Empowering Clients and Building Legacies

Empowering Clients and Building Legacies

June 26, 20248 min read

Why Financial Advisors and Insurance Agents Should Recommend Private Foundations To Their Clients


As a financial advisor or insurance agent, your primary goal is to add value to your clients’ financial planning and help them achieve their long-term goals. In today's complex financial landscape, one tool stands out for high-net-worth individuals: the private foundation.

Far more than just a charitable vehicle, a private foundation can serve as a powerful "impact investment fund," offering unparalleled benefits in tax savings, asset protection, and legacy building.

Think of this article as a "practical guide" that helps you understand HOW and WHY recommending a private foundation can be a game-changer for clients, offering unparalleled tax benefits, asset protection, and a lasting legacy, and an absolute career-propelling, AUM Increasing, high-net-worth-client-attraction strategy for you, helping you stand out from all your competitors.

The Target Clients: High-Income Earners and Asset Holders

Private foundations are particularly beneficial for clients who meet the following criteria:

  • High-Income Earners: Individuals earning $400,000 per year or more (according the IRS)

  • Significant Asset Holders: Clients with over a million dollars in stocks or other publicly held assets.

  • Impending Large Taxable Gains: Those considering liquidating an asset (any type) and facing substantial capital gains taxes (and perhaps recaptured depreciation).

The Benefits of Private Foundations

  1. Tax-Free Investment Portfolio: Contributions to a private foundation are tax-deductible, reducing taxable income. The foundation’s assets can be invested and grow tax-free, significantly enhancing the portfolio's value over time.

  2. Asset Protection: Assets held within a private foundation are not part of the donor's personal estate, shielding them from personal lawsuits and creditors.

  3. Estate Tax Avoidance: By removing assets from their estate, donors can avoid hefty estate taxes, preserving more wealth for charitable endeavors and future generations.

  4. Probate and Estate Transfer: Private foundations are not subject to the probate process, ensuring a smooth and private transfer of wealth without the delays and costs associated with probate.

  5. Generational Legacy: Foundations can operate indefinitely, allowing donors to pass on their charitable mission and financial strategies to their heirs without additional taxes on the transfer.

The ROI Of Creating A Private Foundation

Establishing and maintaining a private foundation involves some costs, but these are outweighed by the long-term benefits:

  • Setup Cost: Approximately $30,000.

  • Annual Compliance: Around $15,000.

  • The ROI: Infinite

    • Tax deduction on donating cash every year: 30% of AGI every year for the course of your life (foundation can last forever)

    • Tax deduction on donating assets directly: 20% of AGI

    • Carry-over excess deductions: Clients can carryover excess deductions for 5 consecutive years

    • Tax-free growth inside the foundation (versus growth of assets that might be subject to income and capital gains tax, and possibly probate, estate, gift, and inheritance tax, if managed, liquidated, or passed through a corporation, will or trust)

Building a Tax-Free Investment Portfolio™

Private foundations enable clients to build a robust, tax-free investment portfolio that can significantly reduce their taxable income and provide a sustainable source of funding for charitable activities.

  1. Donations and Tax Deductions: Clients can donate cash, stocks, or other assets to the foundation, receiving immediate tax deductions that reduce their adjusted gross income (AGI).

  2. Investment Growth: The foundation can invest these assets without incurring capital gains taxes, allowing the portfolio to grow more efficiently.

  3. Grant-making and Charitable Impact: The returns on these investments can fund charitable grants and programs, ensuring that the foundation’s mission is continually supported.

Asset Protection and Estate Planning

By transferring assets to a private foundation, clients can achieve a high level of asset protection and efficient estate planning.

  1. Shielding from Lawsuits: Assets in a private foundation are not part of the donor's personal estate, protecting them from personal lawsuits and creditor claims.

  2. Avoiding Estate Taxes: Removing assets from the taxable estate can significantly reduce estate taxes, preserving more wealth for future generations.

  3. Smooth Transfer: Private foundations bypass the probate process, allowing for a smooth and private transfer of wealth to heirs.

The Legacy and Generational Impact

A private foundation provides an enduring legacy, teaching heirs the principles of investing, entrepreneurship, and philanthropy.

  1. Educational Platform: Involving family members in the foundation’s activities educates them on investment strategies, financial management, and charitable giving.

  2. Entrepreneurial Skills: Family members gain practical experience in running an organization, fostering entrepreneurial thinking and leadership.

  3. Philanthropic Values: The foundation instills a sense of social responsibility, encouraging heirs to continue the family’s tradition of giving back to society.

  4. A Place of Employment: The Foundation can employ family members and pay them a salary for their work in the organization, which ought to be treated as an professional "investment fund" that the family is managing.

The Advisor's Role: Adding Massive Value

Recommending a private foundation not only adds immense value to your clients but also enhances your role as a trusted advisor.

  1. Tax Savings: By helping clients establish a private foundation, you can potentially save them millions in taxes over several years.

  2. Legacy Building: You assist clients in creating a lasting legacy that benefits their family and society, enhancing your reputation as a forward-thinking advisor.

  3. Client Retention and Acquisition: Offering such a powerful and strategic tool can help you retain existing clients and attract new ones, differentiating your services from competitors.

Case Study: Transforming Client Outcomes

Example 1: Piecemeal Donation of Publicly Held Stock

Client Profile: Sarah, a tech entrepreneur, owns $5 million in publicly held stock from her previous startup, which has appreciated significantly since its IPO.

Strategy:

  1. Piecemeal Donations: Sarah decides to donate portions of her stock to a private foundation each year.

  2. Tax Deductions: By donating up to the maximum allowable limit annually, she receives substantial tax deductions, effectively reducing her taxable income each year.

  3. Tax-Free Growth: The donated stocks are transferred to the foundation, where they can be sold without incurring capital gains taxes.

  4. Reinvestment: The proceeds from the stock sales are reinvested within the foundation’s portfolio, growing tax-free.

  5. Charitable Impact: The foundation uses the returns to fund various charitable initiatives, aligning with Sarah’s philanthropic goals.

Outcome:

  • Sarah maximizes her tax deductions over several years by strategically donating portions of her stock.

  • She avoids paying capital gains taxes on the appreciated stock.

  • The foundation’s assets grow tax-free, providing a sustainable source of funding for charitable projects.

  • Sarah’s family gains valuable experience in managing the foundation and contributing to society, ensuring a lasting legacy.

Example 2: Reinvesting Proceeds from Property Sales

Client Profile: John, a seasoned real estate investor, owns several properties worth $10 million, which he buys and sells, time to time.

Strategy:

  1. Property Donation: John decides to donate the properties to a private foundation before the sale.

  2. Avoiding Capital Gains Tax: By donating the properties, John avoids capital gains taxes that would be incurred from selling the properties himself.

  3. Avoid Recaptured Depreciation: By donating the properties, John could potentially avoid having to repay the recaptured depreciation that he might have faced on the appreciated sale.

  4. Tax Deductions: He receives a tax deduction for the fair market value of the donated properties, significantly reducing his taxable income.

  5. Foundation Sells Properties: The foundation sells the properties, now free from capital gains taxes, and reinvests the proceeds.

  6. Tax-Free Investments: The reinvested funds within the foundation grow tax-free, further increasing the foundation’s asset base.

  7. Charitable Funding: The foundation uses the investment income to support charitable programs and initiatives.

Outcome:

  • John successfully circumvents capital gains and income taxes on the sale of his properties.

  • He benefits from substantial tax deductions, lowering his taxable income.

  • The foundation’s assets grow tax-free, providing a continuous source of funding for charitable activities.

  • John’s family is involved in managing the foundation, gaining insights into philanthropy and investment strategies, and ensuring the preservation of family wealth and values for future generations.

Conclusion: A Strategic Move for Advisors and Clients

For financial advisors and insurance agents, recommending the establishment of a private foundation offers a strategic advantage. It provides high-income earners and significant asset holders with a powerful tool to reduce taxes, protect assets, and create a lasting legacy. By understanding and promoting the benefits of private foundations, you can add massive value to your clients, enhance your professional offerings, and build a reputation as a leader in innovative financial planning.

Next Steps for Advisors

  1. Educate Yourself: Gain a thorough understanding of the legal, financial, and operational aspects of private foundations.

  2. Engage Expert: Collaborate with legal, tax, and philanthropic advisors to provide comprehensive guidance to your clients.

  3. Propose Strategic Plans: Develop tailored proposals for clients that highlight the benefits of private foundations and outline the steps to establish and manage them.

By guiding your clients through the process of establishing a private foundation, you empower them to preserve their wealth, achieve significant tax savings, and make a meaningful impact on society. This proactive approach not only strengthens your client relationships but also positions you as a forward-thinking advisor dedicated to maximizing client outcomes and building lasting legacies.

We would love to have you join us at a free workshop where we share ideas and strategies on these topics figure out how you and your team can implement these strategies to stand out as the preeminent advisor who understands law, tax, and estate planning, not just investing!

Book a seat below!


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