Advising Private Foundations: Despite Their Administrative and Regulatory Complexity, These Philanthropic Vehicles Are Taking Off

By McAllister, Brian P.; Yoder, Timothy R. | Journal of Accountancy, April 2008 | Go to article overview

Advising Private Foundations: Despite Their Administrative and Regulatory Complexity, These Philanthropic Vehicles Are Taking Off


McAllister, Brian P., Yoder, Timothy R., Journal of Accountancy


[ILLUSTRATION OMITTED]

EXECUTIVE SUMMARY

* Small family private foundations are growing at a rate of six per day. This indicates a growing probability that CPA firms will be advising benefactors of family foundations. It is vital that CPA firms understand the complex tax rules related to private foundations.

* Private foundations are not allowed to engage in transactions with "disqualified persons," which include foundation managers and substantial contributors, even if the transaction is conducted at fair market value.

* Excise tax on the net investment income of private foundations is assessed at 2%. However, the rate is lowered to 1% for years in which the private foundation makes qualified expenditures in excess of the prior five-year rolling average qualified expenditure ratio plus 1% of current-year net investment income.

* The minimum annual distribution of private foundations is roughly 5% of the average monthly fair market value of assets. Distributions in excess of this amount may be carried forward for five years to offset future required annual distributions.

* Private foundations must pay an excise tax on "taxable expenditures." In general, these expenditures are made for any purpose other than religious, charitable, scientific, literary, educational or other public purposes. To ensure grants made to organizations other than public charities or exempt operating foundations are not classified as taxable expenditures, a private foundation must exercise expenditure responsibility.

* Private foundations are not allowed to invest in risky investments, unless the investments are related to the exempt purpose of the foundation. Private foundations are also not allowed to invest in a business enterprise if the combined ownership interest of the private foundation and all disqualified persons exceeds 20% of the business enterprise.

**********

In the arsenal of estate planning, private foundations have traditionally ranked among the big guns. With their relative formality and extensive tax rules, they have been considered the province of the truly wealthy--people with $1 million or more to dispose of charitably The belief that lesser largesse could be better served by donor-advised funds and certain types of supporting organizations (see "The Rich Truly Are Different," JofA, April 04, page 32) is changing. The Pension Protection Act (PPA) of 2006 has curtailed many of the tax and other advantages enjoyed by those two alternative philanthropic vehicles. Today, small family foundations with assets under $1 million make up nearly 60% of all foundations. One factor driving this growth is the unprecedented transfer of wealth to the post-boomer generation that has begun and is likely to accelerate in coming years. Often, these small foundations are administered by family members, who rarely have expertise regarding the complex tax regulations involved.

For all these reasons, developing a niche practice in private foundations poses growth possibilities for CPA firms, according to Holly M. Pantzer, CPA, a partner with BKD LLP, one of the 10 largest CPA and advisory firms in the U.S., where her areas of expertise include advising private foundations. CPA firms are increasingly likely to be advising founding benefactors of family foundations. CPAs can be a valuable resource for monitoring compliance with the many tax laws unique to private foundations. Awareness of the nuances of private foundation laws is especially important now, given the increased scrutiny of all tax-exempt organizations by Congress and the IRS. Advisers can help prevent inadvertent but costly violations of the tax laws peculiar to private foundations. Key issues for benefactors considering a private foundation include:

* Comparisons to other options (donor-advised fund or supporting organization)

* Prohibitions on self-dealing

* Excise taxes on net investment income

* Taxes on undistributed income

* Taxable expenditures and expenditure responsibility

* Jeopardizing investments and excess business holdings

Private foundations operate exclusively for religious, charitable, scientific or similar activities as described in IRC [section] 501(c)(3) and are exempt from income tax but commonly pay excise taxes on net investment income and, sometimes, as penalties. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Advising Private Foundations: Despite Their Administrative and Regulatory Complexity, These Philanthropic Vehicles Are Taking Off
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.