Friday September 20, 2019

Case of the Week

Lucky Lucy Lindstrom's "Hurricane Grants" Charity


Lucky Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor (RIA) and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy was so successful in these markets that she now only manages her own large personal portfolio.

Somewhat late in life, Lucky Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and learned that giving someone in need a helping hand is even more gratifying than making another million in the futures market.

Lucy had invested $1,000,000 in stock in a Canadian oil "wildcatter" with the name Northern Long Shot, Inc. This company has been drilling new exploratory wells in the far north. Recently, the stock rose from the $1 per share that she paid to over $5 per share. Lucy was delighted with her gain and decided to give the $5,000,000 to a charitable foundation to help those in need.

Lucy discussed options with her attorney and her favorite charity. Lucy was very interested in a private foundation. She asked her attorney for reasons to select a private foundation. Her attorney noted that private foundations are more expensive to operate, appreciated gifts are deductible only up to 20% of adjusted gross income (AGI) and deductions for gifts of real estate to a private foundation are limited to cost basis. He also explained that there is usually a 2% excise tax on investment income and that private foundations are subject to various rules on self-dealing, minimum distributions and excess business holdings. However, a private foundation would give Lucy full control. This is important to Lucy, since she wants to make grants for disaster relief directly to those in need.


Lucy said, "Wow! There are a lot of negatives about private foundations. So why set up a private foundation? And if I fund a private foundation, can I make grants to people who have been impacted by recent hurricanes?"


Her attorney responded and noted that private foundation grants are subject to the expenditure responsibility rules. These rules will require Lucy to take specific steps. First, her private foundation must make a pre-grant inquiry before making a grant where expenditure responsibility is required. The purpose of the pre-grant inquiry is to ensure that the recipient will use the grant for proper exempt purposes.

Second, a grant agreement must then be executed and the recipient must agree to repay any unused portion of the grant, provide reports to Lucy's private foundation on the use of funds, maintain records and receipts of expenditures and make its books and records available to the private foundation. The recipient must also agree not to use the funds for prohibited lobbying or political purposes, not to use the funds to make grants to individuals and not to use the funds for any non-charitable activity.

Next, Lucy's private foundation must obtain follow-up reports from the recipient indicating how the funds were used, the progress being made in achieving the grant purpose and confirming that the grant terms were followed. Finally, the private foundation must report to the IRS that it made an expenditure responsibility grant. Reg. 53.4945-5(b).

These are rather stringent and perhaps expensive requirements. However, Lucy was determined to maintain control over the grants and was willing to live with the added cost and effort to comply with the expenditure responsibility rules. She funded the foundation and now has the satisfaction of directing grants to those in great need.

Published September 21, 2018

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