Foundations can be nonprofit corporations or trusts and are formed to receive gifts and bequests from the public and sometimes governmental and private agencies. A foundation may administer such gifts for the benefit of a particular group, cause, or organization. A foundation’s endowment can provide stability and continuity for the groups and organizations it serves. If used properly, a foundation can create incentives for community members to make charitable gifts and bequests by: (i) giving a family name a place in the philanthropic history of the community; (ii) providing efficient management of investment funds; (iii) providing income tax benefits associated with making charitable gifts; and (iv) providing flexibility to meet the income and other important needs of donors.

Following is a brief summary of the various ways in which donors may contribute to a foundation:

  1. Direct Gifts. Of course, donors may make cash gifts or gifts of other property directly to a foundation. In addition, a donor may make a gift of appreciated securities, real property, or other appreciated property and gain important income tax advantages.

  2. Testamentary Gifts. A donor may name a foundation as the direct beneficiary of the donor’s estate, as the recipient of a stated pecuniary amount of specific real or tangible personal property, as a contingent beneficiary, or as the ultimate recipient of the assets of a trust for the benefit of the donor’s children and/or grandchildren.

  3. Life Insurance. Significant benefits can accrue to a donor who makes an irrevocable lifetime transfer of a life insurance policy to a foundation or to a trust for the benefit of a foundation. In such an instance, the value of the life insurance policy is not included in the donor’s estate at the time of his or her death and premium payments are eligible for an income tax charitable deduction.

  4. Retirement Plan Assets. Estate planning can be difficult for estates with large retirement plan assets. The reason for this is that such assets are subject to estate tax for the owner of the retirement plan and to income tax when received by the designated beneficiary. If a foundation is named as a beneficiary for a retirement plan assets, such assets can pass to a foundation completely free of both estate and income tax.

  5. Charitable Remainder Trusts. The donor of a charitable remainder trust may be eligible for charitable income, gift, and estate tax deductions. Further, a charitable remainder trust is not taxed on any gain realized from selling appreciated trust assets. Accordingly, assets yielding low earnings but subject to high capital gains may be placed in trust, sold by the trustee, and reinvested. In doing so, the donor avoids any capital gains tax and may pass on increased earnings to beneficiaries of the charitable remainder trust. The donor must designate one or more beneficiaries the right to receive the income from the trust assets for a specified term (such beneficiaries may be non-charitable or charitable beneficiaries). Upon the termination of the trust, the remaining trust assets must either be held in continuing trust for charitable purposes or paid to the use of a qualified charitable foundation.

  6. Charitable Annuity. A charitable annuity is a contract between the donor and a foundation whereby the donor makes a gift to a foundation, usually in the form of cash or marketable securities, in exchange for a fixed dollar payment to be received over a specified term. The donor may specify that upon his or her death (or the death of the annuitant, if other than the donor), the unused portion of the fund be added to one or more of the foundation’s funds.

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