Family Foundation Trick

According to "How Tiger Protected His Image " by By REED ALBERGOTTI, VANESSA O'CONNELL and RUSSELL ADAMS in Wall Street Journal, under Golf Digest's contract with Mr. Woods, the monthly, which is owned by Condé Nast Publications Inc., spent as much as $1 million annually on donations to the Tiger Woods Foundation, printing the charity's annual report and sponsoring many of Mr. Woods's preferred tournaments, according to a person familiar with the terms. In return, Mr. Woods agreed to contribute monthly articles on golf techniques and limit his appearances in competing publications.

The question is whether it was taxed as ordinary income as to this monetary compensation. My guess is that it is tax deductable for the both parties. Conde Nast could deduct this payment as the donation. The Foundation is probably non-profit and required to spend about 5% of the total asset on charitable activities. That 5% may count the expenses incurred in the foundation. For instance, if the foundation owns the private jet How do they distinguish such the expenses between private and non-profit purpose uses in such the small organization where probably the key employees are the family members. By the way, their salary and benefits are probably counted as that part of 5%.

If so, what about people who goes to work everyday and make themselves available to work 24/7? Those who are on the payroll and making more than $400K are payting the tax at 35% while someone like Tiger or the former president of the U.S. Bill Clinton are flying on the jet possibly owned by their own founation??? I don't know for sure whether it is true. I am a bit on the hypothetical term since I do not know and will personally not know.

But the trick could be ordinary for those super-stars. After all, how can we believe that those people are really intending to give back their success to the society???

The following is a brief explanation about private family foundation according to Save Wealth Estate:

A Private Family Foundation (PFF) is a separate entity, privately funded by you. It is created with the specific purpose of contributing to various charitable causes.

As a distinct, legal entity, The Private Family Foundation:

1. Contributes to a charitable cause and takes a tax deduction, while relinquishing personal control over your gift.

2. Minimizes your estate tax liability.


3. Avoids capital gains tax on the sale of appreciated property contributed to the charity of your choice.


4. Provides continuing employment and activity for your family members.


5. Identifies and preserves your family name for years to come.

Special Tax Advantages

Private Family Foundations have special tax advantages, because they are considered "charitable organizations" themselves. Because of this classification, any earnings on Foundation assets are tax-exempt, and can be distribute to the charities you choose.

If established properly, a private family foundation can often avoid capital gains taxes on highly-appreciated assets (see below). In addition, interest and investment earnings that are not slapped with an income tax can instead be used to help the charities or causes you support.

Immediate Tax Benefits for You

If you have highly-appreciated assets that you're holding to avoid steep capital gains taxes, a Private Family Foundation could help. Any appreciated assets that you transfer to a Private Family Foundation can be sold by the Foundation with no capital gains taxes. This is because of the Foundation's charitable status.

Second, you can get an immediate tax deduction for any money or property to grant to the Foundation. This deduction can equal up to 30% of your adjusted gross income (20% for appreciated property). Any income tax deduction not used in your contribution year may be carried forward over the next five years.

The valuation of these deductions depends on a number of things, including original cost and the type of property being transferred. (For more information on valuation, please request the PFF Special Report.)

Estate Tax Benefits

Every dollar that you contribute to your Private Family Foundation means one less dollar that is included in your estate. Gifts that are regularly made to charities can instead be used to fund your PFF. And if you are in a higher tax bracket, that could ultimately save up to 46% in estate taxes.

Best of all, you can make such contributions to a Private Family Foundation without affecting the $12,000 annual gift tax exclusion or the current $1 million Gift Tax Credit .




Required Distributions to Charities

Private Family Foundations have certain laws they must abide by, because they are a legal entity. For instance, by law, a Private Family Foundation must distribute at least five percent (5%) of its assets each year to public charities.

Let's suppose you leave $2,000,000 to your Private Family Foundation. The IRS says you must distribute at least $100,000 (or 5%) to recognized charities in order for the Foundation to qualify for its special tax advantages. Of course, you can select a higher payout if you choose. But five percent is the absolute minimum.

The annual payout is established when you first sit down with a qualified estate attorney who has experience working with large estates. And the difference between what the assets earn (e.g. 6% per year) and the mandatory payout can be put back into the Foundation.




Employment for the Family

You may arrange for your heirs and descendants to receive salaries as "employees" of your Foundation. Simply name family members as replacement trustees to succeed you after death or resignation.

Many Foundations pay their directors using the difference between their required distributions and their annual income. If your Foundation is earning 10% annually on its assets, but only paying 5% annually to charities, the difference can be distribute for legitimate expenses, including salaries for the directors of the Foundation.




Ensuring Kids Don't Lose Out

While charities will definitely benefit from your Foundation, your children are deprived of the donated assets, after estate taxes are accounted for. To remedy this situation, some individuals also choose to establish a generation-skipping dynasty trust (like The Legacy Trust) to avoid estate taxes for up to three generations.

The Legacy Trust, which is an advanced type of dynasty trust, also acts as a shield for assets (subject to variations in state law). When properly drafted and implemented, the Legacy Trust can also help place assets outside your estate, outside the reach of creditors, judgments, malpractice and divorce.

The Legacy Trust can also provide a substantial benefit for your heirs, particularly through the use of cash-rich life insurance. After funding The Legacy Trust with annual gifts, it can purchase insurance payable to your heirs (as beneficiaries of The Legacy Trust). The children would then receive a lump-sum when you pass away, or you could have The Legacy Trust support grandchildren (or even great-grandchildren). All of these benefits are usually 100% estate tax- and income tax-free if structured properly.




Foundations and Charitable Trusts

Private Family Foundations can also be combined with Charitable Remainder and Charitable Lead Trusts. By doing so, you may able to draw a significant income for your lifetimes and earn significant tax savings, while still maintaining a large degree of control of your assets.