Estate Planner May-Jun 1999
The complexity of the rules governing private foundations and the restrictions placed on them under the Internal Revenue Code (IRC) have spurred a search for alternatives by the charitably inclined who wish to maintain some control over property gifted to charity.
Establishing a supporting organization is one alternative to consider. Supporting organizations are often overlooked because the rules for establishing them may on the surface seem more complex than for private foundations. Nevertheless, supporting organizations are gaining in popularity and offer significant advantages over private foundations.
Supporting organizations are just what their name suggests — organizations that support or benefit one or more existing public charities. You and your family, as donors, can provide grants and distributions to your favorite charities by establishing a supporting organization that allies itself with those charities.
Private Foundations vs. Supporting Organizations
Private foundations allow you and your family to maintain a great deal of direct control over the investment of foundation funds. However, this ability to control has brought private foundations under Internal Revenue Service (IRS) scrutiny. In addition, private foundations are subject to numerous rules designed to prevent perceived abuses that are thought to benefit the donor. For example, engaging in self-dealing, failing to distribute 5% of the foundation’s assets annually, or making investments that are deemed too risky or that hold too great a share of one business can subject private foundations to excise taxes.
Supporting organizations are not subject to these excise taxes and also provide greater tax advantages for the donor. The income tax deduction for charitable contributions to supporting organizations is limited to a higher percentage of your adjusted gross income than that for contributions to private foundations — 50% rather than 30%. Also, contributions of real estate and nonmarketable appreciated property to supporting organizations may be deducted based on fair market value, and not on tax basis as in the case of private foundations.
One of the primary reasons for the increasing popularity of supporting organizations is the growing awareness of the donor’s ability to exert some influence over the assets’ use after transferring ownership. This influence or indirect control, which, under the IRC, must necessarily fall short of direct control, is a significant objective because supporting organizations have no percentage limits on the amount of a business interest that the supporting organization may hold. In contrast, a private foundation, which allows a donor to retain much more direct control, may not hold more than 20% (including attribution) of an operating business for an extended period of time.
Establishing a Supporting Organization
A donor may establish a supporting organization as either a corporation or a trust. There is some question as to which format provides greater flexibility. For example, some people feel it is easier to keep the indirect control in the family through corporate bylaws or to change charitable beneficiaries through corporate charter amendments.
Once you have chosen the type of entity that is right for you, determine which of the three types of supporting organizations authorized by the IRC is appropriate:
1. A designated charity or charities actually operates, supervises or controls the supporting organization.
2. The supporting organization is “supervised or controlled in connection with” the designated charity or charities.
3. The supporting organization operates “in connection with” the charity or charities.
This third type is the most attractive from a control standpoint because it allows the supporting organization to be controlled by independent parties who may be selected by you and your family. Even if you can’t control the supporting organization, you can still exercise considerable influence if you and your family comprise a substantial minority of a supporting organization’s board of directors and you also select the independent directors.
Is a Supporting Organization Right for You?
A supporting organization offers a viable alternative to a private foundation for many donors when the subject of a charitable gift is property other than cash and marketable securities. You can retain control over the property, and you can receive a greater income tax charitable deduction. If you have questions regarding supporting organizations, or any other questions regarding your estate plan, don’t hesitate to call. We would welcome the opportunity to help you achieve your estate planning goals.
Qualifying as a Supporting Organization
For an organization to qualify as a supporting organization, it must meet four tests:
1. Independent parties must have control — you and your family, as donors, cannot control the organization.
2. The supported charity or charities must have either a “significant voice” in the supporting organization or the supporting organization must qualify as a “charitable trust” in which the supported charity has the power to enforce the trust terms. In addition, the supporting organization must apply substantially all of its income for the charity’s use or perform services that the charity would normally perform itself.
3. The supporting organization must be limited to the specified charities’ approved charitable purposes.
4. The supporting organization must actually benefit the charity through its operations.