By Shelley Kostrunek, CMFC, CRPC

Occasionally in your practice you encounter an individual who has already done a good job with retirement, business and estate planning. The children are grown, and trusts have already been established for the benefit of the grandchildren. Your client would now like to look at philanthropic opportunities to benefit a favorite charitable organization. Using a 529 plan as a scholarship fund can be a great place to start, but have you thought about the benefits of setting up a 501(c)(3) nonprofit organization as the owner of the account?

As a refresher, a 501(c)(3) organization is a tax-exempt organization that is established as a “charitable organization.” Organizations described in IRC Section 501(c)(3) are eligible to receive tax-deductible contributions in accordance with IRC Section 170. Assets of the organization must be permanently dedicated to the charitable purpose and cannot revert to the donor.

Charitable organizations are the one exception in the 529 code that does not require a beneficiary to be identified at the same time an account is established. This means that a wealthy family can establish its own 501(c)(3) nonprofit organization and fund a 529 plan without identified beneficiaries. Family members can be on the board of the charity and determine to whom they want to award scholarships. It’s simple and accommodates the family’s intent to provide scholarships for “nonfamily” students. For example, Grandma or Grandpa might have an interest in the local scouting program or 4-H group, look for candidates among student athletes from their alma mater, or consider the many worthy organizations that help handicapped youth. The possibilities are limited only by your willingness to contribute. Imagine how proud family members would be at the annual banquet for the organization when they are able to announce and present the scholarships to worthy candidates. After Grandma and Grandpa have died, the family can continue its legacy as a loving remembrance.

Why a 529?
You may wonder why I suggest using a 529 college savings plan to fund the scholarship program. After all, charitable organizations don’t pay income tax on investment income; so it is a fair assumption that they wouldn’t be interested in a program that is tax favored. And scholarship programs can certainly be administered in other ways. But consider this: A 529 plan offers professional investment management as part of its goal to invest contributions for future college expenses. There is no need to employ anyone to act as the corporate trustee. And 529 plan sponsors are willing to send contributions directly to the college that your scholar will be attending at your request. The scholarship is tax free to the recipient and a single 529 account can be used to provide for all the scholarships the foundation awards. The account is not subject to the limitations on contributions that apply when a parent or grandparent establishes an account for a single beneficiary.

Establishing a 501(c)(3)
So, how does your client establish a nonprofit entity under Section 501(c)(3)? If you have Internet access, simply go to the www.irs.gov site and download Publication 557. The forms required to apply for 501(c)(3) status for a foundation are detailed on page 57. Your client will need Form 1023, “Application for Recognition of Exemption under Section 501(a),” to apply for the status, and an annual 990 return will need to be filed each year after establishment. Before your client applies on Form 1023, she will need to obtain a Form SS-4 so that she can be issued an employer identification number. An EIN is required for exempt organizations. The application must also include articles of incorporation and a description of the purposes and activities of your organization and a proposed budget for two years. In addition, your client will need a financial statement for the current year. If she is going to be represented by an attorney or a personal representative, she will need to complete Form 2848. Lastly, she will need to complete Form 8718 and attach the user fee for an exempt organization determination letter. This fee is $500 if her donations are going to be more than $10,000 annually, and $150 if she plans on annual contributions of less than $10,000.

Ease of use, meeting charitable goals and preserving a family legacy all seem to come together with this planning idea. For these reasons, you should consider combining the use of professionally managed 529 college savings plans with establishing a 501(c)(3) charitable education foundation for your high-net-worth clients.

If you would like to learn more about philanthropic pursuits, you will find that The Chronicle of Philanthropy is an excellent resource. This is a newspaper that nonprofit organizations use to detail fund-raising, grant and gift information. Subscriptions are available on http://philanthropy.com.

Shelley Kostrunek, CMFC, CRPC, is senior investment products consultant for advanced sales with Mutual of Omaha. (800-228-2499, ext. 2522; member, NAIFA, Omaha)

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