We recently asked our Foundation Source clients what they would like to learn more about in 2023, and one of their top picks was centered around how to leverage the unique features of a private foundation. One of these powerful tools, the cash set-aside, allows private foundations to defer their 5% minimum distribution requirement (MDR) in their early years without IRS approval. This can be especially helpful for your charitable clients when they’re engaged in a long-term philanthropic project because it enables them to save up amounts (that otherwise would need to be distributed to avoid penalties) for projects that will not be completed by the end of the set-aside year.
While the cash set-aside can be advantageous, its technicalities are commonly misunderstood and must be approached carefully to avoid serious consequences. Here are two key things to know as shared by our Chief Legal Officer Jeffrey Haskell.
#1: It doesn’t replace the MDR; it postpones it.
A set-aside doesn’t excuse a private foundation from satisfying its MDR; rather, the obligation to pay the amount set aside is simply postponed to a later time (up to 60 months from the date of the set-aside). Bear in mind that the foundation will still need to timely satisfy its MDR for the remaining years within that 60-month postponement period. For instance, suppose a foundation has an MDR of $50,000 and makes a set-aside earlier that year in this amount to satisfy its entire MDR without disbursing any cash. Suppose further that its MDR for each of the following five years (the postponement period) is also $50,000. The foundation will be obligated to distribute a total of at least $300,000 ($50,000 in each year multiplied by 5 years, plus $50,000 postponed set-aside amount) by the end of the postponement period.
#2: A foundation can make more than one cash set-aside during its “startup period.”
During the first four tax years (after the tax year in which they were deemed created), a private foundation may make more than one set-aside. For instance, in the previously mentioned example, if the $50,000 set-aside was made during the startup period, the foundation could have made more than one set-aside during that period.
Want to see the rest of the list?
Checkout the complete article in Taxation of Exempts.
Learn More About How We Support Advisors
Schedule a call or reach us at 800-839-0054 to learn how we can best support your clients who are passionate about philanthropy. Together, let’s #begiving.