Every business owner wants to make an impact and leave behind a strong legacy. One of the best ways to do that is to not only create a strong company but to also consider creating a charitable foundation.
A charitable foundation gives you an opportunity to influence your community, in terms of where you place your money, how you make your grants and which organizations you serve and support. Take, for example, Tecumseh, Michigan. It’s not a town many people have heard of, but it’s consistently voted one of the top 100 places to live in the country. A big reason for that is the philanthropic work of Kenneth G. Herrick, who founded Tecumseh Products Co. and created The Herrick Foundation, which is one of the largest charitable foundations in Michigan.
Among other things, Herrick gave to libraries, museums, schools, human service agencies and health care providers.
“During his lifetime and since his passing, Herrick was a significant philanthropist, helping to shape and grow the community of Tecumseh,” says Gregory A. Schupra, the vice president and group manager for the Charitable Services Group at Comerica Bank. “Like Herrick, you too can perpetuate your legacy and affect the quality of life in your community for generations through a charitable foundation.”
Smart Business spoke with Schupra about charitable foundations, how to set one up and what you need to know when doing so.
Why should business owners establish a charitable foundation as a charitable trust as opposed to setting up a nonprofit corporation?
There are two main reasons: One, with a charitable trust, you can protect and preserve your charitable intents more easily. Two, you can protect and preserve your family’s involvement with the foundation as well so that it does not get ‘hijacked’ by outsiders.
When you set up a nonprofit — no matter what state you’re in — the trustees or directors can amend the articles and bylaws of the nonprofit to change the charitable purpose without anyone knowing or having any say-so. However, if you have a charitable trust, the trustees or directors would have to go to court to make a change like that, at which point it would be up for public debate.
Another aspect of a nonprofit is that trustees and directors are self-appointing, so, if they keep appointing nonfamily members to the nonprofit, the family can lose all authority and control. You could put family protection into the articles and bylaws of the nonprofit, but it’s a lot easier to have a charitable trust with certain requirements that family members have to be involved.
What tax implications should business owners be aware of when creating charitable foundations during their lifetimes?
The thing to keep in mind is that tax law is different for gifts from people’s estates as opposed to gifts given to a foundation during a lifetime. For example, if you have a piece of real estate — which many business owners do — and you give that real estate to your foundation during your lifetime, you can only deduct the cost basis. On the other hand, if you leave that real estate to your foundation in your estate, your estate can deduct the full fair market value. It’s the same for closely held stocks. If you give during lifetime, deduction is only on a cost basis; if you leave through your estate, deduction is full fair market value.
How should the foundation’s assets be invested?
First, the foundation has to determine what its grant-making and spending polices are going to be. If it’s going to grant out a higher percentage of its assets each year, then the assets should probably be invested in more fixed-income vehicles, such as bonds and treasury bills, in order to preserve more value. On the other hand, if the foundation is going to be giving, say, only 5 percent a year — which is the required minimum by law — then the asset allocation should be in longer-term investments like equities.
If you asked this question a year ago, I’d say that a perpetual long-term charitable foundation should have an asset allocation of 60 percent equity and 40 percent fixed income. But, because of the paradigm shift in the economic markets, it’s now 40-50 percent equity and 50-60 percent fixed income. It’s likely to stay like that for the next three to five years.
Bottom line, you want to create an asset allocation that fits your spending needs and the short- and long-term objectives of the foundation.
When looking to set up a charitable foundation, what are some other key considerations?
The key is to ask yourself the following four questions:
- Do you want to conduct charitable activities (educate, feed the homeless, etc.) or make grants to organizations that conduct the charitable activities?
- Do you want to establish during your lifetime or testamentary?
- Do you want to support specific charities, particular charitable purposes or geographic areas?
- Do you want your grant making to be competitive or noncompetitive?
There are many philanthropic options for business owners, and those options might seem complex, but if you work with professional advisers who know what to do and how to do it, you can have a great experience, both during your lifetime and by perpetuating your legacy over time.
Gregory A. Schupra is the vice president and group manager for the Charitable Services Group at Comerica Bank. Reach him at (734) 930-2417 or firstname.lastname@example.org.