
Let a Lawyer Help
With all of that said, this is why it’s a smart (even essential) idea to enlist an attorney well-versed in the intricacies of nonprofit law to serve as a guide at different steps throughout the life cycle of a private foundation, from formation to board building, to continued compliance.
Questions? Want to learn more about how to make certain your private foundation is set up for success from the start? Don’t hesitate to contact me for a free consultation. You can also download my free, no-obligation nonprofit formation guide!
Private Foundations: Prohibited Grants
NonprofitsAwarding grants is a primary way for private foundations to accomplish their charitable goals. It’s also an oft-used way to meet annual distribution requirements to avoid an IRS-imposed penalty of an excise tax. However, this area of nonprofit activity can be ripe for misstep and noncompliance because some grants are prohibited. Further, others require heightened diligence to steer clear of trouble.
Taxable expenditures
Taxable expenditures for non-charitable purposes are not considered qualifying distributions, including:
Scholarships
Adopt Smart Grant-Making Policies & Procedures
It is in the best interest of private foundations to exercise expenditure responsibility by setting in place a formal set of policies and procedures for grant-making. This document and its provisions, among other things, should:
When it comes to high quality policies and procedures, you can and should avoid the time, energy, and monetary costs of DIY Internet templates. Set the foundation up for success when you enlist an attorney well-versed in nonprofit law to draft a document (or set of documents) and implement with an effective, engaging board/staff training. The benefits of investing in a qualified attorney to craft your important policies (like those related to grant-making) are numerous; the right attorney will put your organization’s best interests first, saving you resources in the long run.
It’s important to note that the info in this post is, at best, a mere outline of just one of the complex regulations governing private foundations. If you want to learn more, don’t hesitate to contact me as I offer a free consultation. You can also download my free, no-obligation nonprofit formation guide if you’re thinking about topics like this the pre-formation phase of the foundation’s life cycle.
Happy Pi Day: The One Constant in Estate Planning is Change
Estates & Estate Planning, EventsPi (π) is the ratio of a circle’s circumference to its diameter. Pi is a constant number, meaning that for all circles of any size, Pi will be the same. (It’s also a great day to deliver pie to Gordon Fischer Law Firm…any kind will do!)
Like geometry, in estate planning there are many variables, and some constants, too. Ironically, one of the constants in estate planning is change. And as your life and circumstances changes, your estate plan needs to change too.
Change & Your Estate Plan
Let’s assume you’ve gone to an estate planning lawyer, and you have (at the very least) the six “must have” estate planning documents. That’s great, well done. (You can read all about these six documents here.).
But remember you also need to keep these documents updated and current.
Major Life Events
If you undergo a major life event, you may well want to (re)visit with your estate planning lawyer, to see if this life event requires changing your estate plan through different provisions, tools, and strategies.
What do I mean by a major life event? Some common such events include:
This is just a short list of life events that should cause you to reconsider your estate plan; there are many others.
Changes in goals
It’s not just life changes, though. It may be that your overall goals for your estate plan have changed over time. You may want to change the amounts of inheritances. As your financial situation changes, you may want to increase or decrease, your charitable bequests.
Laws are dynamic and changing
And, it’s not just changes in your own life you need to think about, either. Congress, the Iowa legislature, and the courts are constantly changing the laws. When the rules change, so too must your estate plan.
Meet the Donor Family
To illustrate when estate plans should be updated, let’s look at the Donor Family. Jill and Dave have been married for 25 years and have four grown children. They executed a common-sense estate plan a few years ago.
Since that time, the Donors have gone through many changes, as you would expect, and as all families have. Should Jill and Dave update their estate plan to reflect changes in their family’s circumstance? Consider the following:
Divorce
One of the Donor kids filed for a divorce from his wife. Jim and Carol need to update their estate plan since they decided they now want to exclude the ex-spouse as a beneficiary.
Changes in financial status
Jill’s uncle passed away and left her a great deal of money. The Donors need to determine how this inheritance will affect their current plan and future estate tax liability. The Donors may want to be more generous to their favorite charities. They may want to talk to their estate planning lawyer about charitable giving through a planned gift, such as a charitable gift annuity or charitable remainder trust.
Birth
Our example couple’s youngest child recently announced that she and her spouse are expecting their first child. Jill and Dave must update their estate plan to provide for the new grandchild.
Major changes in health
The Donor’s youngest child was in a serious car accident, which resulted in severe disability. He can no longer work and is receiving government disability benefits. The Donors will want to seriously consider setting up a special needs trust. This type of trust will allow a beneficiary to receive inheritances, without it being considered income by the government for qualification purposes.
New real estate outside Iowa
Jill and Dave recently bought a vacation home in Arizona. The vacation home may well be affected by Arizona laws. In any case, the Donors’ estate plan should reflect this new asset.
As you can see the Donor Family has many reasons to revisit their estate plan, and more than likely, so do you! In between bites of your favorite pie, review your current estate plan to make sure its current. (If you still need an estate plan, the best place to start is with my Estate Plan Questionnaire.) Additionally, I can always be found at gordon@gordonfischerlawfirm.com and 515-371-6077.
Payout Requirements for Private Foundations
NonprofitsWhen forming a nonprofit organization, at some point founder have to weigh the merits of the public charity versus the private foundation. Both are classified by the IRS as 501(c)(3)s. There are indeed benefits and challenges to the structure of both nonprofits, but private foundations can be subject to stricter oversight and need to meet different requirements to retain compliance. Because all the different aspects of a private foundation can be difficult to parse out together, it’s helpful to break it down. We’ve covered self-dealing and now it’s time to explore the payout requirement for private foundations.
Qualifying Distributions
Unlike public charities, private foundations are required to spend a minimum amount—called a qualifying distribution—for grants, administration, and other charitable distributions every year, or pay a penalty. The amount of the qualifying distribution is equal to 5% of the fair market value of the foundation’s assets during that year.
The following are considered permissible for qualifying distribution payments:
If a private foundation fails to make a qualifying distribution, the IRS imposes a hefty penalty (a 30% excise tax) on the funds a private foundation fails to distribute.
The More You Know
An important caveat to the qualifying distribution requirements is that a foundation may elect to set aside funds for up to 5 years for certain major projects. Furthermore, excess qualifying distributions may be carried forward for a period of five tax years immediately following the tax year in which the excess was created.
Leader Liability
Foundation managers should be aware that while the penalty is imposed on the foundation, individuals may also be charged penalties on the grounds s/he failed to exercise fiduciary duties.
Let a Lawyer Help
With all of that said, this is why it’s a smart (even essential) idea to enlist an attorney well-versed in the intricacies of nonprofit law to serve as a guide at different steps throughout the life cycle of a private foundation, from formation to board building, to continued compliance.
Questions? Want to learn more about how to make certain your private foundation is set up for success from the start? Don’t hesitate to contact me for a free consultation. You can also download my free, no-obligation nonprofit formation guide!