By Allyn Hughes CFP®, ChFC®, CLU®, CAP®
Managing philanthropic foundations has gotten a little more difficult every year.
In the past, successful people who wanted to combine their money and skills to try to solve a social problem often chose to create and fund a private foundation. In exchange for a tax-deduction for the amount of their donation to their new foundation, the foundation owners got a large set of responsibilities. They had to:
- Create the foundation entity.
- Get it approved as a 501c-3 charitable enterprise.
- Distribute at least 5% of the previous year-end balance each year.
- Make all IRS filings and complete and file the Form 990 each year to provide the IRS (and interested readers) with updated information about the entity.
Some multi-millionaire millennials like Mark Zuckerberg of Facebook and Lauren Powell Jobs – the widow of Steve Jobs – are working to re-design how a foundation might work.
Instead of managing the distribution of their considerable wealth to charitable organizations by creating a private foundation, they are setting up regular Limited Liability Corporations to hold the money that they plan to give away. After-tax money is used to fund these LLCs and the donor does not get any type of tax break for making this gift to the LLC.
Why use a LLC? The LLC provides the donor’s other assets with protection from lawsuits. It also has many fewer restrictions about how the money is used and reported on than if it was held in a private foundation. This helps make it more anonymous and it allows the owner to better control both the expenses of managing this money and its distribution.
Most importantly, if the donor ever needs the money back, there are no rules that stop the money in the LLC from going back to the donor.
So in return for forgoing a tax deduction, they get anonymity, flexibility and relief from regulatory burden. If reduction of estate tax or income taxes is not a prominent preference, the LLC route sounds like a pretty good way to invest.