Investment Opportunities Involving Private Foundations And Pension Plans

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By Bruce Givner, Esq.private-foundations-pensions


Private foundations (a particular type of which are charitable remainder trusts) and pension plans are attractive structures since they both involve (i) tax deductible contributions and (ii) no tax on the funds accumulating in them.  Despite their obvious advantages, we find that clients shy away from adopting them due to the tax laws’ restrictions on what they can do with the funds invested in the two structures.  Let’s first discuss the significant advantages of each.  Then we’ll discuss the restrictions and at least hint at the ways to exploit those limits.

Private Foundations In General.

Private foundations give clients the satisfaction of controlling the end-user charities to which the funds are distributed.  Also, the clients can take a small trustees’ fee.  When the clients are gone, their children can continue to run the foundation and take a small trustee’s fee.  Clients like having their own private foundations because it makes them feel good and it helps mentor their children to support the causes that the clients themselves like.  Being forced to distribute 5% of the fair market value of the assets each year to end-user charities is a way of gaining access to other important people in the community, which can be a benefit to both the clients and their children.

Private foundations have lower deduction limits than public charities: a gift of cash is deductible to the extent of 30% of adjusted gross income and a gift of appreciated property is deductible to the extent of 20% of adjusted gross income; the comparable limits are 50% and 30% for public charities.  One problem our clients have with public charities is that they cannot dictatorially control public charities: the governing board (trustees if a trust or board of directors if a corporation) must be broadly representative of the community.

Pensions In General.

Pensions are, of course, significantly different than private foundations since the clients are the ultimate beneficiaries by means of taxable distributions.  The clients can directly invest the funds, though there are restrictions, discussed below.  Also, if the plan sponsor has employees other than our clients, there may be a significant cost in terms of covering the rank and file employees.  However, for each individual client the accumulation in a pension trust might be as much as $3,500,000, which is of great comfort in retirement.  Also, if the client does not need the money in retirement, it is actually quite easy to pass the bulk of those funds on to the next generation despite the required minimum distributions of IRC Section 401(a)(9).  Finally, funds accumulated in a pension trust have the highest degree of creditor protection offered under the law of most states and under Federal law.


Clients often chafe under the restrictions imposed on both types of structures.

Private Foundation Self-Dealing Rules. 

Private foundations are subject to the taxes on self-dealing under IRC Section 4941 – 4947.  For example, any sale, loan or leasing between a private foundation and a “disqualified person” is an act of self-dealing.  A “disqualified person” includes a substantial contributor to the private foundation, which will always include our clients, and a family member, which includes the spouse, ancestors, children grandchildren, great grandchildren and the spouses of children, grandchildren and great grandchildren.  There is a tax on each act of self-dealing of 10% of the “amount involved.”  For a loan that is the greater of the interest charged or the fair market rate of interest that should have been charged.  However, in other types of acts of self-dealing the “amount involved” might be the entire amount of funds passing from the private foundation to the “disqualified person.”  Also, each year that the act of self-dealing is not corrected is a new act of self-dealing.  So the penalties can quickly pile up.

Pension Prohibited Transaction Rules.

When Congress passed ERISA in 1974 it modelled the prohibited transaction rules of IRC Section 4975 on the private foundation self-dealing rules.  However, the penalty on each prohibited transaction is 15%, versus 10% for an act of self-dealing.

Unrelated Business Taxable Income.

In addition to those potential excise taxes, both types of structures are potentially subject to the tax on unrelated business income (UBTI) of IRC Sections 511 – 514.  For example, if a charity operates a business, all of that income is taxed at the normal corporate tax rates.  One particularly irritating form of this problem is that when property is acquired with debt, a pro rata portion of the gain becomes taxable income, even to these otherwise tax-exempt entities.

Nice Results.

There are surprising, attractive ways to invest the funds of both private foundations and pension plans.  For example, a charitable remainder trust can own the stock of a “C” corporation which operates a Taco Bell without having UBTI.  If the private foundation owns 35% or less of the stock then the trustee of the private foundation can take a salary for running the Taco Bell.  With careful planning, a pension plan can buy an apartment building using debt, and the rental income is not subject to UBTI; nor is a pro rata share of the sales proceeds subject to UBTI.


If you master these and other rules you will find clients more open to the idea of establishing both private foundations, including charitable remainder trusts, and pension plans.


teleconferenceWhat can you do when your clients need big income tax deductions but don’t like their investment restrictions placed on pension plans, private foundations & charitable remainder trusts (“CRTs”)?  Nationally renowned tax and estate planning attorney, Bruce Givner, can show you how.  Join us on a 90-minute teleconference entitled, “Advanced Investment Strategies for Pension Plans, Private Foundations & CRTs”.  For more information and to register, click here.


Bruce Givner, Esq. is an estate and tax planning attorney of the Law Firm of Givner and Kaye, located in Los Angeles, California. Mr. Givner graduated from U.C.L.A., Columbia University Law School, and N.Y.U.’s Graduate Tax Law Program and specializes in the area of asset protection and advanced estate planning. He has personally worked with Mr. Philip Kavesh for over 30 years and continues to serve “of counsel” to Mr. Kavesh’s law firm, Kavesh, Minor and Otis, Inc.

Mr. Givner has been cited as a “tax expert” by the U.S. Tax Court, the California Court of Appeals, and the Wall Street Journal. He’s also written books on estate tax planning for the California CPA Society and the AICPA, and has co-authored three for the California Bar Association. He represented the winning taxpayers in the 1994 Tax Court case L&B Pipe and Supply, in which the IRS sought almost $2,000,000 in back taxes and interest due to alleged unreasonable compensation. The U.S. Tax Court awarded the IRS nothing.


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