KC Chohan, founder of Together CFO, explains how private foundations can be used by multi-seven-figures business owners to achieve advanced tax savings. Private foundations are not just a tax strategy but also a commitment to a cause and a way to create a lasting legacy. This strategy, inspired by the Rockefeller ethos of “Own nothing, but control everything,” can help in reducing taxes, protecting assets, and creating a legacy.
Private foundations offer significant tax benefits, including deductions on income tax for contributions made to the foundation. Donors can deduct cash donations up to 30% of their adjusted gross income, and they can also contribute appreciated assets like stock, art, cars, yachts, jets, etc. without paying capital gains tax on the appreciation. These contributions can also reduce the size of a donor’s estate, lowering estate taxes over time. By establishing a private foundation, families can integrate their philanthropic goals with their estate planning while potentially saving on estate taxes.
Assets gifted to a private foundation no longer belong to the donor, although they can retain control over them. The assets within the foundation can grow almost tax-free, with income and capital gains not subject to capital gains tax. However, there is a 1.39% net investment income tax on any money created from investments in the foundation. Private foundation donors can make contributions in a year when they need a deduction the most and can make grants over time without being forced into making donations, as long as the 5% expenditure rule is met.
While private foundations offer tax advantages, certain actions can lead to trouble with the IRS, such as self-dealing. Self-dealing involves prohibited transactions between a private foundation and disqualified persons, which could include selling or leasing property, lending money, or furnishing goods and services to disqualified persons. Disqualified persons include substantial contributors to the foundation, foundation managers, and family members of these individuals. By establishing a private foundation, donors can set forth their foundation’s charitable purpose and governance policies, ensuring that the activities reflect their philanthropic vision.
Private foundations exemplify the concept that real power lies in control rather than ownership. By transferring assets to a foundation, donors can achieve both philanthropic impact and tax-efficient wealth management while holding the reins on how the foundation’s assets are utilized. Private foundations allow wealthy individuals to involve their families in investing, philanthropy, and imparting values of stewardship and community responsibility. By designating family members as officers or board members, control can be retained within the family over multiple generations. It is important to consult with a licensed professional for advice concerning a specific situation.
