When counseling, I asked Robert a simple question. “Do you envision your children and grandchildren living a more extravagant lifestyle than you and Diane have over your many years together?”
Robert and Diane had been married forty years, amassing wealth of over $35 million through hard work, self-denial of luxuries and disciplined investing in real estate and stocks and bonds. Despite their wealth, they lived in a modest home, and drove Buicks. Robert thought about my question for a moment, shook his head slightly and said, “No, I don’t want them to live extravagantly. We never did.”
Diane nodded in agreement.
“What is it that you want for your children and grandchildren?” I asked.
Diane took the lead, “I guess you can say that we don’t want them to have to struggle as much as we did, but on the other hand, we don’t want to take away their drive and ambition. Of course, if our children or grandchildren suffer an accident or disability, we want the funds to be used for their care.”
“Education,” chimed in Robert, “is important too. I don’t mind teaching a man to fish, rather than feeding him a fish, if you know what I mean.”
“Well, there’s plenty to take care of both of your concerns, and so much more than that,” I added. “Tell me, what was an important moment in your youth? Maybe that can uncover some clues.”
“My father worked two jobs, and my mother taught dance to supplement our income,” Diane said. “Growing up we didn’t have much. As a youngster, Mom wanted to attend Julliard but never had the opportunity. So, she taught dance as a young adult. Our daughter followed in her grandmother’s footsteps. She teaches dance but doesn’t make much money.”
“Would you have any interest in adding a charitable component to your plan?” I asked. “For example, you can create a private foundation that pays your daughter to teach dance to underprivileged kids. That would carry forward your mother’s work.”
“A foundation could do that? Robert asked.
“Yes, of course! I answered. “I’m talking here about a private operating foundation. The IRS defines it as a foundation that spends at least 85% of its adjusted net income or its minimum investment return, whichever is less, directly for the active conduct of its exempt activities. Directly for the active conduct refers to qualifying distributions a foundation makes that are used to conduct exempt activities by the foundation itself, rather than by making donations to grantee charitable organizations. Operating a dance studio for underprivileged children would qualify as active conduct.”
Diane seemed puzzled. “Why would we want a private operating foundation as opposed to just a private foundation?”
“A private foundation that is not a private operating foundation is required to distributed at least 5% of the fair market value of its noncharitable-use assets through grants to qualifying 501(c)(3) charities. There is also an excise tax on the net investment income of private foundations equals 1 to 2% of net investment income.”
Our conversation continued into the benefits of a private foundation, including family control over the entity. The foundation would have an annual meeting, where the family could decide how it was going to complete its charitable missions. A foundation could, of course, include several different goals. These philanthropic activities can serve to bond the family together for generations.
Generally speaking, younger family members tend to favor social responsibility causes, while older ones might favor the arts, medicine, religion, or education. There’s no reason to limit a foundation’s causes to just one outlet. The big decision with private foundations is to determine whether the family wants it to be an operating foundation, or simply a grant foundation.
Donor Advised Funds are another way to promote family philanthropy. These can be established through many investment banks and companies, and don’t have to file for tax exempt status. In a future article I’ll review DAFs in greater detail.
When I have conversations with my clients about how they want their hard-earned wealth to be used, philanthropy is a topic that isn’t discussed enough. When there will be more than enough to provide for children and grandchildren’s future, what better way to bond a family together than through philanthropy? There’s the added benefit of charitable tax deductions associated with the transfer into charitable entities.
Balancing bequests to provide for your loved ones needs while at the same time bonding the family now and into the future speaks to the concerns that many people of wealth harbor. I hope this column gives you some ideas to talk to your estate planning counsel about.
©2022 Craig R. Hersch, Sheppard Law Firm Learn more at www.floridaestateplanning.com