Case Studies on Community Foundations
A Tax-Effective Way to Sell a Closely Held Business:
Daniel and Lorraine White, both age 60, started a comprehensive financial planning business over 30 years ago. With hard work and a lifelong commitment to building the business, they now have over 30 employees who serve many of the high net worth clientele in their city. Over the years, Daniel and Lorraine have branched out into a number of financial areas, one of which is online investing. This aspect of the business has done extremely well and the company has grown substantially over the past three years. The net worth of the company is now projected to be over $5.5 million.
Unraveling the Life Plus Term CRT:
Quintana, Arizona is the official yarn capital of the world. The city of Quintana in fact produces over 70% of all the yarn sold worldwide. There are six major yarn companies in Quintana with Spun, Inc. being the largest. Spun, Inc. is a family-run business headed by founders David and Mary Kabril. David, 69, and Mary, 68, have lived their entire lives in Quintana and plan to retire there as well. They truly loved the Quintana community and have raised all of their four children there. Not surprisingly, they strongly support the community with their time and charitable contributions.
Preserving Large Gifts to a Small, Developing Charity:
Connie Bellweather, 55, was heavily involved for years with helping the homeless in her city. She typically volunteered during the holiday seasons because there was no established shelter in her community offering day-in and day-out support. Fortunately, a nonprofit was created last year whose purpose was to help the homeless. A building and cash were donated to the new shelter after its creation. At the present time, the shelter has a modest endowment of $75,000. Connie, a very wealthy widow, desires to make a substantial gift - about $1 million - to the shelter to ensure its survival and provide her with tax benefits. However, she worries about the shelter's ability to manage such a large gift. She was concerned primarily with three items. First, the shelter may invade principal if it experiences any financial trouble in the future. Second, the shelter does not have a formal investment policy or committee. Finally, the shelter may dissolve or expand its purposes beyond helping the homeless.
Helping Victims of Crisis with a DAF:
David Hall, 55, is a long-time fire fighter with numerous medals and recognition for bravery. After 25 years of service to his city, David reluctantly decided five years ago to retire due to an injury. He has become a very successful banker during that time, yet he still remains very close to his local fire fighting brothers and sisters. In fact, he is a regular attendee of fire fighter events and fundraisers.
Decide Now, Deduct Now But Give Later:
Carol Garcia is CEO, President and Founder of Widgets, Inc. After many years of blood, sweat and tears, Widgets, Inc. has become a very strong and established corporation.
Preserving the Family's Social Capital:
Lorraine Moore, a widow age 75, has an estate valued at $1million. Her estate consists of her home valued at $100,000, liquid investments of $400,000 consisting primarily of bonds and some stock, and an apartment building valued at $500,000. As a former high school history teacher, she lives comfortably with her pension and the income from her investments. The apartment building generates an income stream of about $20,000 per year after expenses. However the property is continuing to age and with recurring repairs, she is growing tired of dealing with the responsibilities of the day to day management. Her husband passed away five years ago and he actually enjoyed taking care of the property during his retirement. He knew many of the tenants personally and in many cases was the handyman who handled most of the repairs.
Lucky Lucy Lindstrom's "Cousins' Scholarship" Plan:
Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy was so successful in these markets that she now only manages her own large personal portfolio.
Somewhat late in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and has learned that giving someone in need a helping hand is even more gratifying than making another million in the futures market.
Lucy had invested $1,000,000 in a "penny stock" company. Recently, the stock rose from the $1 per share that she paid to over $5 per share. Lucy thinks that this stock should be sold as soon as possible, but she would like to receive a charitable deduction this year. In addition, she thought that the $5,000,000 could be placed in a supporting organization with a community foundation to provide scholarships for students.
Lucy comes from a large family. She has 30 cousins, and many of their children are now entering college. Since her supporting organization will distribute $250,000 in scholarships each year, Lucy asked the community foundation's CEO if she could give scholarships to the children of her 30 cousins. She likes the concept of a "Cousins' Scholarship" program.
Would this plan work? Can the supporting organization fund scholarships for her cousins' children?
Lucky Lucy Lindstrom's "Ultimate Control" Charity :
Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor (RIA) and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy was so successful in these markets that she now only manages her own large personal portfolio.
Somewhat late in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and learned that giving someone in need a helping hand is even more gratifying than making another million in the futures market. Lucy invested $1,000,000 in a "penny stock" company. Recently, the stock rose from the $1 per share that she paid to over $5 per share. Lucy was delighted with her gain and decided to give the $5,000,000 in stock to a charitable foundation to help those in need.
Lucy discussed several options with her attorney and her favorite charity. She could create a private foundation (PF), or she could set up a supporting organization (SO) with her favorite charity. If the supporting organization were created, her favorite charity wants to elect three of the five directors, and Lucy would elect two directors. Since the SO would be controlled by her favorite charity, it would also qualify as a public charity. Lucy could give the stock and take a deduction up to 30% of her adjusted gross income, with a five-year carry-forward for the excess value.
Lucy thought about the SO but was also very interested in a private foundation (PF). She asked her attorney for reasons to select one or the other. Her attorney noted that private foundations are usually more expensive to operate, appreciated gifts are deductible only to 20% of AGI, deductions for gifts of real estate to a PF are limited to basis, there is usually a 2% excise tax on investment income and the PF is subject to various rules on self-dealing, minimum distributions and excess business holdings. "Wow!" said Lucy, "there are a lot of negatives about private foundations. So why do some of my friends set up private foundations?"
Another Tale from ESOPs Fables, Part II:
In Part I, we were introduced to Eric and Stephanie Hawkins, who are the sole shareholders in a Seattle printing business. They are looking to divest themselves of ownership in the company and transfer shares of stock to their employees through an employee stock ownership plan (ESOP). One of their major goals is to transition away from the fast-paced lifestyle of owning a business and spend more time with each other and their two children. Their dream has been to own a bed and breakfast and they have taken a major step in this direction by purchasing a five-acre parcel of property on San Juan Island.
So Many Charities, Not Enough Choices:
Anne Clarke Johnson, age 58, is a very successful real estate agent who deals primarily in the high-end commercial real estate market. Over the years, she has acquired a number of exclusive properties including an office complex which is valued at $3.5 million and is not encumbered. This property is fully leased and is returning 10% on a net-net-net basis. Anne currently has an estate of approximately $10 million and is interested in transferring the office complex to her only son, Thomas, when he turns 50. Thomas is now 35 years of age and his real estate management company is managing the property for his mother. Anne feels she does not need the income from the property as her other stock and real estate investments are producing more than enough income to support her livelihood.
Going Beyond the Tax Benefits of a CRT:
Kevin and Kai Chapman, both professors at the local university, retired from full-time teaching a number of years ago. Kai still teaches on a part-time basis at least one class each semester. Kevin has also taught part-time up until last year when his health began to deteriorate. It has continued to deteriorate steadily the past few months and the prognosis is not favorable. Kevin is age 68 and Kai, is age 62.
The Lead Trust - An Estate Planning Tool for a Down Market:
Howard and Elizabeth Young, both in their late 50s, have been married for 25 years and have four children. Howard has been actively trading in the markets for many years and for the past year and a half has been trading online. He has a diversified and well-balanced portfolio that has done well, but over the last few months the market has turned downward for his particular investments. The portfolio was worth over $1.2 million earlier this year but due to a market downturn, is now valued at $800,000. Howard feels that his portfolio is very solid, as the stock holdings include many blue chip companies. He is very confident the values will recover, so he has no inclination to sell any of the holdings.
