Case of the Week

Case:

Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor (RIA) and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy was so successful in these markets that she now only manages her own large personal portfolio. Somewhat late in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and learned that giving someone in need a helping hand is even more gratifying than making another million dollars in the futures market.

Lucy had invested $1,000,000 in stock in a renewable energy company with the name Northern Long Shot, Inc. This company designs and manufactures energy solutions for companies across the far north. Recently, the stock rose from the $1 per share that she paid to over $5 per share. After this success, Northern Long Shot decided to “spin off” a smaller company with a portion of their energy systems. Lucy exchanged $5 million in stock for 60% of the stock in Northern Long Shot II, Inc. After the exchange, Lucy decided to give the Northern Long Shot II stock to a private charitable foundation to help those in need.

After several years of helping those in need through Northern Long Shot Foundation, Lucy discussed future options with her attorney. She was concerned about the rules that applied to private foundations. In addition, her grants are now centered on helping children and most of those grants are being made to her favorite children’s charity.

Question:

Lucy asked, “Why should I continue to pay the costs of operating the Northern Long Shot Foundation? Could I transfer the assets to my favorite children’s charity? We could set up a fund to support needy boys and girls through this public charity and save most of the private foundation’s operating costs.”

Solution:

Her attorney explained that it is possible to transfer assets from a private foundation to a public charity. There are thousands of smaller private family foundations in existence that will be merging and distributing assets in the future. When the purpose of a private foundation is satisfied or operation of a private foundation is no longer necessary or desirable, the simplest solution is for the private foundation to terminate and transfer "all of its right, title and interest in and to all of its net assets" to one or more specific public charities. Section 507(b)(1) states that when a private foundation terminates by distributing its assets to a qualified public charity, it does not need to notify the IRS and is not subject to termination tax. Some states may require additional steps to terminate a private foundation, but Lucy’s state does not have such a requirement.

Lucy transferred Northern Long Shot Foundation’s assets to her favorite children’s charity. She still supports the same field of interest as before but is not subject to the costs and restrictive rules that govern private foundations.