Private Foundations and Mandatory Distributions - Meeting the Minimum Distribution Requirements

Private foundations are legally required to make certain minimum distributions each year. Read on to discover the three aspects of meeting these legal requirements that are particularly important.

1) Calculating the correct amount of the required distribution for the particular private foundation

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Calculating the exact amount of the required distribution can be quite a challenge.

Private Foundations and Mandatory Distributions - Meeting the Minimum Distribution Requirements

First of all, there are two major types of foundations, and they are subject to slightly different rules. There are operating foundations, which are foundations that engage in charitable activities directly, and then there are non-operating foundations, which primarily support other charitable organizations.

Non-operating foundations generally must distribute at least 5% of their market value of its investments, as averaged over a 12 month period. This amount is usually called the "Distributable Amount."

Operating foundations must distribute at least 4.25% of their average value.

Various additional aspects of the foundation's financial dealings must also be included in that calculation. These range from cash reserves to investment returns, recovery of previously distributed amounts, and so on. All that can make for some highly complex math, so you'll need good accounting software such as QuickBooks and Lecerte.

2) Making the right kinds of distributions to count toward the MDR for the private foundation

The key to making a distribution count is that it must meet certain requirements. First of all, any distributions must be made for charitable purposes in order to count towards the minimum distribution requirements -- and not just any charitable purpose.

It is crucial that those grants further the mission of the foundation. No matter how praiseworthy the purpose of a grant -- if it's not part of the foundation's mission statement, it won't necessarily count towards the minimum distribution.

So if a foundation has been set up to fund art education in schools, it might not get credit for distributions that were given to feed the homeless, no matter how worthy a cause that may be, without obtaining prior approval from the government.

In addition to the requirement that a distribution must further the foundation's declared goals, i.e., those that are in its mission statement and those that have led to it being given tax exempt status by the IRS, there's one other key requirement: the foundation must in fact release the funds.

Those two criteria may seem obvious and not very hard to figure out. But there are other types of distributions that can also count as qualified. Those include the following:

a) Administrative expenses, as long as they are reasonable and necessary, that are used to accomplish the foundations' tax exempt purposes.

b) Funds used to purchase assets that will be used to further the foundation's tax exempt purpose.

c) A variety of program related investments.

As the expenses get more complex and less central to funding the mission of the foundation directly, a foundation might benefit from getting some advice to make sure it stays on the right side of the IRS, as well as ensuring that the foundation's mission is in line with the founder's life mission and personal interests.

3) Reporting the distributions on the proper federal form for the private foundation

In addition to the distribution requirement, there is also a requirement to report the distributions on the foundations annual information returns, i.e., form 990-PF.

Foundations that don't make the required distributions and report them properly can incur stiff penalties, so it is very important to follow all those intricate guidelines very closely.

In order to keep up with all the details of those guidelines, it's generally a good idea to get help from an expert on private foundations.

Private Foundations and Mandatory Distributions - Meeting the Minimum Distribution Requirements

To start with, you're invited to get a free chapter of international wealth management advisor Thomas Quinlin's ultimate guide to using private foundations [http://www.privatefoundationcenter.com] for wealth management.

And if you would like answers to specific questions, feel free to call Thomas at 408-437-1410 or contact him at Financial Advisor San Jose [http://www.financialadvisorsanjose.com] San Jose, 1798 Technology Drive, Suite 258, San Jose, CA 95110

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