The Preservation of Principal Restricted Stock Program Fact Sheet

Terms

Contractual

Selected Features

Returns principal to the donor equal to the value of the stock contributed

Makes a distribution to the donor equal to the long term capital gains tax due

Freezes the value of the stock at today’s prices, regardless of future market conditions

Enables multiple donations from the same capital base

Can be merged into a long term estate plan

Does not deplete the donor’s cash reserves

Description

The flagship of First Bridge Foundation’s gift-giving programs, the “Preservation of Principal” (POP) Restricted Stock Program provides a donor with the ultimate in future flexibility. What makes the program unique is that a donor is given two choices.

The first choice creates the opportunity for the donor to receive a 100% return of principal (in cash) equal to the value of the Restricted Stock donated to the charity.  While this choice does limit the amount of a tax write-off at the beginning, it offsets this drawback by providing the donor with the ability to access 100% of the principal contributed at a point in the future. This is a very important consideration when it comes to estate planning.

The second choice revolves around a donor who does not wish to receive a return of principal at a given point in the future. In such a case, First Bridge Foundation’s handling of the original donation, in which the majority of the contribution would be held in a segregated bond portfolio, enables the donor to receive a write-off that is significantly larger than if the donor had simply made a straight Restricted Stock contribution. Also, with this alternative, the donor does not have to pay long term capital gains tax on the sale of the Restricted Stock which increases the amount given to the chosen charity.

While this program can be somewhat complex due to regulations related to returning principal on a charitable contribution, it does have some very unique donor benefits, including

The Ability to Maintain Capital Reserves 

At a fixed point in the future, the donor would have the option to receive a full return of principal (in cash) equal to the value of the Restricted Stock at the time of the contribution. This enables the donor to maintain his or her capital reserves. With any other donor program, once the money is given to the charitable organization, it is permanently lost. Also, by returning principal, the donor’s ability to give is not diminished by previous charitable activities. This results in the donor being able to donate greater amounts over a longer period of time.

The Payment of Long-Term Capital Gains Tax

One of the more unique features of this program is that it allows First Bridge Foundation to make a cash distribution equal to the long-term capital gains tax (23.8%) should the donor decide to receive a return of principal.  Whether the IRS determines that this money should be paid up front, or more likely, at the point in time when the donor makes a decision to receive a return of their principal, makes no difference.

Should the donor elect not to receive a return of principal the long-term capital gains tax issue is moot.

The Ability to Freeze the Value of the Stock at Today’s Prices 

By liquidating the Restricted Stock and placing the proceeds into a bond portfolio (held in segregation on behalf of the donor), the program has the effect of freezing the dollar value of the underlying stock at the time of the contribution. The stock could decline to zero and it would have no impact on the donor as the blended bond portfolio assures the return of principal.

Recourse and Flexibility in an Uncertain Future 

The donor maintains recourse in the event that economic conditions change for the worse in the future. Since such events can’t be predicted, the donor is afforded the opportunity to make future financial decisions based on the actual economic conditions, versus trying to make decisions based on “projected” economic conditions. Further, should the donor’s financial situation deteriorate over the years, he or she would have recourse to recover capital based on the underlying stock’s value at the time of the contribution.

Major Consideration

One of the more unique concepts of the Restricted Stock/Preservation of Principal donation program is the opportunity by the donor to recapture principal (equal to the initial charitable contribution) at a predetermined point in the future – if the donor so chooses.

In order to comply with federal regulations donors must deal with certain elements of the transaction in the following manner.

1. While highly unlikely, the IRS might require that long-term capital gains taxes be paid at the time of the donation. In the event of this unexpected occurrence, the program allows the charity to be able to make a cash distribution to the donor in order for the donor to cover the long-term capital gains tax at the time the stock is donated.

A more likely scenario is that the long term capital gains taxes will be due if and when the donor elects to receive a return of principal.

In either case, the charity can make a distribution to the donor equal to the taxes due from either (a) the proceeds of the donation, if required up front, or if postponed, from (b) the income earned from the bond portfolio held segregation on behalf of the donor. This covers the worst and best case scenario and is a major benefit to the contributor. If the donor elects not to receive a return of principal at a given point in time, the donor will be allowed to write-off whatever ends up being given to First Bridge Foundation.

2. The second consideration that must be taken into account relates to the amount that can be written off in taxes as a result of the donation. Obviously, a donor would not be allowed to write-off the total amount of the contribution at the time it is made, and still receive back a full return of principal at a later time. That would be an abuse of tax laws. Therefore, the Restricted Stock/Preservation of Principal program would only allow the donor to receive a tax deduction based on the amount the chosen charity actually receives.

In summary, until a donor makes a decision as to the principal amount he or she wishes to be returned or eventually donated to a charity, coupled with an accounting of the amount actually received by the charity, a final resolution as to deductibility of the gift will be postponed.

Comparison

The Restricted Stock “Preservation of Principal” (POP) Donation Program offers substantially more benefits when compared to a standard Restricted Stock donation, or even in comparison to doing nothing but holding on to the Restricted Stock.  In simple terms, it has been designed to offer a donor maximum flexibility in the future. It can also be coupled with other estate planning tools to provide the ultimate in benefits.

RS “POP” Do Nothing Standard RS FBF Program
Ability to make a donation with “Illiquid” serurities N/A Yes Yes
Preserves cash for other purposes Yes Yes Yes
Alleviates long-term capital gains tax No Yes Yes
Ability to receive a return on principal No No Yes
Ability to change conditions of donation in the future (better estate planning) No No Yes
Ability to maintain future flexibility should economic conditions change No No Yes
Ability to increase the size of a donation after initial contribution without adding additional capital No No Yes
Ability to increase the size of the tax write-off in the future if needed No No Yes
Ability to leverage donation No No Yes

Important Qualifications

  • The enclosed material is distributed with the understanding that First Bridge Foundation is not rendering accounting, legal, or tax advice. You should consult your own advisor or counsel before making any donation
  • The figures shown are used for example purposes only and may change significantly at the time a donor either enters into a contractual agreement or purchases an enhanced debt obligation. As many of the programs are based upon prevailing interest rates, should rates decline conditions of the programs may change for the negative. Advancing rates will tend to produce greater benefits with those programs based upon changing rates.
  • Federal tax laws may change significantly in the future, interest rates may rise, stocks or stock market indices may decline, and bond portfolios, no matter how well diversified, may provide less than desirable results. These are the risks to the First Bridge Foundation programs.
  • Many of the programs have significant flexibility in the manner in which they are financially engineered. Donors should be aware that each program can be customized for their individual needs.
  • While we have made every effort to be as thorough as possible, donors should recognize that this document simply provides an overview. Further buttressing material will be available upon request.

Contact:

Mike Rusch CEO
First Bridge Foundation
2003 Horsebarn Road
Suite 9
Rogers, AK 72758
479-381-0311