charitable giving series presented thursday, january 17,...

Heckerling Institute on Estate Planning“The Life Cycle of a Donor’s Charity”

Charitable Giving SeriesPresented

Thursday, January 17, 2019By

Edward Jay Beckwith - BakerHostetler LLPWashington, DC

Martin Hall - Ropes & Gray LLPBoston, Massachusetts

Michele A.W. McKinnon - McGuireWoods LLPRichmond, Virginia

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The Philanthropic Spark -Overview

Why a client wants to support a particular charitable causeWhat factors drive the impulse to giveWill it be advantageous to avoid the “charitable impulse” to

create a new entity? Using existing structures and considering opportunity issues

and anonymous givingGiving in a trust for or adding to the endowment of one or

more public charitiesGiving to existing private grant-making foundationsGiving to a donor advised fund (“DAF”)

Donor planning and tax considerations

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The Philanthropic Spark –Key Take-Aways

Developing a Philanthropic Plan is a Creative, Interactive Process

Before Jumping to any Conclusions, Assess a Donor’s Prior Philanthropic Experience and Philanthropic Personality

Before Creating a New Charitable Entity, be sure to explore other Potentially More Economical and Efficient Alternatives

Careful Tax-Planning can enhance the Donor’s Capacity to Give

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Getting Organized -Overview

Selecting the Type of 501(c)(3) OrganizationChoosing the Form of EntityDesigning Effective GovernanceSecuring Tax-Exempt Status

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Getting Organized –Case Studies

Problem 1 – Family Involvement in the Foundation

Harry and Sally have a successful real estate development company and have amassed considerable wealth. They have three children and a number of grandchildren, all of whom have been adequately provided for. Harry and Sally want to give back to the community and would like their nonbusiness assets to support community arts. There is a local arts council that has been successful in developing a local art museum. However, the organization’s support varies and its programs’ financial stability is uncertain. It therefore could benefit greatly from Harry’s and Sally’s support. Harry and Sally are concerned, however, that the arts council board lacks the resources and talent necessary to handle a significant gift.

Harry and Sally have asked what options are available to them to support the arts council or any successors in perpetuity without giving control of the assets directly to the arts council. Because their children and grandchildren all reside in the community and support the arts, Harry and Sally would be amenable to an arrangement that allows future generations to be involved in continuing their philanthropic activities. But, Harry and Sally want to ensure that the funds are always used in their community and are used only to support the arts.

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Problem 1 – Family Involvement

Issue 1. Can the objectives of Harry and Sally be met with a donor advised fund at a local community foundation?

Issue 2. If Harry and Sally wish to ensure the involvement of family in perpetuity, would a Type I supporting organization meet their objectives?

Issue 3. Would the conclusion be different if Harry and Sally would like for the charitable donee to employ one or more of their children?

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Problem 2 – Funding the Foundation with Closely Held Business Interests

When he was in his 30’s, John founded a trucking business with his brother, who never married and has no children. Now in his early 60’s, John’s interest in the trucking business is worth in excess of $400 million. John has two sons and a daughter. His daughter, who is unmarried, has worked in the business with John for 10 years. One son is a lawyer and the other a neurosurgeon. John wants to leave half of his accumulated wealth to his family, but desires to devote the other half to charitable causes. John is not certain at this point whether his daughter will want to continue the business after John’s death. He does know that he wants to treat his three children fairly even though two of them do not work in the business.

John is interested in undertaking some lifetime charitable giving, but anticipates that a substantial portion of his charitable giving will be testamentary. His children are close and all share John’s desire to give back to the community. He is certain that his children would be able to work together on charitable giving after he is gone. John’s brother, who owns 50% of the business, is close to all of John’s children and also shares John’s charitable objectives.

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Problem 2 – Funding the Foundation with Closely Held Business Interests Issue 1. Would a private foundation be an appropriate vehicle for John’s family

to carry out their philanthropy? How would an anticipated sale of the business either during John’s lifetime or at his death affect this analysis?

Issue 2. If the business will not be sold, could a supporting organization or donor advised fund solve any problems associated with transferring shares of a closely held business to a private foundation?

Issue 3. Are there any charitable vehicles that could enable John to achieve tax benefits during his lifetime?

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Problem 3 – Charitable ActivitiesSteve and his wife, Mary, have been talking to their lawyer about establishing a private foundation. Steve retired at a relatively young age after amassing considerable wealth from the sale of a technology company he founded. Steve and Mary now wish to use their wealth to make a difference in the world. Steve and Mary are strong proponents of education and reaped the benefits of college scholarships. They would like to use their foundation to provide scholarships to deserving high school seniors who lack the financial means to attend college so that others can have the opportunities afforded them through higher education.

Steve and Mary understand that many private foundations make grants to other charitable organizations. While they would like to conduct some grantmaking through the foundation (particularly to satisfy pledges they have made to universities), they would like to devote their attention to projects related to early education, such as the establishment of preschools in poverty-stricken communities. They anticipate direct involvement in these projects and expect to hire staff to assist with the operation and management of the projects.

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Problem 3 – Charitable Activities Issue 1. Given their desire to be involved directly in the charitable activities, what

type of vehicle would potentially best meet Steve’s and Mary’s objectives?

Issue 2. If Steve and Mary decide to use a private foundation, can the foundation carry on direct charitable activities?

Issue 3. What issues should be considered if Steve and Mary anticipate paying existing pledges made by them from the foundation?

Issue 4. Do the scholarships present any issues if the organization Steve and Mary establish is a private foundation or a supporting organization? What if the foundation is a private operating foundation? Could the scholarship program be handled through the foundation or a donor advised fund established by Steve and Mary?

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Problem 3 – Charitable Activities

Issue 5. Steve and Mary decided to create a private operating foundation. Five years later, they tell their attorney that they want to encourage (i.e., lobby) local governments to allow charter schools, invest significant sums in start-up Ed-tech companies, and otherwise support good social causes that you have told them do not qualify as “charitable.” They have also been contributing significant amounts to their foundation and making other charitable contributions, and have significant charitable contribution deduction carry-overs. What other vehicles should they consider?

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Getting Organized –Key Take-Aways

The Technical Requirements to Organize and Operate a Separate Charitable Entity Deserve Careful Attention

Different Charitable Formats Offer Different Opportunities and Challenges

Present and Future Governance Issues Should be addressed in a New Charity’s Organizational Documents

Prepare All Submissions to the IRS Carefully and Thoroughly

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Getting Launched -Overview

Running the charity “like a business” while staying true to charitable purpose, mission, vision, and values

Board governance

Non-tax considerations (local and state registration requirements, etc.)

The importance of adopting and following polices (investment, endowment, payout, administration, conflict, etc.)

Developing and maintaining good donor relations and donor support

Hiring and managing employees and advisors

Special opportunities available for designing and operating benefit programs for the employees of a charitable organization

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Getting Launched –Key Take-Aways

Sustained Success Requires Thinking Generationally Focus on Mission, Vision, and Mechanics A New Charitable Entity is like any Other New Enterprise – Pay

Attention to “Back Office” Issues Early Assemble a Support Team of Advisors and, if needed,

Employees Thoughtful Policies, Guidelines and Procedures are your Friend Master the Dos and Don’ts Applicable to Private Foundations Meaningful Grant-making is a Learned Skill

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Confronting the Unexpected -Overview

Anticipating and adapting to change in: Mission Operations Tax and regulatory environment

Managing board and staff issues: Staff and performance failures Board apathy or dysfunction Board rejuvenation

Addressing financial issues Poor investment performance Declining resources and support Effect on tax classification

Confronting internal and external risks Whistleblowers Disappointed donors and their heirs Cybersecurity challenges Liability protection for directors and

officers

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Confronting the Unexpected

ABC FOUNDATIONNOTICE OF SPECIAL MEETING OF BOARD

Notice is hereby given of a special meeting of the Board of Directors of ABC Foundation to be held on January 17, 2019 at 4:00 p.m. at ABC Foundation’s offices in Orlando, Florida.

A confidential agenda of the matters to be addressed at the meeting will be forwarded in advance of the meeting. Legal counsel to ABC Foundation, Martin Hall, will be in attendance at the meeting.

Edward J. Beckwith Michele A. W. McKinnon

Chair of the Board President and CEO

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Confronting the Unexpected

ABC CHARITY BOARD MEETINGJANUARY 17, 2019

AGENDA (CONFIDENTIAL) Review of Financial Statements Termination of CFO

Failure to adhere to budget

Other financial improprieties

Potential Data Breach related to Termination of Development Officer Employment Tax Audit Review of Donor Contributions and Other Support Expenditure or Borrowing from Endowment Funds Potential Merger with XYZ Charity

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Confronting the Unexpected –Key Take-Aways

Like any Other Enterprise, a New Charitable Entity may be confronted with a wide array of “Near Death” Challenges

Anticipation and Openness to being Flexible can help Navigate Existential Threats

Supportive Staff and an Engaged Board can be Key Rely on Outside Advisors to Ensure Proper

Operations and Activities Regularly Review Mission, Operations and

Effectiveness

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Leaving a Legacy with Grace and Dignity –Overview

Potential Causes of Failure Restricted Gifts

DocumentationCy Pres and DeviationPlanning

Financial ControlsOversightSegregation of RolesPolicies

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Leaving a Legacy with Grace and Dignity

THE ABC FOUNDATIONDear Sis,I know Mom and Dad had hoped that naming us as the directors of The ABC Foundation would enable us to work together. But I think you and I know this will never work out. I want to continue to travel the world without any commitments or obligations as I have done for my entire adult life. The burdens of running a $50 million foundation would be a major imposition on my lifestyle. It is appealing to me to have funds available to pursue my philanthropy. Although I am certain you and I would not see eye-to-eye on what is a worthwhile cause for support. Because I am certain you will agree with me on the major obstacles to our ability to manage the Foundation together effectively, I have spoken with my tax advisors. They have informed me that there are a number of options to solve our dilemma. I have asked them to put together a list of options and will be in touch soon.

Sincerely,Your loving brother

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Leaving a Legacy with Grace and Dignity –Overview

TERMINATION OF THE ABC FOUNDATION

Transfer of all or portion of assets to one or more public charities Could include one or more donor advised funds Could be a partial distribution with continuation of private

foundation by one family member Division of private foundation into two separate private foundations

Creation of two new foundations usually preferable Must comply with private foundation termination rules

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Leaving a Legacy with Grace and Dignity –Key Take-Aways

Nothing is “Forever” – Plan for a Successful Exit or Transformation

Consider Declaring “Mission Accomplished” if –The Charity has fulfilled its Purpose, Resources Dry Up or there is No One Left Who Cares

The Planning Process behind a “Soft Landing” is much like the Initial Considerations when first creating a New Charitable Entity

When All Else Fails, the Courts may be Your Best Friend

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