The March 31 ESPN Website, reported on an "Outside the Lines" investigation of 115 charities founded by high-profile, top-earning male and female athletes. The investigation's conclusion: "most of the charities don't measure up to what charity experts would say is an efficient, effective use of money."
Using the charitable income and estate tax laws to attain undeserved tax advantages is not limited to athletes. There are important reasons why tax policy encourages individuals to give to charities and thereby reduce the government's role to support the poor, and provide support to education, scientific, health and other worthy charitable purposes. But these public policy reasons are subverted when the charitable laws are ignored. Often times the failure to comply with the law exists when high net worth individuals create private foundations, as was the case in most of the scenarios described in the Outside the Lines investigation.
What are the typical problems?
--Foundations are required to distribute a percentage of their assets each year, typically 5%. Often, no money is distributed.
--Individuals working for Foundations are entitled to a fair salary. However, often salary is excessive and little or no services are performed. Not surprisingly, the "employees" are often friends and family.
The moral of the story: don't create and fund foundations (or other charities, such as donor advised funds or supporting organizations) without a true charitable intent. Further, even with the appropriate charitable intent, rely on legal and accounting help to ensure the charity is operated properly.
The failure to properly utilize the Foundation will result in public embarrassment, loss of tax exempt status, and civil and even criminal penalties.