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Author: Cschultz Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121144  
Subject: Charitable Foundation & investments Date: 12/6/1998 11:37 AM
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My husband and I are setting up a charitable foundation in which our investments can grow untaxed.
We are working with a lawyer,accountant and financial advisor to set this up. We would like to manage the investments if at all possible. Our plan is to contribute $100k per year out of our currently taxable account into the foundation for a total of $500k. Our strategy is to have 4 separate foolish 4 accounts in there, each purchased during a different quarter of each year, to be turned over as normal, each at the end of 1 year of holding. The last $100k could possibly be some blue chip companies. This foundation would probably need money taken each quarter when that particular fool 4 turned over, and put into a money market account in the foundation for expenses and donations. Our question is this..does this sound like a good portfolio strategy? Our financial planner is suggeesting that we farm out our money to 3 or 4 money managers that each specialize in a particular investment style that fits with our plans and needs. It's expensive and it would require our portfolio to make more money just to make up the management costs. We don't mind paying for it if it's worth it but we've already been burned by a portfolio manager who wasn't worth it and we're a little hesitant to get into it again with someone else.
I would appreciate a reply if anyone has done anything similar with more than one foolish 4 account and how it worked out. Remember,this will be in a tax-free account so the turnover won't matter.
In our taxable account, We plan to keep blue-chip companies and also a percentage of high-tech related companies.
Thank you very much for any replies.
C&D Schultz
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Author: gapfan Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6812 of 121144
Subject: Re: Charitable Foundation & investments Date: 12/7/1998 4:16 AM
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Reply to #6794:

This is not exactly what you are asking but I set up Charitable Remainder Trusts and Pooled Income Funds within the trust. There were several tax advantages for me. The information is in Post #10,11, and 14 in the Retired Fools postings.

There was no fee for setting it up and the management fee is 1% per year in addition to mutual fund fees. You could check details at the Fidelity site.

Hope this gives you information you might use. I have been very well pleased with these trusts.

Good Luck, Gapfan :-)

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6817 of 121144
Subject: Re: Charitable Foundation & investments Date: 12/7/1998 10:57 AM
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[[Our question is this..does this sound like a good portfolio strategy? Our
financial planner is suggeesting that we farm out our money to 3 or 4 money managers that each
specialize in a particular investment style that fits with our plans and needs. It's expensive and it
would require our portfolio to make more money just to make up the management costs. ]]

Congrats on your foundation. I have a number of clients that also take this approach to charitable giving. Many other of my clients use something akin to the Fidelity Charitable Gift Fund. The gift fund is MUCH less expensive to establish and maintain than a full blown charitable foundation...and basically accomplishes the same thing for the small investor.

As far as your investment strategy question, I'm afraid that I'm unable to provide you with any real answers. I have a deal with the main Fools at HQ: they don't answer tax questions, and I don't answer investment question. Perhaps some other Fools can stop by and give you their thoughts.

Or you migh consider re-posting this message in the "Fools and Their Money" folder, or even the "Foolish 4" folder. You may get a great many more responses there.

Sorry for the non-response...
TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6834 of 121144
Subject: Re: Charitable Foundation & investments Date: 12/7/1998 12:12 PM
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[[There was no fee for setting it up and the management fee is 1% per year in addition to mutual fund
fees. You could check details at the Fidelity site.]]

Thanks for your thoughts, Gap...

My clients have also been please with the Fidelity Gift Fund. Easy to set up. Only minor administrations fees. Big time flexibility. It really is a great deal.

TMF Taxes
Roy

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Author: KATinChicagoland Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6842 of 121144
Subject: Re: Charitable Foundation & investments Date: 12/7/1998 2:46 PM
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Like Roy, I stay away from giving investment advice. However, you should be aware of a potential tax problem with adopting a Foolish Four approach to investing foundation assets.

Private foundations are subject to various regulations designed to protect their assets. No doubt your advisors have mentioned at least some of these, such as the rule against self-dealing. One of the rules imposes a penalty tax with respect to investments that jeopardize the charitable purposes of the foundation. The notion is that when you're handling funds held in trust for charity, high risk or speculative investments aren't appropriate. You're not supposed to be taking risks to beat the market; you're supposed to be growing the assets in a prudent way.

There's no bright line that tells you when you're doing something that violates this rule. No particular type of investment is forbidden outright, although investments that are traditionally viewed as being risky (e.g., short selling, trading in options) will be closely scrutinized. One of the factors set forth in the regulation is whether the investments are appropriately diversified. I think there's a possibility that a private foundation that was invested exclusively, or even primarily, in the Foolish Four (even in rotating portfolios) could be viewed as not being properly diversified.

I'm not saying you have to hire a bunch of investment managers--the rules don't even imply that that's necessary. And I'm not saying you can't use the Foolish Four for some of the foundation investments. But I would be nervous about using FF as heavily as you indicate, because the world at large doesn't necessarily subscribe to the FF theory, and even among those who do, many would counsel more diversification.

If push comes to shove, the IRS can impose a 5% penalty tax (5% of the amount improperly invested) on both the foundation itself and the managers who permitted the improper investment (in other words, you). I'm not saying that's likely to occur, but it's a possibility you want to eliminate. There's a more painful second-tier penalty tax if the problem isn't promptly corrected.

I generally tell my clients they shouldn't deal with all the headaches of a private foundation unless they plan to put in at least $1 million. It's not unreasonable to do one for $500,000, but at that level you certainly don't want to buy any unnecessary problems.

Kaye Thomas, author
Fairmark Press Tax Guide for Investors
http://www.fairmark.com

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