Non Profit & Charities

Trust and Will litigation tears families apart.  It may be that family relationships aren’t too good to begin with if litigation arises, but taking matters to Court doesn’t help.  And as lawyers we have little to no ability to repair family relationships.

In one case, out of the many hundreds I have handled over my career, a client of mine chose to make a bold statement after a family dispute arose.

Her name is Sofia.  Sofia—who didn’t have a lot of money—worked as a registered nurse.  While her mother was alive, Sofia helped her with her care.  While Sofia’s father was alive, Sofia sold her home and gave the proceeds of the sale to her parents because they were in need of money at that time.  Her parents, in turn, put Sofia on the deed to their home so that she could be repaid after their deaths.  Over 15 years later, both parents passed away and the house passed to Sofia.

Sofia’s brothers and sisters were not too happy about the arrangement and a nasty dispute arose over the property.  But in the end Sofia won out because she had given a large sum to her parents and in return, they gave her their home when they were done with it.

The whole ugly affair did not sit well with Sofia.  So she decided to make a bold statement with the house she received from her parents, she gave the entire thing-100%-to charity.  This was a substantial gift for anyone, as it was for Sofia.  The house was worth around $350,000 and had no mortgage.  That is a large amount of money for a single working woman, something to tuck away for retirement and future care. 

Instead, Sofia gifted the entire home to the Ronald McDonald House charities, which provides housing free of charge to parents who have very sick children in the hospital.  Ronald McDonald House was planning on building a new home in Long Beach, California, and Sofia’s gift kicked-off their fund raising for the new Ronald McDonald house with an entirely unexpected gift.  The home was sold by the charity and now is being used for their charitable purpose.

Sofia’s one requirement in making the gift was that it be dedicated to the memory of her parents, David and Teodora Pacheco, and their grandchildren, because they loved their many grandchildren unconditionally.  The kitchen of the new Ronald McDonald house charity will be dedicated to Sofia’s parents, primarily because her mother loved cooking and it was a central part of any family gathering.  A plaque will read “David and Teodora Pacheco Kitchen in honor of their grandchildren.”

Sofia had no obligation to make this gift.  The house was hers and she should have used it to provide for her retirement.  But for the first time in my 11 year career as a California Trust lawyer, Sofia demonstrated the power of personal sacrifice.  She did not have money to spare and could not afford such a generous gift, but she made the gift anyway.  It was important to her to turn a family dispute, one that she alone could not repair, into a lasting tribute to her parents.

Non-profits, charities, 501(c)(3)’s, foundations, private foundations, family foundations—what do all these terms have in common?  They are typically used to refer to the same thing, an entity that is recognized as not-for-profit under Internal Revenue Code Section 501(c)(3).  But not all charities are created equal.  There are different types of charities based on the type of activity they engage in and the primary source of their charitable contributions.

The three basic types of 501(c)(3) charities are (1) private foundations, (2) private operating foundations, and (3) public charities.

  • Private Foundations.  A private foundation is a charitable entity that does NOT receive a bulk of its charitable contributions from the general public.  Foundations are usually formed to provide grants to other public charities.  They can receive contributions from any source, but they typically are funded by a single family or a small group of corporate or individual donors.  Under Section 501(c)(3) of the Internal Revenue Code, all charities begin life as a private foundation unless and until they can establish that a bulk of their contributions come from the general public.

Because private foundation status is the easiest level of non-profit to obtain, it also has the least tax advantages.  When individuals make contributions to a private foundation, the income tax deduction may be limited.  For example, if you were to give a private foundation real property that you bought long ago for $50,000, but the real property now has a market value of $500,000, your charitable deduction would be limited to $50,000.  When giving that same real property to a public charity, your deduction would be $500,000—the full market value.  So the type of charity you’re giving to can make a difference.  These rules apply for any appreciated property (including business interests), but do not apply to cash gifts or “marketable” securities (i.e., stocks listed on a stock exchange). 

Furthermore, private foundations are required to contribute a minimum of 5% of their annual net worth to a qualified 501(c)(3) charity each year.  So if you are involved with a public charity, you want to seek out private foundations who desire to support your cause because every private foundation is required to make minimum grants to public charities each year.

Private foundations are often created by individuals or even businesses that wish to support charitable causes, but don’t necessarily want to engage in the actual charitable activity directly.  It can be a great way to build good-will in the community.  For example, the Ronald McDonald House charity, or the In-N-Out Foundation.  These are great examples of charities created by businesses.

  • Private Operating Foundations.  Private foundations that choose to engage directly in charitable activities are referred to as private operating foundations.  They are somewhere between a private foundation (which is just a grant-making charity as discussed above) and a full-blown public charity.  Operating foundations do not qualify for public charity status because their contributions are not derived primarily from the general public.  But they do engage directly in a charitable activity.  For example, someone who begins operating a animal rescue/shelter charity may not have enough contributions from the general public to qualify as a public charity, but since they are actually engaging in their charitable purpose (i.e., rescuing and sheltering animals), they qualify as an operating foundation. 
  • Public Charities.  This is the type of organization most people think of when talking about a charity.  A public charity is an organization that directly engages in their charitable purpose and receives a bulk of their support from the general public.  They are not funded by any one individual or business, but rather, a whole segment of the general public.  They can still receive large donations from individuals or businesses, but those contributions cannot exceed more than 50% of their overall income.

Public charities are the most beneficial entities from a tax perspective.  A large amount of their income is exempt from tax and the income tax deduction individuals receive for making gifts to public charities are very generous. 

  • How can knowing your charities help business?  Knowing about the different types of charities can be helpful in a number of ways.  First, if you are going to make a gift to charity, the best tax benefits you will receive come from giving to a public charity.  If that is a concern to you, then you will want to find out what type of charity you are giving to.

You can also leave gifts to charities as part of your estate plan (under your Trust or Will), which is a great way to leave a legacy and provide a greater charitable contribution than you may be able to give during your lifetime.

If you do work for a public charity, or as a business you help support a public charity, you would want to seek out private foundations that share you charitable purpose.  Since you know that every private foundation must make minimum grants to public charities each year, finding a private foundation may lead to a great charitable contribution for your public charity.  How do you find charities?  Ask the IRS, by going to www.irs.gov and clicking on the “Charities & Non-Profits” tab at the top of the page.  You can search for approved charitable organizations.

Also, as an individual or business you may want to create a private foundation to help benefit charitable causes you care about.  It’s relatively easy to do and helps build good-will in the community.  For example, my firm created the Albertson & Davidson Children’s Foundation to help support children’s causes in our community.  It is a private foundation that is funded by contributions from my firm and contributions from clients, vendors and friends of the firm.  Each year our foundation will provide grants to public charities that support children’s causes. 

But a foundation does not need to be limited to a single cause.  It can be a general charitable purpose and provide grants to a wide range of public charities—the sky’s the limit when it comes to being charitable!