The Department of the Treasury has released the Treasury Green Book for Fiscal Year 2017, which provides explanations of the President’s budget proposals. One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 240 of the Green Book and is re-printed here for your convenience:
REFORM EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE FOUNDATIONS
Private foundations that are exempt from Federal income tax generally are subject to a two percent excise tax on their net investment income. The excise tax rate is reduced to one percent in any year in which the foundation’s distributions for charitable purposes exceed the average level of the foundation’s charitable distributions over the five preceding taxable years (with certain adjustments). Private foundations that are not exempt from Federal income tax, including certain charitable trusts, must pay an excise tax equal to the excess (if any) of the sum of the excise tax on net investment income and the amount of the unrelated business income tax that would have been imposed if the foundation were tax exempt, over the income tax imposed on the foundation. Under current law, private nonoperating foundations generally are required to make annual distributions for charitable purposes equal to five percent of the fair market value of the foundation’s noncharitable use assets (with certain adjustments). The amount that a foundation is required to distribute annually for charitable purposes is reduced by the amount of the excise tax paid by the foundation.
Reasons for Change
The current “two-tier” structure of the excise tax on private foundation net investment income may discourage foundations from significantly increasing their charitable distributions in any particular year. An increase in a private foundation’s distributions in one year will increase the foundation’s five-year average percentage payout, making it more difficult for the foundation to qualify for the reduced one-percent excise tax rate in subsequent years. Because amounts paid by foundations in excise tax generally reduce the funds available for distribution to charitable beneficiaries, eliminating the “two-tier” structure of this excise tax would ensure that a private foundation’s grantees do not suffer adverse consequences if the foundation increases its grantmaking in a particular year to respond to charitable needs (for example, disaster relief). Such a change would also simplify both the calculation of the excise tax and charitable distribution planning for private foundations.
The proposal would replace the two rates of tax on private foundations that are exempt from Federal income tax with a single tax rate of 1.35 percent. The tax on private foundations not exempt from Federal income tax would be equal to the excess (if any) of the sum of the 1.35- percent excise tax on net investment income and the amount of the unrelated business income tax that would have been imposed if the foundation were tax exempt, over the income tax imposed on the foundation. The special reduced excise tax rate available to tax-exempt private foundations that maintain their historic levels of charitable distributions would be repealed. The proposal would be effective for taxable years beginning after the date of enactment