The following ideas can help established and newly formed foundations creatively meet their obligations in a difficult market environment, help them weather a sustained market downturn and prepare for a future of inspired giving.
1. Accelerate Your Minimum Distribution Requirement
If a foundation sees a downturn looming, or the downturn has just begun, a foundation that doesn’t have enough cash on hand could consider accelerating its charitable disbursements to meet its minimum distribution requirement (MDR) before values decline further. If a foundation waits too long to liquidate sufficient assets to meet its MDR, it may be forced to do so after the stock price has fallen further, deepening the losses and creating a bigger shortfall. A private foundation’s MDR is based on the prior year’s asset average, which can be a challenge when there is a current year market crash or sustained volatility. When this occurs, a foundation may be required to satisfy its MDR with greatly diminished assets, representing far more than 5% of its assets in the downturn year.
2. Put Losses to Work
If a foundation has already incurred significant capital losses to date in a downturn year, it can turn lemons into lemonade by putting those losses to work. If the foundation holds appreciated stock, it can achieve an effective “step up” in basis by selling that stock at a gain, offsetting the gain with the realized losses, and buying back the stock. Note that the “wash sale” rules should not prevent a foundation from selling stock at a gain and buying it back; those rules apply to securities sold at a loss. This is an especially attractive strategy, as a foundation’s capital losses can’t be carried over to offset capital gains in future years.
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