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Community foundations offer many useful tax advantages.

Many tax advisers are not aware that a community foundation may be a simple and extraordinarily attractive alternative to direct contributions to operating charities or to the establishment of private foundations. A community foundation is an aggregation of funds held for the charitable benefit of a community in perpetuity, the income of which is used to meet the community's charitable needs.

Both individuals and corporations can obtain significant tax advantages by giving to a community foundation, and still retain much of the satisfaction of being involved with their favorite charities. The donor obtains the maximum tax deduction for both federal and state income tax and estate tax purposes. A donor with variable income can build a fund in the community foundation by giving the optimum amount each year that makes sense in terms of that year's income.

The donor cannot exercise the amount of control over the charitable gift that is possible through creation of a private foundation, but the donor can, for example, suggest the charity or charities that will receive proceeds from the gift. The donor can also elect to establish an endowment in a community foundation, choose the name of the endowment and direct the foundation to apply proceeds from the endowment to a particular charity or field of interest.

In making a typical gift to an operating charity, a donor places complete dominion over the gift in the hands of the charity. If the charity's purposes change or the charity otherwise become unworthy of continued support, the donor will have no influence on assets held by the charity as a result of the donor's past generosity. If, on the other hand, a donor makes a gift to a community foundation with the general intention of supporting a particular operating charity, the donor may retain a degree of influence over the gift.

Depending on the arrangement with the community foundation, a donor may choose to have all of the income from the gift allocated to one operating charity in one year and to another operating charity--or, indeed, to many other operating charities--in a later year. Moreover, while a donor to a private foundation may retain a considerable degree of control over assets contributed to such a foundation, community foundations are clearly superior to the typical private foundation in terms of tax benefits as a potential recipient of a donor's contributions.

Because community foundations are organized as public charities under Sec. 501(c)(3), they enjoy favored tax status. Operationally, they are not subject to the excise taxes or the restrictions on activities that limit private foundations under Secs. 4940-4942. Donors contributing to community foundations enjoy the maximum level of charitable contribution deductions for federal income tax purposes.

Donors have

wide choice of

instruments and funds

The community foundation offers the tax adviser a chance to present a wide variety of instruments and funds for the donor's consideration. Donors can use charitable lead or remainder trusts, insurance, gifts of appreciated stock or real property, and other means to convey assets to the community foundation and reap tax benefits. Charitable remainder trusts are particularly popular; they enable the donor to retain income for life, shift that income to a spouse for life and give the remainder to the foundation, all the while receiving a significant charitable tax deduction for making the contribution.

In establishing a charitable remainder trust, the donor can select the trustees and designate the purpose for which the foundation can apply income from the fund. In a pooled income fund, which is also popular, the donor's gift is commingled with other money into a fund managed by the community foundation. The donor receives a proportionate share of the income generated by the entire fund over the donor's life. On the death of the donor, a proportionate share of the assets is distributed to the charity.

While obtaining tax advantages through use of inter vivos or estate planning devices and instruments, the donor can meanwhile exercise considerable influence over the use that the community foundation makes of the gift.

* The named fund: A donor can establish and name a fund within a community foundation and designate the charity that will receive the income earned by the principal. If circumstances so change that the continued distribution of income to one or more charities designated by the donor is no longer wise or beneficial, the community foundation, by virtue of the variance powers incorporated in its governing instruments, may vary the use of the income to more effectively meet the charitable needs of the community.

* The field-of-interest fund: A donor can specify a field of interest within which income from the donor's gift to the community foundation will be used, rather than name one or more particular existing charitable organizations to receive that income over the years. Such a field of interest may be broad and general (e.g., "for educational purposes") or relatively narrow and specific (e.g., "for educational programs increasing awareness of Eastern European culture among secondary student").

* The supporting organization: In situations in which a donor has a very substantial amount to contribute and feels strongly that one or more of the donor, the donor's spouse and the donor's children should participate in the ongoing management of the charitable uses of the income of the fund, a "supporting organization" formed in conjunction with a community foundation should be considered. A supporting organization is one that qualifies under Sec. 509(a)(3) as other than a private foundation. A supporting organization is recognized for tax purposes as a seprate legal entity with its own governing body (typically including the donor and members of the donor's family). It is classified as a public charity because it is organized and operated to benefit a publicly supported charity (the community foundation and its beneficiaries), even though only one donor may have contributed to it. This approach permits the donor to influence distribution of the income earned on the assets and avoids the restrictions on private foundations.

* The donor-advised fund: Many donors choose to establish a donor-advised fund at a community foundation as an alternative to forming a separate supporting organization. The limitations on a donor adviser's role vis-a-vis a donor-advised fund are set out in Regs. Sec. 1.507-2(a)(8) and in guidelines established by community foundations. The donor can make recommendations each year with respect to the use to be made of the income of the fund without requiring the formation of a separate legal entity. Typically, a donor-advised fund enables the donor and perhaps the donor's spouse or children to make annual recommendations to the community foundation on the use of the fund's income.

Each of these various vehicles offers not only significant tax benefits for the donors but also significant economic advantages to the donor or members of the donor's family during or after administration of the trust or fund. In appropriate situations, a well-counseled donor, will find one or more of these vehicles for giving to a community foundation to be very attractive.
COPYRIGHT 1992 American Institute of CPA's
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Article Details
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Author:Bank, Malvin E.
Publication:The Tax Adviser
Date:Mar 1, 1992
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