Advisors Must Take Care To Deal With Qualified Charitable Organizations

A qualified charity is one that is tax-exempt and is eligible to receive contributions that are tax-deductible to the donor. Because of the tax-favored nature of these qualified charities, the Internal Revenue Service pays close attention to their structure and operation, looking for situations where financial benefits from the operation of the charity inure back to the donor.

Unfortunately, many unscrupulous individuals have tried to hide their business activities and normal living expenses inside the wrapper of a charitable organization, thus attempting to avoid taxes. For this reason, it is important for financial and legal advisors to know which charitable organizations are legitimate, and how these organizations can help meet the social and personal objectives of their clients.

The following are some popular types of qualified charitable organizations, their distinctions and use:

Public Charities: Public charities are sometimes called “50% charities” because contributors are allowed to deduct cash contributions to these charities, up to 50% of the contributors adjusted gross income. When appreciated property is contributed to a public charity, the donation is deductible up to 30% of the donors adjust gross income. Any deduction over the applicable limit can be carried over for up to five additional years. Long-term capital gain property is deductible at its full, fair market value up to the 30% limit, but ordinary income property is deductible at the lower of its fair market value or the donors basis.

Public charities include qualified churches, educational institutions, organizations that benefit certain state and municipal colleges and universities, hospitals, medical research organizations, governmental units, community foundations and publicly supported organizations.

Private (Family) Foundations: Private family foundations are charitable organizations that are established and operated by a single individual or family. These charitable foundations do not meet the public charity requirement of receiving broad financial support from the public. However, they offer the donors family multi-generation control over the investment and distribution of assets within the scope of the foundations charitable purposes.

Cash contributions to private family foundations are limited to 30% of the donors adjusted gross income, and contributions of appreciated property are limited to 20% of adjusted gross income. Contributions of qualified appreciated (publicly traded) stock are deductible to the donor at fair market value. Contributions of all other appreciated property, including closely held stock, are deductible only to the extent of the lesser of the fair market value or the donors basis in the property.

Private foundations are subject to the following requirements: a 1%-2% excise tax on net investment income, strict self-dealing rules relating to the donor and the donors family, strict rules relating to excess business holdings by the foundation, and required minimum distributions of 5% of net investment assets.

Donor-Advised Funds and Supporting Organizations: There are certain other tax-exempt entities that are treated as public charities, with all the tax advantages that accompany those charitable entities. These include donor-advised funds and supporting organizations. Both of these charitable entities provide opportunities for involvement by the donor and the donors family in how donations will be invested and distributed, but they do not provide the control that exists with a private foundation.

A donor-advised fund is a fund kept in a public charity, such as a community foundation, in the name of the donor and is made up of contributions from the donor. The donors family cannot control the use of the money in the fund but can make recommendations to the foundation manager regarding the investment and distributions of the money.

A supporting organization is a separate entity that supports the charitable activities of one or more public charities, such as a community foundation. It is a middle ground between a private foundation and outright gifts to a public charity. The supported public charity appoints a majority of the board members and has legal control over the assets of the supporting organization, but the donors family could have minority representation on the board of the supporting organization, thus influencing the investment and distribution of assets.

Each type of qualified charitable organization has a purpose and may be useful in meeting the social and financial planning needs of individuals and families. Financial and legal advisors should expend the time and effort to understand these organizations in order to help meet their clients planning objectives.

Richard C. Baier, J.D., CLU, ChFC, FLMI, is assistant vice president–advanced sales for

Jefferson Pilot Financial, Greensboro, N.C. He can be reached at rcbaier@jpfinancial.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.