You may want to establish a charitable family foundation in your name or your family’s name during your lifetime or at your death. This type of charitable organization, also known as a private foundation, would be dedicated to funding certain specified or unspecified charitable organizations or accomplishing certain charitable purposes. While this type of organization is subject to significant regulation and restrictions (e.g., self-dealing between the foundation and its founder, foundation managers or their families is expressly prohibited and would subject the foundation and the foundation managers to onerous penalty taxes), it may accomplish your estate planning goals. First, the private foundation would enable you to achieve the transfer and income tax savings outlined below. In addition, you could establish rules for providing a permanent source of funds to assist the charitable organizations of your choice. Further, the private foundation structure provides a unique vehicle to permit family members and descendants to remain involved in your charitable vision.

Concerning the tax savings associated with gifts to a private foundation, contributions by you (or your revocable trust) of property during your life to qualified charities, including other foundations, entitle you to claim income tax charitable deductions (subject to various limitations) on the amount of such contributions (i.e., in the case of publicly traded securities given to your foundation, the deduction equals the fair market value of the securities contributed). These assets are permanently removed from your estate and escape transfer taxes altogether. Your revocable trust can designate additional amounts to be transferred to charity at your death, which amounts would escape estate taxation as well. In addition, your private foundation could be controlled by you during your lifetime and by children, descendants or other relatives or unrelated parties of your choice after your death.

The structuring of the relationship between your foundation and your family members (i.e., children, grandchildren, siblings, nieces or nephews) raises unique and potentially sensitive issues. For example, the term “self-dealing” includes any direct or indirect transfer to, or use by or for the benefit of, a disqualified person (which would include you both) of the income or assets of a private foundation. Such prohibited use of foundation assets generally includes grants directly to or for the benefit of disqualified persons. However, the payment of compensation (and the payment or reimbursement of expenses) by a private foundation to a disqualified person for personal services which are reasonable and necessary to carrying out the exempt purposes of the private foundation is not an act of self-dealing if the compensation (or payment or reimbursement) is not excessive. Notwithstanding these restrictions, the foundation arguably is permitted to compensate you and other family members who actually render services to the foundation as long as the compensation is reasonable in the IRS’ view.

Setting up a family foundation is rather technical and involves the creation of several documents, including organizational documents for the foundation and an application for recognition of tax-exempt status that must be filed with the Internal Revenue Service within 15 months of the foundation’s formation. The IRS also charges a user fee that must be paid with the application for recognition of tax-exempt status.