Plan Islam » Advanced Planning

Islam and Private foundations: It’s a lot of work. Is it really worth it?

Ahmed Shaikh — Sat, 19 Jun 2010 00:48:44 +0000

Any family considering a “private foundation” should do so only after significant thought has been given to the charitable goals the foundation is supposed to undertake as well as a the level of commitment the family willing to bring to the table.

It’s a lot of Money

Many well-informed practitioners have recommended to their clients at least a $500,000 initial commitment to the foundation to get going. A recent article in Trusts & Estates magazine (subscription required) is the initial figure at $3 million with a “willing and able” contribution threshold of $5 million. There is a substantial upfront costs including the necessity to prepare documents federal and state filings and ongoing administrative expenses for recordkeeping, grant-making and continuing filings.

It’s not all about Taxes

A private foundation is really not the best vehicle for somebody who is solely, or even primarily interested in a tax deduction. There are other vehicles that provide tax deductions that may be better targets to explore.

It does make sense however to strategically time the contributions in order to maximize the allowable tax deduction. coordination with a tax advisor is necessary in order to make sure that this happens correctly.

Growing the Pot

With a private foundation, you essentially have a charity with some restrictions. These restrictions exist because of private foundation typically is not a charity that does its own charitable things, rather it is a grant making organization that provides grants to other charities. Furthermore, its controlled by a family leaves open the possibility for abuse. In fact, private foundations have been abused frequently and have been subject to some congressional, media and IRS scrutiny.

Even so, since we are talking about a charity, assets inside the charity will tend to grow tax-free or subject to a relatively small (1% or 2%) excise tax on net investment income.

The authors of the article cited above state that while this is usually true that growth is greater inside a foundation then in a taxable account, it is not always true. Much of this has to do with the types of assets that may be donated to the foundation.

In all instances, it is necessary to have an overall strategy, including an investment, tax and charitable strategy in order to make this particular type of arrangement work.

To DAF or not to DAF

Donor advised funds typically offer less of the financial and time commitment than a private foundation (though the numbers provided above were simply guidelines, not hard and fast rules) and are in many cases, a better fit than private foundations.

Of course, as a charitable giving plan would have to be part of an overall integrated strategy, every strategy will have to be thoroughly tested and evaluated.

The article cites the bankruptcy of “the National Heritage Foundation ”where bankruptcy court decided that all of the donor advised funds assets were available to satisfy creditors claims. This means that the philanthropist who gave money out for the purpose of charity ended up giving to creditors of the company they decided to operate their Donor Advised Fund.

Undoubtedly, for many philanthropists, this may well be a dealbreaker on donor advised funds.

Charity: Vanity in giving

Ahmed Shaikh — Fri, 07 May 2010 01:28:31 +0000

An interesting argument by William Drennan in the Alabama Law Review, proposing a limit by with the name of a charity can be modified. It starts and makes reference to one of my favortte examples of testamentary excess, Leona Helmsley's gift to the dog world.

People put their names on all kinds of things, charities and private organizations are willing to oblige. The international star registry comes to mind. While much of this is harmless, the article does point out some of the costs to society, especially over centuries.

Eventually, the name of the person who founded a charity may have to give way to the cause that created the charity in the first place. The two can be at odds with each other in ways that I did not realize. Its worth a read.

However the damage can come sooner then anyone expects, as Mr. Drennan points out with the example of a business school's name being associated with a person who came to be known as a corporate villain.

A proposal of a 50 year limit for the name of a vanity charity seems reasonable and well worth considering.

There are without a doubt reasons to give charity in secret and reasons to give charity in public. However for Muslims who want to give in charity, its best to do away with the vanity names altogether.

Islamic Rules of Inheritance and immortality

Ahmed Shaikh — Thu, 29 Apr 2010 18:23:26 +0000

The Financial Times notes a new book out by Ray D. Madoff called “Immortality and the Law” which is about the ever-increasing rates of dead people to control the rights of the living. Of course, people cannot take their property with them. However, it does seem nonsensical that individuals have a wide range of obligations to their family that simply evaporate on death, forcing family members to become wards of the state. Unfortunately, in the United States, this seems to happen over and over again.

From a positive review of the book, which I should hope to write about in the future in this space, there also appears to be a hostility to charitable foundations. It questions whether this is a net societal benefit. The underlying assumption here is that somehow the government can spend money in a manner that is more likely to benefit society. Given where government funds are usually spent, a small portion of which is really for societal benefit, I would question the underlying assumption.

In the Islamic rules of inheritance, family members have rights to inheritance that cannot be changed by the deceased person during his lifetime. An individual can give their money away during their life, however it cannot be intended to injure the rights of the people who are entitled to inheritance under the Islamic rules of inheritance. Up to one third may be utilized for a beneficial purpose, including charity. The Islamic rules of inheritance provides a middle way between simply allowing for a property owner to engage in his own personal vanities while at the same time,allowing the utilization of resources for charitable purposes as well.

Charity: But your rich! So why don’t you donate?

Ahmed Shaikh — Wed, 28 Apr 2010 00:14:39 +0000

A recent report from Barclay's Wealth (PDF) addresses the concerns of wealthy philanthropists, and why they may be less so. There is a study on why it is those that donate do so. The top reason, "I can afford to." Religious beliefs came in at number 10 (though it came in on top as an "internal motivator." The study concerns the UK and US. It would not make much sense to do a study this way except that Barclay's is a British Bank, and so the numbers may be a little skewed.

The results however were bad overall. Most wealthy people donated less then 1% of their net worth every year, indicative of hoarding, only 1/3 gave more. The economy is not the main reasons the wealthy hold back, though its a factor. Tax policies, how charities are run and the lacking of key motivators are also to blame. Trusts and Estate Magazine summarized the report here (subscription required).

Building an Endowment

Ahmed Shaikh — Sat, 17 Apr 2010 22:23:17 +0000

I recently spoke in Chicago on building endowments for Islamic Schools. Its not an easy subject and in fact, many schools would not be able to set up an endowment as they are too new or too small or do not have enough of a donor base. Before delving into the issue, you want to have the consulting and legal expertise available. Trusts and Estates Magazine has a brief primer on building a better endowment. You can access it here.

A few highlights:

Endowments are not especially common among US charities. While everyone has heard of the giant Harvard and Yale endowments, they are more the exception then the rule. Furthermore, and this is obvious to many, Endowments have taken massive hits recently.

Endowments may have many, sometimes thousands of seperate special use funds associated with them. The purposes of donors in such accounts are governed by state law. Most states have adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Here is a link to a PDF of the act.

The Act uses a "total return" approach to investing, rather then the traditional way, which was looking at income alone. In developing a trust based Waqf, I have looked at removing some of the "default" UPMIFA rules, particularly on investment returns so as to make them more conservative. However the Uniform Act has a good approach and does much to protect endowments. Of particular interest for many in the Muslim community is the difference between they way Trusts and Corporations are treated. For historic reasons, as well as the continued inclination to to develop Islamic Rules of Awqaf by contract, I continue to favor the use of Trusts when developing endowments.

Muslim Community Association in Santa Clara

Ahmed Shaikh — Sat, 14 Nov 2009 07:09:51 +0000

Last Friday we had a wonderful series of programs at the Muslim Community Association in Santa Clara, CA. The programs focused on Waqf, or the endowment bulding process as well as the 1/3 rule in Islamic Inheritance. It also included a brief introduction to Islamic Inheritance.

On Saturday, we had a program called "Islamic Inheritance: Step-by-step." This is a brand new program I plan on doing at other Islamic Centers around the country. It includes a 38 page outline, which I plan to continualy improve and for some programs, expand on. The entire contents of the outline will be adopted for this website in the comming days and weeks. Its an intense program that goes over every major issue that individuals need to tackle when planning based on the Islamic Rules of Inheritance for American Muslims.

Unlike other programs, the Saturday program is not an "argument" for Islamic Inheritance and assumes everyone thinks this is a vital step for their families. In the future, that "argument" may well also be included. It would just have to be a longer program.

Posted via email from Ahmed Shaikh’s stream

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