Reviewing Charitable Vehicles: Donald Kramer leads session for diverse group.

Leaders of community foundations and nonprofit organizations joined financial planners and attorneys in Northeast Pennsylvania recently to hear about developments in philanthropy from nonprofit attorney Donald W. Kramer.

The event hosted in Scranton by the Estate Planning Council of Northeastern Pennsylvania and the Scranton Area Community Foundation stimulated discussion and increased awareness of charitable giving vehicles among the financial planning and legal communities.

“We explored innovative ways of being charitable so we can make a difference and address the challenges we face and the needs of region,” Maggie Martinelli, Scranton Area Community Foundation Director of Administration and Projects, told the group of about 50.

Kramer, chair of the Nonprofit Law Group at Montgomery, McCracken, Walker & Rhoads, LLP, opened by noting the 29 categories of nonprofits and stressed the importance for donors and nonprofit leaders to know what category they are in or interested in. While there’s great deal of diversity, Kramer said when people talk about nonprofit giving, they tend to think of 501c3’s, those organized for clearly defined charitable purposes with the ability to receive donations that may be tax deductible. He also discussed 509a’s, public charities that receive fee for service, such as nursing homes, museums, and service providers. “If you don’t know what box you are in, you don’t know what rules apply,” Kramer said. He cited federal 2017 tax changes where the US Congress targeted some nonprofits by imposing a tax on annual salaries more than $1 million and a 1.4 percent tax on endowment returns when assets exceed $500,000 per student. The bill was targeted at endowment-rich schools and those with highly compensated university coaches, presidents, or physicians working at university-connected health care. “This was not based on the idea of excessive compensation,” Kramer said. “It was based on the sense that someone working a nonprofit should not be compensated at that level.”

How private foundations compare

Private foundations face a range of restrictions that public charities and community foundations do not. Donations of appreciated assets to a private foundation are deductible at cost, as opposed to current market value as it is for a public charity donation. Investment income is taxed at 2 percent for foundations, but untaxed for public charities. An individual may donate no more than 30 percent of his or her adjusted gross income as a deductible gift to a foundation, but as much as 60 percent to a private charity. A private foundation must pay out 5 percent of its assets annually. Repeated compliance failures lead to increased IRS penalties and can, technically, continue until they wipe out the foundation assets.

Kramer said Congress is concerned about the power and influence of private foundations and the possibility they can be missed by super-wealthy individuals.

Donor Advised Funds, DAFs, compare favorably to private foundations in that they are quickly established, less expensively administered, and more tax advantageous. Administered by a private charity or national DAF charity, the key advantages for donors include the full market value deduction for appreciated assets, Kramer said. Entrepreneurs with closely held stock have found gifts to DAF far more advantageous than private foundation. DAF creators may recommend grant recipients, but the final decision lies with the public charity administering the fund.

But donors who want absolute control over administration, investment policy and grant making — and who want to be compensated for doing it— may opt for a private foundation, he said. Kramer said assets of at least $3 million are needed to cover administrative costs.

The increasing restrictions on private foundations prompted some wealthy individuals to form LLCs for their charitable endeavors. Kramer cited the Chan-Zuckerberg Initiative, organized as an LLC by the Facebook founder Mark Zuckerberg and his spouse.

“Maybe they don’t want to do a 5 percent payout every year, or pay that tax on investment income,” he said.  “Chan – Zuckerberg is doing charitable things, but it is not a charity.”

As part of the program, Kramer led an ethics exercise, presenting scenarios and asking the diverse audience how they would handle each, guessing based upon the response whether the person was a planner, attorney, or nonprofit executive.

The group also heard from Ryanne Jennings of the Wayne Community Foundation and Kathy Fitzpatrick of the Scranton Area Community Foundation who offered overviews of their current project and community needs they are targeting. Oliva Kirk, an officer of the local Estate Planners Council, said planners likely found the presentation informative and new.

“We are happy to bring together attorneys, financial planners and foundations within the community to learn about the range of charitable vehicles available,” she said. “These are topics and issues that are not normally presented to us, but that we should be conversant about.”

By David Falchek, CAE | PANO Member | November 2022