The Formation of Private Foundation as “Trust”

The private foundation is venerable solution for high wealth trust owners planning an estate. According to the U.S. federal Internal Revenue Service (“IRS”) the transfer of funds to a private foundation permits a trust to contribute philanthropic funds to nonprofit charities, whilst avoiding capital gains tax on income. Rules of estate applying to private foundations, including IRS codes guiding tax-exempt “trust,” specify distribution of private foundation assets to 501(c)3 charitable entities can be made during the life of a philanthropic benefactor, as well in the future for purposes of endowment or other organizational purpose after they are gone. Planned giving specialists can find out more about how private foundation trust strategy affects the existing nonprofit charitable giving plan of an estate.

Definition of the Trust

The definition of “trust” in subparagraph (a)(1) of Section 8-1-4 of New York Consolidated Laws, Estates, Powers and Trusts Law – EPT § 8-1.8, refers to “Private foundations: administration of certain trusts as defined in the United States Internal Revenue Code of 1954.” The enactment of federal rule Section 509 of the Internal Revenue Code of 1986, established private foundations considered tax-exempt entities, devoid of liability for imposition of undistributed income tax.

Governance of the Trust

With respect to asset transfers to a trust, a trustee must abide by the directives of a private foundation’ s governing instrument. There are some exceptions to rules of transfer in circumstances where there is a conflict of interest with existing directive. Changes to a public foundation’s governing principles is generally viewed as impracticable. Impracticability is described as a principled rule element within federal and state contract laws applying to estates. If it is determined there is omission present within the governing instrument or specific provisions guiding trust investment or reinvestment of the fund, or there is evidence an instrument or provision is enforcing conflict of interest, a public foundation will find it practicable to revise those governing provisions.

Rules of Tax Exemption

As IRS registered 501(c)3’s, private foundations are responsible for financial control of any transaction considered to be an “act of self-dealing” under IRC rules. Public foundation trusts are subject to income reporting under section 4941 of IRC code. The IRS also prohibits taxable expenditures, establishing the limits to tax liability for a trust under IRC section 4945. State tax board rules generally follow IRC section 4943 restrictions regarding excess business assets however trusts are often entirely exempt from IRC section 4943 pursuant to section 4947(b)(3)(A) or (B) of the code in the states where they have been formed.

Rules of Public Disclosure

State rules applying to private foundation trusts generally concede that 501(c)3 trust entities publicly disclose organizational financials as part of annual IRS reporting. Public disclosures must be available by requests. Some states also specify public disclosures must be visible during business hours and published for circulation of notice with an organization’s address, phone number and principal contact. A notice of judicial proceedings may also be enforced under state rules applying to major metropolitan areas.

Private foundation trust charter is an estate plan designed for purposes of IRS 501(3) 3 registration and tax-exempt philanthropic donation of capital gains to charitable organizations.

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