Dividing Philanthropy on Dissolution of Marriage

• Jurisdiction: California,United States
• Author: Brigit Kavanagh and Cecilia Chung
• Publication year: 2016
• Citation: Vol. 38 No. 3

Dividing Philanthropy on Dissolution of Marriage

Brigit Kavanagh and Cecilia Chung

Brigit Kavanagh is an attorney at NEO Law Group in San Francisco, where she specializes in the law of nonprofit organizations and charitable gift planning, advising charities, foundations, and their donors. She is a frequent speaker on topics including charitable gift planning, endowments, and many aspects of nonprofit and tax exempt organizations and is an update author for CEB - Continuing Education of the Bar California. Ms. Kavanagh is a member of the California state bar and is a member of the Northern California Planned Giving Council; Partnership for Philanthropic Planning; American Bar Association; and the San Francisco Bar Association.

Cecilia Chung is an attorney at Hanson Crawford Crum Family Law Group, LLP, a boutique family law firm with offices in San Mateo and San Francisco. Her practice focuses on high asset dissolution cases, which often involve complex financial issues such as venture capital, private equity, family trusts, equity compensation, and charitable vehicles. Incorporating an interdisciplinary approach to each case, Ms. Chung uses her experience coordinating experts specializing in finance, corporate law, charitable vehicles, tax, and estate planning, as needed, to develop the most effective and efficient path to resolution.

INTRODUCTION

Couples build things together in a marriage. Sometimes they build substantial wealth allowing them to engage in philanthropy. This philanthropy can take several forms, such as establishing a private foundation or a donor-advised fund. The couple may leverage their tax planning objectives by contributing highly appreciated/low basis assets while also achieving their philanthropic goals. When spouses separate, their assets must be divided. But what happens to the couple's philanthropy on dissolution of the marriage? This article provides an overview of the most common types of charitable entities established by high net worth individuals, reviews Family Code disclosure obligations and discovery issues, and explains the issues to be considered in resolving the parties' rights with respect to control of their philanthropic interests in the context of a marital dissolution action.

THE BASICS

What is a charity?

Core to any charitable organization that is tax-exempt under Internal Revenue Code section 501(c)(3) are the requirements that assets received are (i) no longer owned by the donor and (ii) irrevocably dedicated to charitable purposes.

A Charity has no Owner.

Assets contributed to charity are no longer part of the marital estate because the charitable recipient, often a charitable entity, owns them. However, the spouses could continue to have control over the charitable purposes for which the assets are used. This continued control could occur if the charitable recipient is a private foundation whose only directors are the spouses or if the charitable recipient is a donor-advised fund and the spouses are the advisors of that fund. Thus, even though the assets are not technically part of the marital estate, the spouses often have strong opinions about who will control them for both investment and philanthropic purposes during and after dissolution, and not surprisingly, they may not (or no longer) agree. In addition, to the extent that the donors have retained some part of the asset, such as an income stream from a charitable remainder trust, the retained portion must be characterized and allocated in the overall division of the marital estate.

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Summary of Basic Philanthropic Forms

A family's philanthropy can take several forms. Below is a brief summary of the most common types of charitable entities and the unique issues that need to be considered in the context of a marital dissolution action.

Private Foundation. In California, a private foundation is usually formed as a nonprofit public benefit corporation¹ and it is tax-exempt under Internal Revenue Code section 501(c)(3). It is common for the spouses to hold the director and officer positions of a family foundation. Thus, although the assets have been given irrevocably to the foundation, the spouses often continue to control the way the assets are invested and used for charitable purposes. Because they are typically funded and controlled by the same people, private foundations are also subject to strict regulation under the Internal Revenue Code and offer a less favorable income tax charitable contribution deduction than other types of charitable vehicles. Divorcing spouses may no longer agree on investment strategy or...