Monday, April 03, 2000
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Private family foundation has number of restrictions
Question: We have been paying $7,000 in yearly college expenses for a relative who could not attend college otherwise, and another $27,000 a year in living and college expenses for a divorced relative who has several children. Can we set up a nonprofit corporation and cycle our donations through it to make them deductible on our income taxes?
Answer: Barbara Culver, certified financial planner with Blue Ash's Resonate Inc., says the answer is a very cautious maybe, but setting up a private family foundation probably doesn't make sense.
You should work closely with a lawyer who is very experienced in setting up private family foundations.
The advantages of creating a private family foundation to those creating it are that you can take an income tax deduction upfront while continuing to control the distribution of the foundation's assets.
There are disadvantages to a family foundation, such as setup expenses. A rule of thumb is that it does not make sense to establish a private family foundation for less than $1 million; public foundations, or donor-advised funds, can be established for significantly less.
However, there is absolutely no way that you could send distributions to a relative under a public family foundation.
Contributions to private foundations are subject to restrictions on income-tax deductibility as well. (See IRS Section 170.)
Cash contributions are gen erally deductible up to 30 percent of the donor's adjusted gross income (AGI), while contributions of appreciated property are generally deductible up to only 20 percent of the donor's AGI.
If the 20 percent or 30 percent limitation is exceeded, the excess deduction may be carried forward for up to five years.
Deductions allowed for contributions to private family foundations are less generous than those allotted for contributions to public foundations or public charities.
Perhaps the biggest obstacle to using a private family foundation here is the concern over self-dealing.
The law prohibits certain activities between the family foundation and disqualified persons, which can include family members.
Some of the activities that are prohibited include the lending of money, the payment of compensation and/or the transfer to or use by or for the benefit of a disqualified person of the income or assets of a private foundation.
Compiled by Amy Higgins
Readers should consider the advice from the Money Panel as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.
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