Money Talk: A legacy of giving
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October 09, 2009 2:00 AMI recently tuned in to New Hampshire Public Television and caught a new documentary called "Retirement Revolution: The New Reality," hosted by Paula Zahn. The program highlighted some common challenges facing current and future retirees. But it was the segment on "encore careers" that caught my eye. As the program showed, new business ventures and work on projects with broad social impact are two common themes defining the new retirement reality.
For many individuals, retirement is an opportunity to create a new career that combines their entrepreneurial and philanthropic drives. Armed with skills from their first career, these social entrepreneurs strike out in retirement to positively affect the world around them by starting their own private foundations. For these entrepreneurial spirits, establishing a private foundation offers an opportunity to stay personally engaged and productive later in life.
Similar to public charities, private foundations are tax-exempt entities established exclusively for charitable, educational, religious, scientific and literary purposes, but instead of soliciting donations from the public, they are funded and controlled by an individual, family or business. Warren Buffet and Bill Gates both have one, but you do not have to be on the Forbes wealthiest-in-the-world list to create and run your own private foundation. According to the Urban Institute's National Center for Charitable Statistics, there are currently 484 private foundations in New Hampshire, more than half of which have less than $1 million in assets. The number of private foundations in the state has increased nearly 34 percent over the past decade and together, these philanthropic organizations currently have more than $950 million in their charitable coffers.
Most private foundations are set up as non-operating foundations. That is, they do not provide services directly. Instead, they fulfill their tax-exempt purpose by making grants to public charities or individuals in the form of scholarships, awards or emergency assistance. To maintain their tax-exempt status, the foundation must donate 5 percent of its average net assets each year. IRS rules allow a tax deduction for donations to the foundation in the year they are made, up to a maximum of 30 percent of adjusted gross income. Unused deductions can be carried forward to offset income for up to five years.
Starting a foundation involves some initial legal work, such as establishing by-laws, appointing a board and obtaining IRS status as a tax-exempt organization. Ongoing management of the foundation, however, can remain a family affair. Children and other family members can be appointed as officers and directors of the foundation or serve in a staff role, providing a way to unite the family and pass important values — and management skills — on to younger generations. Family members can be compensated for their service as long as IRS rules are strictly followed.
Operating a foundation involves establishing a mission, researching charities, setting grant-making rules, reviewing and approving grant requests, as well as overseeing the foundation's investment strategy. The board of directors has ultimate responsibility for each of these functions, allowing for the greatest level of control. It is a very hands-on approach to creating a charitable legacy, well-suited to an entrepreneurial personality. Still, the administrative burden need not be overwhelming, even for those less management inclined. For smaller foundations that cannot afford a staff, many administrative functions (accounting, tax, legal, investment) can be outsourced, allowing the donor and board to focus on charitable objectives.
For those with the desire to create a charitable legacy without the drive toward social entrepreneurship, establishing a donor-advised fund may be a good option. Donor-advised funds offer less control and flexibility, but avoid administrative requirements of a private foundation. Using a donor-advised fund, you make an irrevocable gift to a fund that pools contributions from many donors, and manages the investment and disbursement of the funds to public charities. While you can give direction as to which charities you would like to receive your donations, these funds are managed by a board that ultimately decides where grants are to be placed.
David T. Mayes is a certified financial planner professional and IRS Enrolled Agent at Mackensen & Company Inc., a fee-only advisory firm in Hampton. He can be reached at 926-1775, david.mayes@mackensen.com or by visiting www.mackensen.com.