Thursday September 28, 2023
Case of the Week
Lucky Lucy Lindstrom's "Ultimate Control" Charity
Case:Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor (RIA) and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy was so successful in these markets that she now only manages her own large personal portfolio.
Somewhat late in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and learned that giving someone in need a helping hand is even more gratifying than making another million in the futures market. Lucy invested $1,000,000 in a "penny stock" company. Recently, the stock rose from the $1 per share that she paid to over $5 per share. Lucy was delighted with her gain and decided to give the $5,000,000 in stock to a charitable foundation to help those in need.
Lucy discussed several options with her attorney and her favorite charity. She could create a private foundation (PF), or she could set up a supporting organization (SO) with her favorite charity. If the supporting organization were created, her favorite charity wants to elect three of the five directors, and Lucy would elect two directors. Since the SO would be controlled by her favorite charity, it would also qualify as a public charity. Lucy could give the stock and take a deduction up to 30% of her adjusted gross income, with a five-year carry-forward for the excess value.
Lucy thought about the SO, but was also very interested in a private foundation (PF). She asked her attorney for reasons to select one or the other. Her attorney noted that private foundations are usually more expensive to operate, appreciated gifts are deductible only to 20% of AGI, deductions for gifts of real estate to a PF are limited to basis, there is usually a 2% excise tax on investment income and the PF is subject to various rules on self-dealing, minimum distributions and excess business holdings.
Question:"Wow!" said Lucy, "there are a lot of negatives about private foundations. So why do some of my friends set up private foundations?"
Solution:Her attorney noted that although the PF requirements were substantial, it would be manageable. She continued, "If you want control, and are willing to pay the added cost to comply with these requirements, then the private foundation is an appropriate choice."
Lucy asked, "If I set up a private foundation with this stock, will I receive a full charitable deduction?" Her attorney responded, "Yes, since the stock company is publicly traded stock, and you own less than 10% of the stock, there is a rule that is an exception to the usual 'cost-basis only' deduction for appreciated gifts to a PF. With publicly-traded stock gifted to a PF, you will receive a deduction for your gift at fair market value."
After thinking through these options, Lucy decided to move forward with the Lucy Lindstrom Private Foundation. She had her attorney create the PF and gave her lucky penny stock to the foundation. The PF sold the stock, diversified and reinvested the proceeds. Each year, Lucy and the board of her PF make grants to those in need.
Lucy decided that she wanted the control of a private foundation and was willing to pay the added costs of operation. She thought, "I will run the Lindstrom Private Foundation for a number of years and then maybe I will merge it into the public charity at a later time."
Published February 10, 2023
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