Private Foundation Issues, Solutions, & Alternatives

1. Private Foundation Issues, Solutions, & Alternatives Presented by: Carol Bradford, Vice President, External and Donor Relations, CCF Reynolds Cafferata, Partner, Rodriguez, Horii, Choi & Cafferata LLP Barry Peterson, Director, Charitable Business Development, CCF Date: November 19, 2009

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4. Your Presenters Carol Bradford Vice President External and Donor Relations Carol Bradford oversees the external and donor relations department that provides technical assistance and support to donors, professional advisors and nonprofit organizations seeking to set up funds, create planned gifts or make gifts of complex assets. Barry Peterson Director Charitable Business Development Barry Peterson oversees the charitable business development team that assists donors and professional advisors with technical aspects of charitable and planned gifts including complex gifts, such as real estate, closely held stock, and life income plans.

5. Our Featured Presenter • Cafferata's practice is concentrated in the area of charitable tax, trust and corporate law. He has experience advising charitable organizations and individuals regarding: • Planning complex charitable gifts and charitable trusts • Creating and operating donor advised funds, private foundations and support organizations • Creating policies for gift acceptance and risk management, unrelated business income taxes, and self-dealing and intermediate sanctions excises taxes • Endowment management and state law compliance • Cafferata also has considerable experience providing corporate fiduciaries guidance in the management of charitable trusts, as well as representing charities and fiduciaries in contested probates and judicial reformation of trusts. Reynolds Cafferata Partner, Rodriguez, Horii, Choi & Cafferata LLP

8. What Is California Community Foundation (CCF)? • Established in 1915, California Community Foundation (CCF) is one of the oldest and largest community foundations in the nation. As the premier giving partner in Los Angeles, we offer: • A proven track record of experience: • 53rd largest foundation in the nation • Stewarding nearly $1 billion in assets for 1800 donors, families, corporations and non-profits • More than 5000 grants and $150 million provided to philanthropic causes in LA and beyond • Leading funder of: • Iraq/Afghanistan veterans • Individual artists • Permanent affordable housing • Scholarships • A range of innovative solutions to maximize the impact of your philanthropy, including: • Sophisticated charitable vehicles and fund choices • Flexible options for giving to causes and non-profits locally and globally • Personalized donor education and grant making assistance • Customized services evolve with your philanthropy

9. CCF and the Foundation Industry • 717 Community Foundations • Approx.100,000 US foundations • CFs $4.6 billion in grants • 10% of all foundation grantmaking (2008) • CCF • 2nd in grantmaking • 5th in gifts • 8th in assets (2007)

12. Private Foundation Issues, Solutions, & Alternatives • Private Foundation Issues • Anonymity & Privacy • Self-Dealing and Disqualified Persons • Required Distributions • Scholarships • Grants to non-charities • International grants • Investments • Private Foundation Solutions • Private Foundation Alternatives

13. Private Foundation Issues • Anonymity & Privacy • How often do you see clients who want to make large anonymous donations? What are the motivations behind it? • Does CCF have anonymous funds? • How do anonymous donors work with CCF? • How do you approach the issue of privacy for a client who is contemplating starting a private foundation?  Do you brief them on what information is made publicly available? • In the conversations you have with donors and advisors around privacy, are they aware that private foundation tax returns are publicly available?  • Community foundation tax returns are also publicly available on Guidestar?  How is this different than a private foundation? Worst pick up line ever… "You know all those anonymous gifts to charities—that was me."

14. Private Foundation Issues • Self-Dealing and Disqualified Persons • Who are disqualified persons?  • Can you give an example of a scenario involving a donor’s closely-held corporation and their private foundation? • In California many folks have substantial real estate holdings; can they rent empty office space to their private foundation?   • Board compensation and hiring family members as staff • Do many private foundations get set up for these reasons: for example, so family members can be hired or compensated? • What are some of the potential pitfalls here?  How is reasonable compensation determined? • Travel expenses for family • What’s permissible and what guidance do you give clients on this issue?

15. Private Foundation Issues • Attending fundraisers • What are the common mistakes private foundation donors can make when supporting fundraising events? • How does CCF handle this?  Do donors submit grant recommendations for fundraising events?  • Legally Binding Personal Pledges • Are some donors fulfilling personal binding pledges with their private foundation?  Is this a common error?  • Why do they enter these pledges in the first place?  Do you advise your clients to consult with you for these large gifts? • Does CCF encounter this issue and what have we done?

16. Private Foundation Issues • Required Distributions • Do many private foundations run into this difficulty of meeting their required distributions? • What would you suggest a private foundation do if a donor was getting older and had no family members who were interested in continuing the foundation? • Does CCF see many donors who have both a private foundation and a fund at a community foundation?  • Should we anticipate donor advised fund payout requirements?

17. Private Foundation Issues • Scholarships • Does a private foundation need to obtain prior consent from the IRS before setting up and scholarships? • If a private foundation trustee meets an A+ high school student, unrelated to the donor, that demonstrates a high need for financial assistance in order to attend college, can the foundation make a scholarship grant to support that individual? • What if a client is interested in other types of grants to individuals such as disaster relief, healthcare, prizes and awards? • How does a donor-involved scholarship fund at a community foundation differ in operation from a scholarship fund at a private foundation? • Can you give an example of a scholarship fund at CCF that falls outside your typical “scholarship” assumptions?

18. Private Foundation Issues • Grants to non-charities • How do private foundations support a charitable purpose with a grant to a non-charity?  • Have can this go wrong? • How do community foundations handle these types of grants?  Do all funds meet the donor advised fund definition?

19. Private Foundation Issues • International grants • What does a private foundation have to do to make an international grant? And what’s the difference between expenditure responsibility and equivalency determination? • What method does CCF use and what does the process involve?    • What would you suggest a donor do if they do not want to support an existing project or charity but want to start a new one?  Are there resources out there for donors who want to do really grassroots work in places like Asia or Eastern Europe?   

20. Private Foundation Issues • Investments • What are jeopardizing investments and what charitable entities does this affect? • In your opinion, are most private foundations aware of these potential violations? • What impact will events such as the Madoff scandal have on the charitable sector?

21. Private Foundation Issues • Code Section 4940. Excise tax based on investment income. • 2% tax on net investment income, required to make quarterly estimated payments • Code Section 4941. Taxes on self-dealing. • No sale or leasing of property with disqualified persons. If you have empty office space, you can’t lease it, you have to give it for free. • IRS sees paying a pledge the same as paying your credit card bill “relieving your debt.” • Tickets/Tables/Golf tournaments, if you purchase a table at an event and invite your family and friends who are not on the board of the private foundation, that’s self-dealing. • Code Section 4942. Taxes on failure to distribute income. • 30% tax on undistributed investment income (assumed 5% return), 100% tax if that amount remains undistributed by the next year. • Code Section 4944. Taxes on investments which jeopardize charitable purpose. • These include trading in securities on margin; trading in commodity futures; investments in working interests in oil and gas wells; the purchase of "puts," "calls," "straddles" and warrants and selling short. • Code Section 4945. Taxes on taxable expenditures. • No lobbying, not even a little • Paying kids – executive compensation, donor has an unemployed son who used to make $250k a year as an investment banker, check the Council on Foundations compensation study. • California Corporations Code Section 5227. Family board members. • Not more than 49 percent of the persons serving on the board of any corporation may be interested persons. If you pay salary to a family member, any brother, sister, ancestor, descendant, spouse, brother-in-law, sister-in-law, son-in-law, daughter-in-law, mother-in-law, or father-in-law of any such person, is and interested person.

22. Tax Advantages Anonymity • Fair Market Value deduction for non-cash and non-publicly traded stock gifts, e.g. real estate, closely held stock, etc. • Deduction for these assets given up to 30% of AGI versus 20% for a private foundation • Grants from donor advised funds can be completely anonymous to the grant recipient and to the public • Private foundation tax returns contain detailed information on sources of contributions to the foundation and grants made. Minimum Distributions Dissolving • Grants from a private foundation to a donor advised fund meet the requirements of a qualifying distribution • Assets of the donor advised fund are not subject to a minimum annual payout requirement • CCF can walk you and your client through the process of dissolving a private foundation • Assistance with selection of the appropriate fund to meet your grantmaking needs after termination. Private Foundations Solutions • A PARTNER TO INCREASE THE IMPACT OF YOUR GIVING

23. Private Foundation Alternatives • Matching Philanthropic and Financial Goals

24. Private Foundation Alternatives • Matching Your Philanthropic & Financial Goals

25. Fundholders Come from DiverseSources • CCF Specializes in Converting Complex Assets into Flexible Grantmaking DONOR SOURCES CONTRIBUTION OPTIONS GRANTING OPTIONS CCF *All beneficiaries must be recognized as charitable organizations under IRS regulations.

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27. Contact Us Visit us on the web www.californiacommunityfoundation.org