Advising clients on their philanthropy represents the pinnacle of advice giving: an area where personal fulfillment meets creative tax planning and beautiful solutions arise. Those advisors who practice in this area can appreciate elegance of the many tools we have at our disposal. There are powerful benefits available to donors and to charitable organizations that are allowable that it is distressing to find those who seek to abuse the system. Yet, there they are. Almost, weekly I’m made aware of a “transaction” that is positioned as a gift structure but is nothing more than an abusive tax dodge. Totally unnecessary personally upsetting and asking for trouble from the IRS.
Here is an example of language from a website that offers one such structure:
…“while addressing the traditional problems of charitable gifts – (1) Loss of control over the money (2) Loss of control over the disposition of the money (3) Loss of investment control (4) Loss of access to use of the funds for financial planning purposes. This strategy is able to overcome these problems in a conservative manner from a tax perspective.
I never realized that the “problem” with a charitable gift was loss of control over the money or better, having access to funds for my own purposes after having given it away. The website goes on to offer a Family LLC structure which gives 99% of its non-voting interests to a Donor Advised Fund (DAF) and allows the family to keep and control the assets with a 1% voting interest. Actually, that part’s fine. It goes on to say, however, that the 1% owners should be entitled to compensation for management citing hedge funds 2-3% management fees and 20-30%. This is more than abusive. In fact, it’s prohibited.
Section 1232 of the Pension Protection Act of 2006 (“Act”) amends the excess benefit transaction rules to add new IRC § 4958(c)(2) (“Special Rules for Donor Advised Funds”) under which, effective for transactions occurring after August 17, 2006, a grant, loan, compensation and other similar payment from a donor advised fund to a donor, an advisor to the fund or a related party is automatically considered to be an “excess benefit transaction.” The entire amount of the grant, loan, compensation or similar payment, therefore, is treated as an excess benefit, notwithstanding the value of the consideration provided in return for such payment.
When you consider how much control we can give donors in DAFs and how much can be given in young polled income funds, there is no reason for any of this nonsense. If you need to make these kinds of agreements with your donor, they’re not truly a donor. These schemes that sound too good to be true are just that. It’s so easy to do this work properly it’s a shame to see so many take these illegal shortcuts.