What is self dealing?

Self dealing is a term that refers to situations where people who are connected with the private foundation derive personal benefits from interacting with the foundation. There are laws against that and serious problems can result both for the donors and other parties as well as for the foundation.

Rules against benefitting personally from a charity have existed in some form for as long as there have been foundations. However, in 1969, Congress established strict official rules against what became self dealing. This happened in response to perceived abuses of foundation insiders.

Among the first things you need to know about this subject is that there are two possible parties to a self dealing situation: the foundation and what is referred to as a disqualified party, or specifically, a disqualified person (“DP”).

What is a disqualified person?

Basically, the term “disqualified person” refers to any person who is not permitted to benefit directly from dealing with the foundation. This includes founders, donors, officers, board members and other insiders of the foundation, along with any person or business who can be classified as a “substantial contributor” to the foundation.

What happens if there is self-dealing?

You may wonder what will happen if the rules are violated. There are penalties, which can be severe, and can range all the way from a 7 ½% tax, to a possible 200% tax, to the loss of the foundation’s tax-exempt status.

So how do you avoid self-dealing?

You basically refrain from engaging in any activities that are not allowed. Unfortunately, this is easier said than done. However, it helps to understand that basically all financial transactions between private foundations and disqualified persons are prohibited. Still, the rules are so numerous that it would be almost impossible to keep track of them all. However, there’s an easier way to manage — by focusing on the exceptions.

What are the main exceptions?

There are two different categories of exceptions, statutory and regulatory exception.

Statutory exceptions are exceptions that are formally included in the statute. Those tend to be “special rules” that were created primarily to allow for transactions that benefit the foundation. Regulatory exceptions are those that are basically accepted by the IRS without being formally included in the statute.

Examples of statutory exceptions include the contributions of indebted property under certain conditions. They also include loans made to the foundation as long as no interest is charged and the money is used to further the foundations tax exempt purpose.

The foundation may also provide a disqualified person with any services, property use, or goods that it also provides the general public.

Are there exceptions that could benefit the donor or the founder?

There are indeed. They include exceptions for payments related to travel, and also reimbursement and “reasonable” compensation for services that are necessary to carry out the foundation’s charitable work.

The latter, of course, provide an opening that allows for targeted travel and activities to be reimbursed — and if the foundation has been created with the right mission, it can allow the founders to pursue a wide range of their interests — and get reimbursed by the foundation.

However, as you can see, with rules that are this complex, it’s generally a very good idea to consult an expert on private foundations before setting up your own foundation. That way, you can ensure that you have the greatest possible access to exceptions, while not running afoul of the many complex rules against self dealing.

The bodies had been annointed and set up at the edge of the river. All of them were completely exposed. They also had gold balls in their mouths, and were decorated with ribbons and a lot of red dye. They actually looked like they were painted with blood, but it really was just dye.

Every day, about 40 to 50 people were cremated at this river. So there was a rather distinctive smell in the air. In fact, when I closed my eyes, I could have sworn I was back in the jungle. You don’t forget that smell.

The people that attended those cremations were typically family members of the departed. Since these were Hindu cremations, they were accompanied by a series of chants as the family gathered around.

I found it very interesting that they allowed me to be right there with the family. No one seemed to mind that I had the camera and took pictures. For some photos, I was just three feet away from the departed.

Among the bodies was a young woman who looked like she was probably just in her 30s. Her family was around her and you could clearly see her face, which is why I could tell how old she was.

The families there tend to be very close, but they don’t have much. If people do have a business at all, it mostly amounts to just having a few things that they sell out of very small shops.

The whole educational process there is based on the same scam that we have in the US. It teaches people that the government is there for everything and will help you, so there’s very little entrepreneurial spirit and activity.

I actually talked with a couple of people about opening a distribution store. And I found that in Thailand it’s even more complicated for foreigners to set up businesses than it is for the people who live there. They have very high tax rates and tariffs.

I need to spend some time figuring out how to get around that. In Thailand at least, certain kinds of businesses can get exemptions from a lot of the tariffs and taxes, particularly businesses that are considered very necessary.

And the same thing applies to Nepal. From what I’ve seen during my travels, the whole concept of free enterprise and laissez faire is really being beaten up there.

So one of the things that I thought that I could do is help people with their own businesses, rather than just sit there and get on a soapbox. You’re not gonna change people’s lives by talking to them in a condescending manner.

But you can make a difference if you can actually open up a business and help people acquire wealth, and more directly, get them to think about what they want to do with their lives.

Here’s a case study:

Recently, I was working with “Dave” (not his real name). He was an executive at a large Silicon Valley tech company. Part of his compensation package included incentive stock options and also non-qualified options.

Dave had been working “24/7″ for more than five years. He had been sacrificing his personal needs in the process. He had also gone through a particularly nasty. His “plan” was to keep working for another five to ten years.

As I was talking with Dave, I discovered several interesting things about him. He liked kids, though he had none of his own. He also enjoyed sports, particularly golf, although he hadn’t played in years. It had been a very long time since Dave had allowed himself to have fun.

He was very concerned about his current tax issues. Earlier in the year, he had exercised and then held about $1.5 million of company shares of stock. He had been told to expect a tax bill exceeding $500,000.

To find a solution, we completed a Macro Strategic Plan. This is a life plan that includes defining one’s vision and goals, and then proceeds to implementing those objectives by utilizing proper structures and tactics. Here’s how Dave executed part of his Plan:

1) He sold about 70% of his shares of stock, converting enough of the previous potential AMT to ordinary income. This left him with about $1,050,000 of ordinary income, more than enough to offset the potential AMT on the remaining unsold shares.

2) Dave set up a private foundation with himself as the founder.

3) Subsequent to setting up his foundation, Dave contributed $500,000 in cash to the charitable entity.

Since Dave was interested in kids and sports, he set up his own charitable program that helped handicapped children learn how to golf. His foundation could subsidize the costs of special equipment, the time to perform due diligence on the types of courses best suited for handicapped children and subsequent educational programs to integrate physical therapy programs

Implementing the above plan allowed him to offset $500,000 of income. Because that $500,000 was contributed to his foundation, and because Dave was the director of his foundation, it was Dave who controlled how the assets in his foundation were managed.

In addition, Dave was able to combine his interest in children and sports by helping handicapped kids learn how to play golf. By starting his foundation, he managed to resolve his financial issues and at the same time achieve a personal dream as well. He was able to integrate his strategic planning goals with his vision and values.

That’s the beauty of private foundations. They can help you integrate your values and vision into strategic planning. They can also help pay for pursuing your interests and save lots of taxes, all while making a real difference in the world.

If that interests you, click on that yellow field at the top right of this page and get a
free chapter of my guide private foundations for wealth management. If you have questions, I’ll be happy to talk with you. Just call me at 702-247-6809.

Don’t just jump into setting up a private foundation without very careful research and soal searching. It’s a big commitment. You and your family have to be very clear about what’s involved. And then, there’s that most important issue of all: You have to choose the right goals.

What are your true goals in life?

A foundation is forever, at least almost. So you’ll need to be ready to stick with your foundation for the long haul. That’s why it’s so important that you choose the right goals. And those goals must be truly yours — plus they need to have staying power.

What happens if you skip that step? The number one problem I’ve seen with people setting up foundations is that many of them neglect that crucial step and focus strictly on the immediate tax benefits, which can be substantial. Unfortunately, that can easily get in the way of developing a real philanthropic program.

Instead of selecting activities that are truly exciting to them, those people take on programs that they believe are more politically correct. As their enthusiasm wanes, their commitment generally wanes as well.

If you want to avoid having that happen to you and your private family foundation, you should think seriously about what exactly you would really like to accomplish. What are the activities they would like to be able to do as part of your work for the foundation?

Do you enjoy gourmet cooking? Are you interested in exploring other cultures? If so, you should work on finding ways to incorporate those into your foundation by building it around those activities. You could for example set up a foundation that provides international gourmet cooking classes for economically disadvantaged teenagers.

As you pursue activities that are of real interest to you as the founder and your families, your private family foundation becomes a mechanism where you can legally tax leverage and institutionalize your hobbies and passions.

If you get that part right and you have carefully integrated your foundation in your overall life plan, working with it can become so rewarding that the considerable commitment involved won’t be too much of an issue.

To find out more about it, just click on that yellow/golden square at the top right of the page and get your free sample chapter from the ultimate guide to using private foundations for wealth management, written by yours truly. And I’ll be very happy to talk with you if you should have any questions. Just call me at 702-247-6809.

Please mark each of the following statements as either true or false:

1. The main reason for creating a foundation should be the resulting tax savings.
2. Setting up a foundation is similar to setting up a corporation.
3. A private family foundation would make a terrific Christmas present for my family.
4. If I don’t like my foundation anymore, I just close up shop.
5. Done correctly, a foundation can be very rewarding and bring the family closer together.
6. It’s important to focus on political correctness when picking a purpose for the foundation, whether I like the activities involved or not.
7. A private foundation is private, so there are few if any reporting requirements and administrative hassles.

Answers

1. False. Tax savings may be one of the benefits, but you should focus first and foremost on what you’re passionate about and make that the mission of your foundation. To make your foundation work rewarding, you need to find a way to integrate it with your own passions and your life. Many of the tax savings actually come from your being able to pursue your passions on pretax dollars.

2. True. Setting up a foundation is very much like setting up a corporation. In fact, a foundation is generally set up as a corporation. There’s also a significant amount of legal and administrative work that must be done on an ongoing basis.

3. False. A foundation is a huge commitment. Unless your family has been closely involved in the decision making process, and is deeply committed to the foundation, it won’t work. “Surprising” your family with a foundation is a very bad idea.

4. False. A foundation, like a corporation, is a long-term commitment. It becomes an entity of its own. You can’t just start and shut them down at will.

5. True. If your foundation is truly built around your passions and those of your family, and is well integrated into your life plan, it will likely be very rewarding. And working together on a shared passion is bound to result in a closer relationship between you and your family.

6. False. Absolutely not. You must create your foundation around your own passions, not around what you perceive to be the politically correct issue of the moment. If you don’t, you will lose interest very quickly, and your foundation will become a chore, and maybe a nightmare.

7. False. The name notwithstanding, a private foundation is subject to numerous requirements. For example, there are reporting requirements, legal and administrative requirements, as well as requirements about disbursing funds to charities or for charitable activities.

The Results

So what’s your score? If you have answered at least 6-7 questions correctly, you may be ready to take the big step. Be sure to get all the facts, though, so your foundation will become the rewarding experience you deserve.

However, if you answered fewer questions correctly, you should start by getting more information on private foundations. You need to find out how they really work and what is involved.

A private family foundation can do far more for you than just save taxes — and you get to make a real difference in the world. But you have to make sure that you integrate it with your passions — and your life.

If you want to make sure you get all the details right, get your free sample chapter from my ultimate guide to using private foundations for wealth. Look for it in the yellow/golden area at the top right of my blog.

And if you want to know more, feel free to call me at 1-702-247-6809. I’ll be glad to talk with you about whether a private foundation could be right for you.

You’re in the right place. It’s been my mission for years to help my clients and myself save on taxes. There’s no reason to give Uncle Sam more than he’s due!

Here’s why I’m so interested in saving on taxes: I’ve been there myself. Believe it or not, I used to pay way more than my fair share to the IRS.

So I fully understand what you’re going through. And I have a secret for you:

These days, I am basically living on pre-tax dollars, legally, and so can you.

Check this out:

There are quite a few things you can do to save a ton of taxes.

And this is good news, especially if Uncle Sam has been grabbing far too big a chunk out of your income. Why not put an end to that right now.

So instead, let’s use the powerful tax saving secrets of the wealthy.

What are these secrets? Let’s start with these two:

1) Start your own business

Yes, start your own business. Don’t be intimidated now. It doesn’t have to be a big business (yet). If you already have one, be sure to learn how to run it more effectively with respect to saving on taxes. This is a tax saving move that can be used by almost anyone, no matter which income bracket you’re in.

2) Start your own private foundation

Start my what? Relax. This may or may not be the right move for you.

But here’s a scenario where you might want to consider it: Do you have a substantial amount of money that Uncle Sam wants to get a big piece of and you would also like to fund expensive activities you enjoy — preferably with your foundation’s pretax dollars. It is also a way that you can “institutionalize” your hobbies and have the government subsidize your activities.

As I said, starting a foundation is not the right move for everyone, but starting a business is absolutely something anyone can and should do.

If you don’t have a business yet, it’s high time to start working on setting one up. And if you do have a business, take a good look at where you may be throwing money to Uncle Sam.

So if you want to save taxes, at the very least look into either starting a business or running the business you already have more tax effectively. Or both.

Want to know exactly how to do that? Start by checking out some of my resource materials for how to save taxes (click on the tab above). You can also get a free chapter of my Private Foundation “bible” — just click on the top right yellow area.

And, of course, you’re welcome to call me for a free tax strategy session at 1-702-247-6809. You may be surprised how much money you’ve been throwing to the Feds. Why not start hanging on to it — legally.

I understand how you feel. In fact, I’ve been helping my concerned clients for years with unique ways to find funding for college. Let me share with you some of the college funding secrets the financial aid officers won’t tell you about.

Using these secrets, you won’t have to spend your life savings just to send your child to college. Now don’t misunderstand me. I’m all for sending them off to college. But why not at least get all the financial aid money you can? After all, you have your own retirement to prepare for, right?

I bet you don’t think you qualify for financial aid. Think again. There are many ways in which people can arrange their finances so they will qualify for financial aid. Even if you think you make way too much, chances are excellent that you can still qualify for financial aid.

You just need to use a few powerful college funding solutions secrets that will make a real difference to your financial health.

What are these secrets? Let’s start with these two:

1) Don’t assume you make too much money to get financial aid

This doesn’t sound like a great big secret, but you wouldn’t believe how many people don’t know that. Most people who have accumulated any wealth at all have no idea that there are advanced ways to qualify for financial aid.

After all, the financial aid forms are practically designed to make you believe you’re earning too much to be eligible for any free money. Yet there are ways to plan ahead and to fill out those forms correctly that may well make your child a prime candidate for financial aid.

But don’t count on high school guidance counselors to tell you about it. They don’t know any of the secret strategies. As much as counselors care about kids, these strategies are really beyond the scope of their capability. If they could, they would tell you to…

2) Transfer wealth from “countable” assets to “uncounted” assets

Did you know that only certain assets count as family wealth for determining how much financial aid your child can get? The trick is to transfer your wealth into assets that do not count against you for purposes of financial aid. One of those assets is Cash Value Life Insurance.

Life insurance? Yes! It’s one of the best kept college planning secrets around. Here’s how it works:

You “overfund” your cash value life insurance (the traditional variety). This will allow its value to accumulate on a tax-deferred basis. You’ll also be able to withdraw the money tax free later. If you choose your life insurance policy carefully, you can get safety with a decent rate of growth. And if your child ends up not going to college, the money will basically translate into tax free retirement funds — for you.

And here’s the big bonus for this college funding approach – you get all that extra life insurance protection as part of the bargain!

So what do you think? Still worried sick? Don’t be. You can send your kids to college without going broke and without paying thousands of extra dollars.

And if you want to know how to do that in more detail, I’ll be happy to talk with you. Just call me at 702-247-6809 and we’ll talk about ways you can transfer your wealth from “countable” assets to assets that don’t count against you.

You may be surprised by how much money you could be throwing away. Why not start hanging on to it instead — legally? I’ll be glad to help.

First of all, you need to remember that the 401k limits for your retirement account can (and usually do) change from one year to the next. This is supposed to keep up with rising costs, rising rates of pay, and anticipated increases in the cost of living once you retire.

What do these changing limits for a 401k mean for you?

Since the limits tend to change upwards, those changes give you the opportunity to invest even more money in your retirement account. If you’re investing with a traditional 401k, this means you can put away more money before you pay your taxes each year. In fact, these contributions can sometimes change your tax situation quite significantly in some instances.

Why are the 401k limits a flat rate rather than a percentage of your income?

It’s really meant to be an effort at fairness. With flat rate limits, everyone receives the same benefits from good old Uncle Sam and no one receives favored treatment simply because of a higher income (and the ability to squirrel away a much larger sum of pre-tax dollars for retirement).

The flat rate may seem small but when invested properly with growth in mind initially, and with generating wealth in mind later, you can build quite a nest egg without being terribly restricted by 401k limits.

What are the current 401k limits?

The 2009 limit as well as the 2010 limit for contributions to a 401k for employees who are 49 years of age or younger is $16,500. That is subject to change as adjustments are made on a yearly basis.

Employees who are 50 or older are allowed what is called a “catch up” contribution. The amount for this is currently an additional $5,500, for a total of $22,000. Since these limits will likely change for 2011, be sure to check for the latest numbers at that time.

What about 401k deadlines?

What is the deadline for making 401k contributions? You may know that you have until April 15 of the folllowing year when you put money into an IRA. That’s not the case with 401k accounts! For those, you will have to make any contributions by the end of the same calendar year.

So if you want to make contributions for 2010, be sure to make it by December 31st of 2010, i.e., the year for which you want them to count. Don’t miss your 401k deadlines or else you’ll lose out on the deductions.

What about Roth 401k Accounts?

Roth 401k accounts are different from the traditional 401k accounts. Here, the money is contributed from your after tax income. There’s a plus side, however: once you retire, you can withdraw that money tax-free. Or you can keep it where it is and let it earn some more money for your later years — or your heirs. The limits and deadlines are the same as for the traditional 401k.

To Roth or not to Roth?

Whether you choose to invest in a traditional 401k or a Roth 401k or both, the limit for your 401k contributions applies to the total amount you contribute to the traditional 401k and a Roth 401k together.

In other words, you cannot double your contribution by contributing to both types of 401k, but you can choose how much you contribute to each kind, up to the maximum limit allowed for both together. Going over your 401k contribution limit can result in stiff taxes and penalties, so avoid this at all costs.

How Can You Get Help?

Fortunately, there are financial advisors including myself who can help you work your way through the details. We are here to sweat the small stuff so you won’t have to.

Be sure to get help from a financial advisor who specializes in overcoming 401k contribution limits by helping you to invest in alternative investments that can yield a much higher return with excellent safety. How would you like the historical 14% return from a safe, unique investment alternative, for example?

This can be especially powerful inside Roth accounts, which high income earners can finally take advantage of in 2010. So if you’d like to know more about how to supercharge your 401k, especially by way of Roth conversion, I’ll be happy to talk with you. Just call me at 702-247-6809.

As a private wealth management advisor, I have been helping clients from both categories. Some of my clients have already accumulated considerable wealth and would like to hang on to it. And I also have clients who are still on their way to wealth and need strategies for how to get there.

Either way, there is one crucial ingredient that I insist on. Anyone who wants to work with me needs to know the answer to the following question, and so do you: Why exactly would you like to be wealthy, and what exactly would make you feel wealthy?

Don’t laugh now. This isn’t as stupid a question as you may think. Sure, there’s the comfortable lifestyle and financial security. But there are huge differences in terms of what “comfortable lifestyle” may actually mean to any particular person.

So your answer to that question can make the difference between arriving where you’d like to be — or not. You need to become very clear about what exactly a “comfortable lifestyle” means to you. Does it mean living in a villa in Beverly Hills? Or does it mean living comfortably any place you want to live, such as Costa Rica, for example? The latter may require much less money than the former.

You should also think about what you would like to do in your ideal life. Think about it! If money were no object, what is it that you would really want to do?

Do you see yourself playing golf, traveling, or pursuing other passions? Do you want to make the world a better place? Or do you mostly want to get the kids through college without going broke?

The thing is, you can achieve any of these on various amounts of money, depending on how exactly you go about them. It won’t necessarily take millions to feel like you’re living a millionaire’s lifestyle — if you know what you’re doing.

Not that there’s anything wrong with being “really” wealthy. But you can achieve a wealthy lifestyle — without overspending! — long before you have amassed a huge net worth. But only if you have the proper guidance.

So before you start focusing on the financial aspects of being wealthy, why not start focusing on the lifestyle you want to achieve?

Take some time out and think through some of the following questions:

1) Where would you like to live?

2) What would you like to do?

3) If there were any one thing you would like to achieve, what would it be?

4) Who would you like to spend time with?

Write down the answers. And add as much detail as you want.

Next, figure out where you are right now and how you can get from where you are to where you would like to be — and how far along on that journey you’d like to be by the end of 2010. What will it take?

If you do have a high net worth, you’ll probably have more flexibility. Still, there are important aspects to keep in mind to ensure that your wealth will be protected and allowed to grow.

If you’re still working on building up your assets, you’ll have to work harder when it comes to figuring out how to get to your goals.

However, there are several things you can do to increase your net worth significantly. These can include saving on your child’s college education, saving on taxes, as well as increasing your income. An experienced wealth management advisor will be able to help with any of these.

These questions are just a few of the ones you need to answer for yourself to guide you in planning your wealth management strategies for 2010.

If you’re ready to escape the daily grind and achieve real wealth for all the right reasons, click here to get my FREE guide that coaches you through discovering your ideal lifestyle design, which is the first step of getting there. Feel free to call me too, at 1-888-490-8200, if you’re ready to live your dreams.

Sure, you’re strictly limited in the amount of money that you can set aside in an Individual Retirement Account. But that shouldn’t stop you from investing elsewhere and doing very well. It’s just that those other investments, except for 401ks and such, won’t give you the same benefits as an IRA.

Don’t Let IRA Contribution Limits Restrict Your Retirement Options

Of course, I hope you realize that IRAs and 401ks are not meant to the ONLY form of retirement planning you do. They are meant to supplement your other efforts. To ensure a comfortable retirement, you’ll have to put aside a lot more money than will fit into an IRA — and a 401k — taken together. Then again, if you start early, it won’t be nearly as hard since you get to benefit from decades of compounding yield — just as long as you invest your money wisely.

Max out Your Current Contribution Limits for IRAs

You definitely should take advantage of every penny the government lets you contribute to IRAs. In 2010, the maximum contribution that investors under the age of 50 can make to their IRAs is $5,000. If you are 50 years of age or older, you’ll be allowed to invest an additional $1,000 for a total of $6,000 each year. So if you’re getting closer to retirement, you get to play catch-up.

IRA Limits Encourage Diversity in Retirement Planning

It’s almost hard to believe, but the fact is that Individual retirement accounts actually encourage more aggressive investing. And those aggressive moves can pay of nicely if you’re lucky. But because it’s a limited amount of money that you’re putting at risk, losing out won’t put you in the poor house either.

Self-Directed IRA Give You Access to Non-Traditional Options

Now here’s the real benefit of IRAs. You can choose a self-directed IRA, which will give you access to non-traditional investment options. You’d never have that opportunity with a traditional 401k or most other employer sponsored retirement accounts.

And here’s the best part: some of those investment alternatives offer both the benefits of the more aggressive investment options with a safety level comparable to bonds. And that’s a great way to compensate for those IRA limits.

Of course, once you step into alternative investment territory, it’s best to get help from a financial advisor who specializes in helping his clients with investment options that can yield a much higher return with excellent safety. How would you like the historical 14% return from this safe, unique investment alternative?

You’ll find that it’s especially powerful inside self-directed Roth accounts, which high income earners can finally take advantage of in 2010. And if you’d like to find out more, I’ll be happy to talk with you and tell you about options that can supercharge your retirement savings.