Breaking Up Is Hard to Do, But for Private Foundations It Just Got Less Costly

Private foundations are often launched by high net worth families who are philanthropically inclined. In addition to giving families the opportunity to support the causes they care about, charitable giving provides powerful tax and estate planning benefits.

Ideally, before a private foundation is created, the family puts a lot of thought into identifying the philanthropic activities that’ll support their values and desired legacy. The foundation is usually governed by family members, often led by a family patriarch or matriarch, and supported by children and grandchildren.

But even the best laid plans can go awry, as the saying goes. Just because the family’s matriarch once had a vision of supporting education in urban areas through the family foundation, for instance, doesn’t mean that the family’s next generation will share that same vision.

A private foundation’s vision can get disrupted by family squabbles and deviating interests, among other things. When this happens, one or more family members might choose to split off from the original foundation, and form one or more new private foundations to pursue their new interests and create their own legacies.

What Happens to the Original Foundation’s Assets?

This question was answered in a recent IRS Private Letter Ruling PLR 201609001.

The ruling was issued after a private foundation, governed and operated by its founder’s nine children and grandchildren, wanted to transfer 40% of its assets to two new private foundations. The desire for the split came about because board members no longer agreed on which charitable organizations to support.

The family wanted to continue operating the original foundation, with the two new foundations being governed and operated by one of the founder’s children. Under the new arrangement, the family wanted to transfer 20% of the original foundation’s assets to each of the two new private foundations. The other 60% of assets would remain under control of the original foundation.

The IRS ruled that the proposed transfer of the original foundation’s assets to the new private foundations qualified as transfers of assets described in Section 507(b)(2). This means that the two foundations receiving the transferred assets would not be treated as newly created organizations. Furthermore, the transferor — the original foundation transferring the assets — is not a termination to which the private foundation tax applies.

What Does This Mean For Private Foundations?

This is great news for family-run private foundations because it provides the flexibility to separate assets for personal or family reasons, while avoiding a termination tax on the transfer assets.

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