The Private Family Foundation has typically been thought of as a province for the super rich, but its advantages are also available for estate owners not necessarily "classified" as super wealthy.

Generally speaking, however, private foundations do make most sense for those with an estate valued at $20 million or more.

Foundations Serve a Great Purpose

Foundations serve a great purpose in our society - everything from public television to scholastic grants, medical research, museums and the like.

They oftentimes can enhance and enrich the lives of many.

Under current law, an estate owner can establish a private foundation while living or at death and any contributions made to a private foundation are tax deductible. Although highly regulated to stem and prevent "self-dealing" strategies, the tax benefits are tempting.

The tax deduction allowed for contributions to a private foundation cannot exceed 30% of your adjusted gross income while living.

On the other hand, there is no limit on the deduction your estate can make after your death.

Reduce Estate Taxes and Serve a Great Cause

Let's look at an example. Let's say a husband and wife have a 20 million dollar estate. Today, they elect to establish a private foundation designed to benefit under-privileged children and single mothers.

Of the $20 million, they take $10 million and contribute it to a private foundation.

As far as the IRS is concerned, their taxable estate is now only $10 million and, in the process, they have saved over $5 million in estate taxes.

The husband and wife placed their children as the directors of the foundation, of which they can draw annual salaries.

Each year, the foundation is required to distribute 5% of its assets to known charities. This gives the donors and the children great potential leverage and prestige in the community in which they reside.

Quintuple Tax Play

Again, let's look at another example of how to use a private foundation combined with some of the other strategies we've examined earlier in our site.

Let's say Bob and Carol who are now in there late 60's. Bob starting buy stock in his late 20's and was a buy and hold, valued-oriented investor. Today, just their stock portfolio is valued at over $20 million.

If they were to sell their stock holdings, they would incur a substantial capital gains tax liability.

If they elect to continue holding the shares until he and the wife pass away, estate taxes would consume over 40%.

To avoid the inevitable tax bite, Bob and Carol established three (3) Trust Strategies - a Charitable Remainder Income Trust, a Tax Free Inheritance (insurance) Trust and a Private Family Foundation.

Example: Bob and Carol donate the $20 million of stock to a Charitable Remainder Trust and, as trustees, liquidate the stock holdings and incurred no capital gains taxes.  The proceeds are invested at a 3.00% rate.  The charitable remainder trust pays Bob and his wife $600,000 annually.

At their Bob and Carol's death, the $20 million dollars that remained in the Charitable Remainder Trust then distributes to the Bob and Carol Charitable Foundation.

(Be reminded that under this strategy, Bob and Carol's children would have normally stood to lose $10 million dollars, assuming he and his wife held his stock until they passed (instead of transferring it to the Charitable Trust).

To ensure that their children get their share and to perpetuate the family wealth, they also set up a Tax-Free Inheritance (insurance) trust which purchased a $10 million dollar Survivorship Life insurance plan.

The deduction that Bob and Carol received for making the original contribution to the Charitable Trust is typically enough to cover the cost of the insurance premiums.

In Summary

  • Bob and his wife established a charitable trust and transferred the stock to avoid the capital gains taxes and the estate taxes.

  • They established a private family foundation to serve as the eventual recipient of the charitable trust proceeds.

  • The foundation is run by his children/grandchildren and they receive and income for doing so.

  • The children receive the death benefit from the tax free inheritance (insurance) trust 100% income and estate tax free.

  • And the foundation distributes 5% of its assets to charitable causes it supports.

Action To Take

Click HERE to obtain Private Family Foundation information

For Faster Service Call 1-800-480-7526




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Copyright 1998 Fielder Financial Management, LTD.
All Rights Reserved.

Securities offered through Fortune Financial Services, Inc. member FINRA, SIPC.  Fielder Financial Management, Ltd. not affiliated with Fortune Financial Services, Inc.  Mark Fielder, Financial Professional, CA. Insurance Lic. # 0690576.