Dividing Private Foundations and Charitable Donations in Divorce: Control, Tax Implications, and Impact on Charitable Commitments
Divorces involving high-net-worth individuals often present complex financial and legal issues, and when private foundations or significant charitable donations are involved, the stakes are even higher. Philanthropy can be deeply intertwined with a couple’s financial planning, legacy-building, and personal values, making the division of private foundations and charitable donations in divorce proceedings especially delicate.
Private foundations, with their assets, charitable commitments, and tax implications, must be carefully handled during a divorce to ensure legal compliance and maintain the foundation’s mission. Contact a Boynton Beach High Net Worth/High Asset Divorce Lawyer to learn how private foundations and charitable donations are divided in a divorce and discuss the potential tax implications and how ongoing charitable commitments might be affected.
The Role of Private Foundations in Divorce
A private foundation is typically a non-profit organization created and funded by a family or individual to support charitable activities. Foundations are often used to fund scholarships, grants, or community initiatives and serve as a way to leave a lasting philanthropic legacy.
When divorce enters the equation, the future of a private foundation can become uncertain. Foundations are usually considered marital assets if they were created or funded during the marriage. Therefore, they are subject to equitable distribution under Florida law, which divides marital assets fairly, though not necessarily equally.
Ownership and Control of the Foundation
One of the key questions in dividing a private foundation during a divorce is who will retain control. If both spouses have been actively involved in managing the foundation, determining ownership and decision-making authority can become contentious. The foundation’s board of directors, often comprised of family members, might also play a role in decision-making, further complicating the process.
Future Roles for Both Spouses
In some cases, both spouses may wish to continue their involvement with the foundation, either as co-managers or as board members. If they are able to cooperate, they may decide to maintain joint control over the foundation, ensuring its charitable goals continue unimpeded. However, more often than not, divorcing couples choose to separate their philanthropic endeavors, with one spouse retaining full control and the other exiting the foundation.
Creating New Foundations
If dividing a foundation becomes contentious or impractical, one spouse may opt to establish a new charitable foundation with a portion of the marital assets. This allows each party to pursue their own philanthropic interests independently while still maintaining a commitment to charitable giving.
Division of Charitable Donations in Divorce
Aside from private foundations, significant charitable donations made by the couple during their marriage can also become a point of discussion in divorce proceedings. Charitable donations often take the form of endowments, pledges, or contributions to causes both spouses supported together.
Completed vs. Pledged Donations
Completed donations—those where funds have already been transferred to a charity—are typically not considered marital assets, as the donation is irrevocable. However, pledged donations, where a future commitment to donate has been made but not yet fulfilled, can be treated differently. Pledges can be viewed as a liability during the divorce process, especially if the funds to fulfill the pledge are drawn from marital assets. Courts must determine who is responsible for honoring those commitments after the divorce.
Impact on Philanthropic Goals
Divorce can lead to a significant shift in each party’s philanthropic priorities. If charitable giving was a shared value during the marriage, splitting donations may result in both spouses contributing to different causes moving forward. In these cases, there may be discussions about how ongoing or future donations should be handled, particularly if a significant amount of wealth was earmarked for charitable purposes.
Tax Implications of Dividing Private Foundations
One of the most significant concerns when dividing private foundations and charitable donations in divorce is the tax implications. The Internal Revenue Service (IRS) has specific rules and regulations governing the tax treatment of private foundations and charitable contributions, and mishandling these assets during divorce can result in penalties, fines, or loss of tax-exempt status.
Dividing Foundation Assets
If the foundation’s assets are split between spouses, care must be taken to ensure compliance with IRS regulations governing charitable organizations. Transferring foundation assets to another entity or person could result in unintended tax consequences, including gift taxes or penalties if not done properly. It is critical to consult with tax advisors and legal counsel when dividing foundation assets to avoid jeopardizing the foundation’s tax-exempt status.
Personal Tax Deductions
Charitable donations typically qualify for tax deductions. During divorce proceedings, disputes may arise over who can claim the deductions associated with prior charitable contributions. If large donations were made in previous tax years, it’s essential to clarify which party is entitled to claim the tax benefit moving forward. Additionally, pledges made prior to the divorce may impact both parties’ future tax obligations, depending on how those donations are fulfilled post-divorce.
New Foundation Tax Benefits
If one spouse decides to create a new foundation after the divorce, they may benefit from certain tax deductions based on their contributions to the new entity. However, the rules for setting up a tax-exempt organization are strict, and creating a new foundation must follow IRS guidelines to avoid tax penalties.
Protecting Charitable Commitments and the Foundation’s Mission
Private foundations are often created to support a charitable mission that reflects the values and legacy of the founders. Divorce can challenge the stability of these missions, especially if both spouses were equally involved in shaping the foundation’s goals.
Maintaining the Charitable Mission
When dividing control or influence over a foundation, it’s important to ensure that the foundation’s mission remains intact. One solution is to establish bylaws or legal safeguards within the foundation’s governance documents that prioritize the charitable goals over personal disputes. These provisions can protect the foundation from being dissolved or diverted from its original purpose due to marital discord.
Handling Public Perception
In high-profile divorces, the division of a private foundation or charitable commitments can attract public attention. The way in which these assets are handled can impact the public perception of the foundation and its reputation. Maintaining transparency and focusing on the foundation’s philanthropic goals during the divorce process can help preserve the foundation’s reputation and continue its positive impact on the community.
Contact Law Offices of Taryn G. Sinatra, P.A.
Dividing private foundations and charitable donations in divorce presents unique challenges, from determining control and ownership to navigating complex tax regulations. It’s essential for divorcing couples to approach these issues thoughtfully, keeping the foundation’s charitable mission at the forefront while addressing the financial and legal aspects of asset division. By working with experienced legal and financial advisors, couples can ensure that their philanthropic goals are protected while reaching a fair and equitable settlement.
If you are going through a divorce involving private foundations or significant charitable donations, the Law Offices of Taryn G. Sinatra, P.A. can provide the expert legal support you need. Our team is experienced in handling complex financial and philanthropic issues in divorce, ensuring that your assets and charitable legacy are preserved. Contact us today to learn how we can assist you with dividing private foundations and charitable donations during your divorce.
Sources:
irs.gov/pub/irs-pdf/p4221pf.pdf
irs.gov/pub/irs-pdf/p526.pdf
leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0000-0099/0061/Sections/0061.075.html
