Page 319 - TaxAdviser_2022

so-called Type III supporting organiza-
There are tions, which themselves are further It is also
divided into two types: functionally in-
several granular tegrated (Type III FISO) and nonfunc- not unusual for
considerations in the tionally integrated (Type III non-FISO). a wealthy couple
Most families prefer Type III non-
decision between a FISO, but some have been dissuaded to set up a private
DAF and a private since the creation of the new regulatory foundation for

foundation. requirement of minimum annual distri- their children to
butions (Regs. Sec. 1.509(a)-4(i)(5)(ii)).
assist in running,
DAF
inurement to contend with. Both doc- The fifth and final rung on the chari- to teach their
children philanthropy
trines also apply to public charities, al- table side is the DAF account. With
beit possibly with less harsh effect, given a DAF account, the donor surrenders and how to
the intermediate sanctions provision of not only asset control but also ultimate
Sec. 4958, a penalty for private benefit say about the identity of the charitable get along.
less than the “death penalty” (loss of tax- recipients — but retaining advisory
exempt status and prohibitions against privileges, which today can be almost
self-dealing). perpetual — in exchange for deduct-
The private foundation represents the ibility of contributions as if the DAF Most DAF sponsors do not require a
second-best way to retain control over were a public charity. This relieves the minimum contribution, but sponsors can
charitable gifts. The family retains full DAF from the often bureaucratic and differ greatly over whether the account
grantmaking authority and control over sometimes burdensome grant taking, must reach a certain minimum level
the charitable entity or trust within the grantmaking, and beneficiary oversight. before advisory grants can be made out
confines of the tax law and the tax and DAFs can be used to give anony- of it.
state law limitations and restrictions over mously, unlike with private foundations. The more difficult question is how
exclusively charitable assets. The contributed funds grow tax-free much of a contribution is required to
inside the DAF. Unlike private founda- justify the creation of a private founda-
Supporting organization tions, at least under current law, there tion? If you asked this of five lawyers,
The fourth rung on the charitable side is is no annual 5% minimum distribution you would probably get five different
the supporting organization. In the sup- requirement, so the DAF can grow answers, but the important point is
porting organization, the donor surren- faster. Also unlike private foundations, that the professional legal and tax work
ders effective control over the operations there is no 1.39% annual tax on invest- required to start a private foundation
of the charitable entity and the flexibility ment income. are significant.
of changing the charitable beneficiary First, a not-for-profit corporation
or beneficiaries unless a community Second factor: Level of or wholly charitable trust instrument
foundation is used in exchange for effec- philanthropic contribution needs to be formed and qualified as
tive treatment as a public charity — i.e., or investment tax-exempt with the IRS. Once the
relief from the restrictive and punitive The ultimate financial deciding factor in foundation has been formed, it must
private foundation provisions of the choosing the best philanthropic vehicle be administered, which includes taking
Code. However, supporting organiza- is often the amount of money the client grant applications, making grants, super-
tions, while possibly not requiring quite is willing to irrevocably commit. This vising accountability of grant recipients,
the level of financial commitment as the level of commitment usually points to filing an annual Form 990-PF, Return
private foundation, nevertheless still re- either a DAF or a private foundation of Private Foundation, advertising what
quire a sizable investment. It is virtually due to the sizable difference between is required, making the investments of
unheard of for a supporting organization the minimum financial commit- foundation assets, and more. All of these
to start with less than $500,000. ments required. activities require a minimum commit-
Supporting organizations come in The easier question to answer is ment of $2 million, and probably closer
three forms. The overwhelming majority what is the minimum initial contribu- to $5 million, to justify forming a sepa-
of family supporting organizations are tion required to open a DAF account? rate private foundation.

www.thetaxadviser.com June 2022 39