10 Precautions for Protecting the Benefits of Your Private Foundation, according to McManus & Associates

Top AV-Rated Estate Planning Attorney John O. McManus Identifies Advantages and Often-Overlooked Pitfalls of Private Foundations

NEW YORK, NY, Dec. 08, 2017 (GLOBE NEWSWIRE) -- A Privation Foundation is established, in large part, to help protect one’s estate and maximize the impact of charitable giving. In conjunction with the giving season, McManus & Associates, a top-rated estate planning law firm celebrating 25 years of success, outlined “10 Precautions for Protecting the Benefits of Your Private Foundation,” as part of its Educational Focus Series. To listen to the conference call led by the firm’s founder John O. McManus, go to http://bit.ly/2AnjdGU.

“By making gifts from your Private Foundation to charities in increments over time, you can extend your influence over the ongoing use of your gifts,” explained McManus. “But while there are many advantages of Private Foundations, there are also often-overlooked pitfalls, of which you should be aware.”

10 Precautions for Protecting the Benefits of Your Private Foundation

1. Use Caution when Compensating Family Members through the Foundation

1. Certain transactions between a Foundation and a disqualified person are subject to self-dealing rules. The Internal Revenue Code imposes a 10% excise tax on the disqualified person for acts of self-dealing between a Private Foundation and the disqualified person. A disqualified person includes the following:
2. Officers and members of the Foundation board
3. Substantial contributors to the Foundation
4. Managers of the Foundation
5. Family members of any of the individuals described above 
6. Be aware of the acts that are considered self-dealing between a Private Foundation and a disqualified person in order to avoid penalties, including the following:
7. Sale or exchange of property, or leasing of property, even though the terms are favorable to the Foundation
8. Lending money or other extensions of credit, except on an interest-free basis
9. Providing goods, services, or facilities
10. Paying compensation or reimbursing expenses to a disqualified person
11. Transferring Foundation income or assets to, or for the use or benefit of, a disqualified person
12. There are some exceptions to these self-dealing prohibitions: The Foundation can pay compensation to a disqualified person for personal services that are reasonable and necessary to carry out the Foundation’s purpose; and if the total amount of the compensation is reasonable.
13. Personal services include Foundation management and administrative support, real estate management services, investment management services, and legal and accounting services, but does not include secretarial services.
14. Specific services that a disqualified person can provide include contract and lease negotiation, debt management and budgeting, accounting, supervision of property, operations and inspection, rent collection, and supervision of personnel.    

2. Don’t Fall into the Ticketing and Fundraising Event Trap

1. As a general rule, a disqualified person cannot use a ticket to a charitable event receiving support from the Foundation. This includes attendance by a guest (such as a spouse) of a trustee of the Foundation.
2. A trustee can only attend a charitable event if he/she has responsibility for evaluating and reviewing the activities of the Foundation.

3. Follow Guidelines for Sharing Office Space, Equipment and Personnel with a Family Office

1. Office Space
2. The general rule for office space is that it is an act of self-dealing for a Family Office to pay the Foundation for its portion of the lease (the opposite is also true – renting space to a Foundation). 
3. To solve this problem, the Family Office must enter into its own separate lease and the landlord cannot be a disqualified person. 
4. The common areas should also be allocated to the Family Office – not to the Foundation – because the Foundation cannot pay for such space and then allow the Family Office to use it. 
5. If separate offices and leases are not a viable approach to self-dealing, the family office should sign the lease and allow the Foundation to utilize the space rent-free. 
6. Renting to a Foundation is not self-dealing if the lease is without charge.  The lease is still considered to be without charge if the Foundation pays for its own utilities and other maintenance costs to third parties as they occur.
7. Equipment and Supplies
8. The Family Office can purchase and provide the supplies at no cost to the Foundation, or
9. The Family Office and the Foundation can enter into separate contracts with a third party to provide the necessary equipment and supplies. 
10. If the technology infrastructure cannot be divided between two entities, the Family Office must pay the expenses and allow the Foundation to use it free of charge.
11. Personnel
12. It may be difficult to separate the time of a shared employee in a shared space, so the safest and best response is always to have the Family Office pay for these services and not charge the Foundation.
13. If the employee’s time can be allocated between the two entities, it is possible for the Family Office to employ the individual, with the Foundation providing reimbursement; however, these services must constitute personal services, which are not considered secretarial assistance.

4. Avoid Legally Binding Pledges

1. A member of the board making a personal pledge for a charitable donation but wishing to have it fulfilled through the Foundation, rather than through personal funds, causes an issue. This is an act of self-dealing.
2. If an individual, officer, trustee, or president of a Foundation makes a pledge that is not legally binding, the Foundation can assume the pledge. However, the Foundation cannot assume a legally binding obligation of one of its disqualified persons.

5. Identify Any Benefits from Joint Investments and Co-Ownership

1. A disqualified individual may assume that he or she can enter into a business proposition with the assistance of their Foundation, but the IRS has indicated that joint investments could inappropriately benefit the disqualified person and would be considered self-dealing in many circumstances. 
2. Depending on the facts, co-ownership of other types of property by a Foundation and disqualified person may or may not be considered an act of self-dealing if the Foundation’s co-ownership confers a significant benefit to the disqualified person as the other co-owner. For example, in a private letter ruling, the Service ruled that co-ownership of property by a Private Foundation and disqualified person was not self-dealing because the co-ownership was not a sale, exchange, or leasing of property. Further, the Foundation and the co-owner did not acquire an interest in the property from the other party; and the Foundation received its share of rental payments directly from the unrelated third-party tenants.

6.  Promptly Address Misuse of Foundation Income or Assets

1. When family dynamics come into play, there can be liability for a director, so it is always important to enlist an outside advisor. 
2. When there is misuse of Foundation income or assets, the board will need to reevaluate policies to prevent the transaction from happening again. An example of misuse is a disqualified person displaying a Foundation’s artwork in their home or office.
3. When a member of the board of the Foundation has been using Foundation funds or assets inappropriately, the board should marshal the evidence, and retain legal counsel and a forensic accountant. Investigating utilities, furniture purchases, artwork, and credit card statements may be a sufficient form of evidence. Legal counsel can then work with the forensic accountant to prepare a full report including all of the self-dealing transactions.
4. If the Foundation directors and officers policy covers excise tax and self-dealing, it should notify the insurance company for possible reimbursements for legal expenses under the policy. 

7. A Key Benefit of Seeking Legal Counsel Advice

1. If any transactions might be considered an act of self-dealing, the Foundation should seek legal counsel. 
2. After full disclosure, if a person relies on written legal advice indicating that the transaction does not constitute self-dealing, the person will not be liable for any penalty taxes, even if the transaction is subsequently considered to be self-dealing.

8. Beware the Penalties of Self-Dealing

1. The Foundation does not pay self-dealing taxes; it is the person who participates in the act who pays the initial tax.
2. The first-tier tax on self-dealing is 10%, assessed on the amount that is involved and will be imposed on the disqualified person. A 5% tax is imposed on the Foundation manager who knowingly and willingly participates in the transaction of self-dealing. A second-tier tax of 200% of the amount involved can be imposed on the disqualified person if there is a failure to correct the self-dealing in a timely manner.
3. According to the IRS, self-dealing taxes cannot be abated for reasonable cause.

9. Exercise Expenditure Responsibility

1. An excise tax of 20% is imposed on a Foundation for distributions that are classified as a taxable expenditure, which is defined as any amount paid by a Private Foundation. 
2. If a Foundation is making a contribution and does not want it treated as a taxable expenditure, it must ensure that it exercises expenditure responsibility. Such responsibility includes:
3. Obtaining a written agreement from the grantee
4. Ensuring that the grant is spent solely for the purpose intended
5. Obtaining reports from the grantee on how the funds were expended
6. Recovering the funds if they have not been used for the intended purpose
7. Reporting such expenditures to the IRS on its Form 990 PF

10. Protect the Founder’s Mission

1. Many individuals establish their Foundation with a specific purpose for the use of Foundation assets through the use of a Purpose Clause. 
2. A Charitable Trust Statement can also be included to provide a stringent interpretation of how funds that are being donated to the Foundation can be used. 
3. Governance structures are also beneficial options. One governance structure is to have outsiders act as individuals or majorities on the board.
4. It can be specified that the Foundation will terminate in the event that the board tries to make a donation that is not in line with the original intent. 
5. The founder can also sunset the Foundation to terminate within 10 years after his or her death so that decades later the money is not at risk of being spent outside of the original intent. 
6. A Gift Document can also be included in the original creation of the Foundation stating that the gift may only be used for specific, delineated purposes.  

For trusted advice on creating or managing a Private Foundation, call McManus & Associates at 908-898-0100. Learn more about the award-winning firm at www.mcmanuslegal.com.

About McManus & Associates

Twenty-five years ago, McManus & Associates was founded to deliver the highest quality estate planning services that the largest firms promise with the more intimate, personalized relationships that a boutique firm can offer. Since that time, some of the most prominent families in finance, media, academia and medicine — both domestic and international — have relied on the firm to serve as their advisor in wealth and family mission planning.