By Daniel Weitz, CFP®, CFA
As my father likes to say, “Measure twice, cut once.” Some mistakes can be costly to fix. As a Client Advisor at Massey Quick Simon, I’ve worked with a number of individuals and families with inappropriate life insurance policies, overfunded retirement plans, and even an absence of backup executors or trustees named on important legal documents. Left unattended, the consequences can be costly in terms of both dollars and headaches. Proper planning is key.
Many clients we work with feel strongly about giving back to their communities, alma maters, and favorite charities through donor advised funds, low basis stock contributions, or family foundations. If you are unfamiliar with any of these strategies or would like to learn more about them, please don’t hesitate to contact your client advisory team. They each offer unique advantages and can lead to significant tax savings when executed appropriately. Private foundations are great solutions for those looking to capture the tax benefits of charitable donations while retaining investment control over the assets and promoting family philanthropy. It is common for donors and/or family members to remain actively involved in the grant-making process with a private foundation which helps future generations learn about the importance of philanthropy, budgeting, and cash management. If you currently have a private foundation, or are thinking of establishing one, we encourage keeping the following planning tips in mind.
- Distribute at least 5% of net investments assets each year. Failure to do so can result in an excise tax of 30% on the undistributed amount. Qualifying distributions include both grants to charities as well as certain administrative expenses related to the foundation’s operations.
- Keep detailed records. It is important to keep detailed records of income, expenses, and grants to document compliance with IRS regulations. Also remember to file Form 990-PF annually; failure to do so for three consecutive years can result in loss of the foundation’s tax-exempt status.
- Think again before using margin, leverage, or options. Although private foundations are generally exempt from federal and state income tax, the use of these investment strategies may trigger unrelated business taxable income (UBTI) which is taxed at corporate tax rates.
- Consider the holding period when gifting appreciated securities. Gifts of securities to a foundation held at short-term capital gains (less than one year) are tax deductible only up to their cost basis. Alternatively, gifts of securities held at long-term capital gains may be deductible up to their full fair market value.
That said, private foundations can help achieve a variety of goals and are often supplemented with special charitable trusts that offer additional estate tax planning opportunities as well. Again, careful planning and consideration is key. Please speak with your Client Advisor about how these powerful legacy planning tools may help serve to complement your current financial plan.
Please remember that past performance may not be indicative of future results. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Massey Quick Simon, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to their individual situation, they are encouraged to consult with the professional advisor of their choosing. Massey Quick Simon, LLC is not a law firm and no portion of the newsletter content should be construed as legal advice. If you are a Massey Quick Simon, LLC client, please remember to contact Massey Quick Simon, LLC, in writing, if there are any changes in your financial situation or investment objectives for the purpose of us reviewing and revising our previous recommendations or services. A copy of the Massey Quick Simon, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Massey Quick Simon, LLC), or any non-investment related content, made reference to directly or indirectly in this letter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. The information should not be used in any actual transaction without the advice and guidance of a professional Tax Adviser who is familiar with all the relevant facts. Although the information contained here is presented in good faith and believed to be correct, it is general in nature and is not intended as tax advice.