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10 Private Foundation Do's And Don'ts

Wednesday, December 14, 2016   (0 Comments)
Posted by: Amy Seasholtz
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By Ashlea Ebelling

Can you run a private foundation without getting into hot water? “If you set it up just to avoid taxes, and it’s the next year, and you have to at a minimum give away 5% and don’t have a clue, it’s easy to get yourself in trouble,” says Henry Berman, ceo of Exponent Philanthropy (formerly the Association of Small Foundations). That said, “The vast majority of people play by the rules; they’re doing it for the right reason; they have a passion,” he adds.

Here’s how to stay on the right side of the rules—and steer clear of the mistakes the Trump Foundation has fessed up to and more.

Get expert help at the outset. You’ll need a lawyer and/or CPA to help you set up a private foundation—most are established as non-profit corporations these days. You apply to the IRS for approval, and file with states as needed. For how outfits like the newer Foundation Source and the 60-year-old Glenmede Trust can help ease the administrative burdens of running a foundation, see  Foolproof Foundations.

Avoid self-dealing. That means you’re not allowed to use foundation funds for your personal benefit. The foundation is a separate legal entity. The responsibility to ensure that all the rules and regulations are met falls on the directors and officers (or trustees if the foundation is set up as a trust).

The Donald Trump Foundation last month reported in Internal Revenue Service filings that it engaged in self-dealing in 2015 and before. (See  Trump Foundation self-dealing violations highly unusual.) What if you’re caught self-dealing or fess up to it? You might have to pay penalties and repay the money distributed improperly to the foundation. If you intentionally break the law, the IRS and/or the state Attorney General might come in and replace the board members. Educating foundation directors is key. Three times as many foundations (82%) have conflict of interest policies in place compared to 10 years ago, according to Exponent Philanthropy.

Watch out for issues with tickets to benefits and special events. Can my private foundation sponsor a table at a gala event and I invite my extended family? No--you can't bring non-trustee family members, unless they pay for their own ticket. The exception is trustees can attend events if they are there to learn more about the programs and encourage other donors, says Nina Cohen, director of endowment and foundation advisory at Glenmede Trust.

Set reasonable salaries. Many small foundations are run with no paid staff, but if you do pay staff, in particular family members, the salary has to be commensurate with the work. Imagine you employ your two kids, paying them $100,000 each a year, and they’re going to do all the work to manage $5 million in distributions from the $100 million foundation. If they each make a $2.5 million grant to their alma maters, that’s not reasonable, says Berman. On the other hand, if they’re visiting charities and paying out $25,000 grants, that’s a lot of work, so the $100,000 salary could be justified.

A private foundation cannot make political donations. The Trump Foundation came clean earlier this year, paying a $2,500 penalty for an improper 2013 donation from the Foundation to a campaign group connected to then-Attorney General Pam Bondi in Florida. The Trump Foundation said it was mistake.

A private foundation can’t ask for money from outsiders unless it’s registered with a state charity bureau to do so. State laws vary. New York’s Attorney General Eric Schneiderman issued a notice of violation to the Trump Foundation in September for not being registered to solicit contributions. The New York Attorney General investigation is continuing, according to their press office.

Collaborate. Join a group like Exponent Philanthropy, which focus on foundations with few or no staff. Its members pay $750 to network and share resources from benchmarking advisor fees to handling investments. The Forum of Regional Associations of Grantmakers has information on local groups, such as the Philanthropy Network Greater Philadelphia, that offer training, resources, and affinity groups around issues like early childhood education or substance abuse.

Get a CPA who specializes in private foundation work to complete the annual 990PF tax return. “There are special rules, and the average accountant probably doesn’t deal with them very often,” warns Marc Owens, a tax lawyer at Loeb & Loeb in Washington, D.C. who headed the IRS tax exempt division for a decade. (Note: you have to make it available for public inspection.)

A private foundation must spend down at least 5% of its assets each year. You can’t give a grant to another private foundation without going through a multi-step “expenditure responsibility” exercise, including a written agreement and disclosure on your 990PF, warns Thomas Blaney, a CPA and director of foundation services for PKF O’Connor Davies in New York.

Write yourself a thank-you note. As donor, even if you’re a trustee or on the board of the private foundation, you need a contemporaneous written acknowledgment of your contribution to the foundation in order to claim a tax deduction.  “This is something the IRS expects to see on audit,” says Carol Kroch, managing director of wealth and philanthropic planning at Wilmington Trust.