Foundation vs. Donation: The Hidden Pitfalls of Hollywood Giving
As everyone from Angelina to Letterman boasts of personal organizations, experts warn of tax dangers -- says one lawyer, "I've tried to talk them out of it."
This story first appeared in the Aug. 2 issue of The Hollywood Reporter magazine.
Brad Pitt and Angelina Jolie like to swoop in with relief aid after disasters. Elton John and Bono have ambitions to reduce public health crises. George Lucas cares about education, and Alec Baldwin is generous to the arts.
Despite diverse philanthropic interests, these celebrities have one thing in common: They give via their own charitable foundations. A 2010 survey by Forbes estimated that a quarter of top celebrities have helped humanity (and burnished their reputations) in this manner.
In doing so, the likes of Jerry Seinfeld, Michael Douglas and Martha Stewart have bypassed more direct routes to charitable giving, even though those options might be more beneficial from a tax perspective. In fact, experts say there often are better advantages in cutting checks directly to established public charities. As much as 50 percent of adjusted gross income may be deducted for such contributions, compared with a 30 percent limit for money given to private foundations. Yet few celebrities can resist the allure of having their own foundation.
"I've tried to talk them out of it," says Brad Cohen, a tax and wealth-planning attorney at Venable. "I speak to them about their motivations and tell them to realize that often the best way to create the most impact is not to form a foundation."
What drives charitable celebrities to foundations instead of alternative vehicles like donor-advised funds, say experts, is a desire to be associated closely with a cause. Yes, a foundation enjoys certain tax advantages: the ability to deduct contributions while still overseeing the funds; structuring deductions so they can be spread over many years; and sheltering assets from estate taxes. But the chief advantage of starting a foundation is control.
To qualify for tax-exempt status, a foundation must give away at least 5 percent of its money each year. This often happens through donations to other charities. For example, when Lucas sold his company to Disney for $4.05 billion in October, he indicated he would give the bulk of proceeds to The George Lucas Educational Foundation. That organization then will be required to disburse money. In the past, Lucas' foundation has donated to his alma mater, USC, as well as The Film Foundation and Stand Up to Cancer.
But that's not the end of the responsibilities. "The philosophy of the government is, if you are a public charity, you have eyes looking at you," says Jeffrey Davine, a tax attorney at Mitchell Silberberg & Knupp. "But if it's a private [foundation], there's not as much scrutiny -- therefore the government says, 'We are going to impose additional rules and restrictions.' "
Consequently, for a foundation to prove it is living up to its mission, it must account for its assets and disbursements each year -- and, contrary to some expectations, it must file tax returns to show its activities. Mary J. Blige failed to do so in 2010 and ran into tax trouble.
Foundation namesakes also can be flagged if the organization's assets are commingled with personal funds. It usually is frowned upon when the celebrity pays himself or herself from the foundation's largesse. From 2007 to 2010, the IRS filed three tax liens against Wyclef Jean because his Haiti foundation was paying the musician to rent the Manhattan recording studio he owned. In 2011, Madonna's giving reportedly was investigated by the IRS for enriching a family connected with Kabbalah.
It's seen as a good thing in charity circles when a foundation is efficient with money. David Letterman, Steve Martin and Ron Howard have been praised for lending their names to foundations without much overhead. On the other side are Oprah Winfrey, Jane Fonda and Rosie O'Donnell, whose foundations have higher-than-normal expenses. But limiting spending shouldn't come at the expense of complying with rules.
"I find that a lot of donors who create foundations are very cost-conscious," says Darryl Cluster, a tax and estate-planning attorney at Greenberg Glusker. "But maybe when it comes to keeping records, corporate minutes and other things, they don't spend enough."
Beware: Few gaffes are more toxic than being associated with a failed entity that was established with the public expectation of doing good. Warns Cluster, "For celebrities, it's one of the more transparent activities they are involved with."