By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Estate Planning Attorney
Recently a client asked about creating a charitable foundation using a substantial part of his estate (may be as high as $1,000,000) to establish grants/scholarships to high school graduates going to college and who demonstrate a financial need. This foundation would be designated for a particular college and he wants it in the name of his late spouse. At this point the “foundation” does not exist and so the issue we discussed was: Do we need to establish the foundation now and (at least) have the legal structure in place at the time of his death or can we wait to establish the foundation until he passes? Waiting until he passes seems to make sense but the concern is that unless the foundation is already in existence at the time of death, the distribution may not qualify as charitable bequest, subjecting the estate to an inheritance tax which obviously we want to avoid.
Another alternative we discussed and one that he was interested in was to locate an existing foundation/charity willing to accept these funds with the restrictions and agree to distribute the funds according to the client’s wishes.
Maybe the most practical solution is to draft a Will leaving a specific dollar amount (e.g. $1 million) or a percentage of the residuary estate to a particular college/university to establish a Memorial Scholarship Fund in the clients individual name, and then work out the details with the client and the educational institution separately via a written agreement, memorandum of understanding, or letter of intent – depending upon what type of written document the institution prefers – as to the Fund’s implementation (e.g., criteria for student selection: high schools in a specific geographic area, students from public and/or private high schools, student’s proposed course of study or major if any, minimum grade point average, minimum/maximum amounts granted per year, financial need, etc.) – making sure that whatever documentation is used is revocable and subject to change by the client while he or she is alive (in case the client changes his or her mind).
But consider this: given the high and increasing costs of a college education, the costs of creating such a Charitable Foundation, funding and operating it, may outweigh the benefits (even with $1million). Sometimes it’s simpler to consider and use an alternative arrangement that accomplishes the same objective without the headaches involved.
Understand that a Charitable Foundation is not the easiest thing to manage as the family/trustees need to incur the cost of applying for the foundation and filing annual reports. There can be no private benefit and there is a required minimum mandatory distribution.
Using the New Jersey Community Foundation, which was, and may still be located in Morristown, is a better alternative. Financial institutions such as US Trust (part of Bank of America) and Merrill Lynch also have non-profit foundations, but they may require a large principal amount.
In similar situations where the charitable beneficiaries were not restricted to a particular charity, I have also provided in the Will for the Executor to establish a foundation, upon the death of the testator, setting forth the types of charities and charitable purpose. I don’t think the fact that the foundation comes into existence after death, prevents the charitable deduction as long as the funds are earmarked for the foundation or another 501 c 3 organization and are paid to such foundation or 501 c 3 organization.
To discuss your New Jersey Estate Planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org. Please ask us about our video conferencing consultations if you are unable to come to our office.