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· Advantages and Drawbacks
· Other Facts
Charitable Support Organizations
A charitable support organization ("CSO") offers both the operational advantages of a private foundation and the tax advantages of the public charities they support. A support organization is subject to fewer restrictions than a private foundation but offers you less control over administration and distribution. It is a unique type of charitable organization because of its special relationship to a public charity. It is classified as a public charity, as opposed to a private foundation, which is a private charity. Essentially, by establishing a support organization, you choose either one or several charitable organizations to benefit from the support organization. The support organization will manage the funds. The support organization may support more than one charity, but all charities must be named at the time the support organization is established.
The typical donor:
- Has a larger than average estate.
- Wants to time the gift to his or her tax situation.
- Desires to involve the family in giving decisions.
- Wants to give now to eventually benefit one or more charities.
Gift features and benefits:
- Gift tax deduction based on full fair market value
- Separates timing of the gift with delivery to the charity
- Creates a philanthropic training ground for a family
- Allows family involvement after your death
Advantages and Drawback
There are many advantages of a support organization:
- No minimum distribution requirements.
- No annual payments, no minimum amount of money in the support organization must be paid out annually, unlike a private foundation, which must pay out 5 percent of asset value for annual distribution though the support organizations must pay out substantially all its net income.
- Higher income tax deduction than a private foundation-50 percent for cash and 30 percent for appreciated property contributions.
- No excise tax.
- No self-dealing limitations.
- No limit on holdings in business corporations and enterprises.
- Allows a variety of investments, such as real estate, restricted stock, closely held stock, and risky investments.
- Can support more than one organization.
- Donor can be involved with board members of the charities, allowing you to work closely with and get to know more about the charitable organization.
There are also some disadvantages of a support organization:
- Less control than a private foundation
- Less spontaneity and less freedom to choose charities; must be structured to support specific charities.
Other Facts You Should Know about a Support Organization
A support organization must be structured to meet three tests:
- Organizational test: the support organization must be organized and operated exclusively for the benefit of, perform the functions of, or carry out the purposes of one or more specified public charities.
- Disqualified persons test: certain disqualified persons cannot control the support organization, directly or indirectly.
- Relationship test: requires that the support organization be operated, supervised, or controlled by or in connection with the charity.
Family business and Charitable Support Organizations
Assets, including a family business can be gifted to an SO, with the donor(s)receiving appropriate tax deductions. The family can operate the business, can make investments, can provide income or make loans to family members and can purchase insurance on family members to insure the perpetual funding of the support organization.
The prohibitions of Private Foundations against self dealing, minimum distribution requirements, taxes on net investment income, and prohibited Expenditures generally do not apply to supporting organizations.
Two Family members are in a special board classification and remain on the fivemember board intergenerationally. They select three other board members, and the "outside board members" can be removed.
SO's can:
- Own Family Businesses.
- Make Investments.
- Do Business with the family under certain conditions.
- Pay no estate tax.
- Provide Asset Protection.
- Have Family members remain on board, generationally.
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