Planning a Bequest of a Closely-Held Business Interest to a Private Foundation
Catherine B. Eberl and Nathan W.G. Berti of Hodgson Russ write: A plan to bequeath an interest in a closely held business to a private foundation necessarily requires consideration of whether the foundation will need to divest itself of the interest after the client's death, and if so, how that divestment will occur.
January 05, 2015 at 01:27 AM
12 minute read
The original version of this story was published on New York Law Journal
Private foundations are an appealing planning tool for the charitably inclined closely held business owner. A gift or bequest to a client's private foundation allows the client or his estate to obtain an upfront tax deduction, while allowing the family to continue to control the asset.
However, when the bequest is an interest in a closely held business, the private foundation excise tax rules may prohibit the foundation from owning the interest long term. As such, a plan to bequeath an interest in a closely held business to a private foundation necessarily requires consideration of whether the foundation will need to divest itself of the interest after the client's death, and if so, how that divestment will occur.
The federal government subjects private foundations to strict administration rules, frequently referred to as the private foundation excise taxes. As opposed to a public charity, which receives contributions from a wide base of donors, private foundations generally receive contributions from only one donor, or from several donors who are members of the same family. Frequently, the donor and the donor's family frequently control the foundation. Because the donors are also the foundation managers, historically there was a perception of widespread abuses of the private foundation structure. As a result, Congress enacted the excise tax regime, subjecting private foundations to strict rules intended to ensure that the foundation's assets are used only for charitable purposes.
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