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Saturday, April 27, 2024
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Case Studies |
Death and Taxes - The Madison Era of Giving, Part 1 of 7
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Case:
Financial titan George Madison, Jr., has truly lived the American dream. A child of immigrant parents, he grew up during the Depression on the tough streets of New York. Thereafter, he served two arduous tours in World War II. While always grateful no matter where his place in life, George returned to the States determined to "make it big" and live the "good life." In particular, he wanted to lift many of the hardships his parents were enduring as poor immigrants. Consequently, George committed himself to the study of finance with an emphasis in investment banking. And the rest, as they say, is history.
Fifty years later, George's company - Madison Financial - is the third largest investment firm in the country. Needless to say, George has made it big - $3 billion big to be exact. He has homes in New York City, Miami, Paris, and Tuscany. He drives a Bentley during the week and his weekend car is a limited edition Ferrari. Not surprisingly, his travel accommodations are aboard his Gulfstream private jet. Never to be one to forget family, he fulfilled his goal to lift the many burdens that saddled his parents. They now live in a 5000 square foot home situated on a golf course in lovely Beverly Hills.
A true success and now approaching 75, George finally began to cut back his hours at the office. George now leaves the office at 2pm each day so that he can pick up his great-grandchildren from school. On one such day, George ran into the Director of Development of the private middle school, Susan Hamilton. During their conversation, Susan "happened" to mention that the school was raising funds for the construction of a new state-of-the-art library. In fact, the new library would be the most advanced one-of-its-kind in all of New York. Wanting nothing but the best for his great-grandchildren, George conveyed his interest in giving a "little something" to the capital campaign.
Question:
Coming from a control perspective, George asked if there was a way he could "watch over" the spending of his gift so that it was used effectively and efficiently. In addition, George wanted to know what method of gifting would produce the best tax result.
Solution:
Aware of George's hands-on approach, Susan recommended a Supporting Organization (SO). A subsidiary of a public charity, an SO may be either "controlled by" or "operated for the benefit of" a public charity. While not having complete control, George would have great influence of his SO. In most cases, the supporting organization has a majority of the directors elected by one public charity and a minority of the directors selected by family members. This arrangement pleases George. Given his people skills and friendly relationship with the charity, he feels safe knowing that his money will be well spent.
The SO also meets George's tax planning goals. In particular, an SO has all of the public charity benefits, such as higher allowable income tax deductions and higher AGI limitations. (See Secs. 170(b) and 170(e)). In addition, the private foundation restrictions do not apply to George's SO. This enables the supporting organization to be run at very reasonable expense without a significant administrative overhead. Moreover, the supporting organization benefits from the investment, accounting and grant-making expertise of the parent charity.
After several meetings with Susan and George's tax attorney, George enthusiastically decides to go forward. He loves the idea of helping his great-grandchildren and taking part in building something that will stand out as being the best in all of New York. He also (not so secretly) enjoys the idea of the public attention his SO will bring him. Knowing Susan has raised $5 million of the $25 million needed, George sets up a $20 million SO with highly appreciated stock. Not surprisingly, Susan and the rest of the school are floored with George's generosity, especially given the fact this was his first charitable gift ever to the private school.
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