Charitable Giving Through a 501(c)(3): How It Works

501c3s are not a loophole. Used right, they're a legacy builder. My name is Stefan and I'm the founder of Whitwell & Company, a nationwide wealth management firm serving business owners and senior execs. 501c3 is the part of the IRS code that talks about creating tax-free entities known as charities. Anybody can file a 501c3 and get it up and going, and a lot of people have.

A vehicle for a mission you care about

The thought behind it is that if there's a mission, a cause that inspires you that is of the public good, it can be a very powerful vehicle for you to not only make a difference while you're alive but potentially make a virtual family office that could be a benefit to your children and help them continue your good work. And I would say the sky's the limit in terms of creativity, as long as you're following the rules and there's truly a sense in your heart of wanting to make a difference and wanting to give back. But subject to those two things, there's a lot of room for individually tailoring it to things that you're into. So for example, maybe your thing is educating people on how to revitalize neighborhoods. So maybe it's about buying beat-up real estate, finding ways to improve it, take it from blight to beautiful and functional, make it a contributing asset to the community.

The rules, no self-dealing

You can't buy your beach vacation home and use that all the time and keep that inside your 501c3. So anytime there's kind of self-dealing, that would kind of defeat the purpose. You probably also shouldn't be buying your jet skis or your fancy sports car in the 501c3. But there's nothing that says you can't buy real estate, investment real estate, and do exactly that: improve it, lease it, rent it, as long as that supports the approved mission.

You can hire and pay people to run it

The other thing that people don't know is that you can hire people, your children, your heirs, experts in the field that you're interested in, to administer the 501c3. So if you had a sizable 501c3 and you built up the assets inside of that through tax-free income over, say, 30 years or so, that is a vehicle that your heirs, son or your daughter or whoever, could use. And while they're running that 501c3, they could be entitled to take a salary, even a very generous salary. In fact, if you look at how much money people make that are in the senior ranks of charities, they often make a million dollars a year. I mean, there's a lot of money in the charity business. There's a lot of flexibility there in terms of what you can pay people that you hire to run that charity. The other thing that people don't know is you can even, for the benefit of those people who are running the charity, set up the equivalent of a 401(k). There is a 401(k) equivalent that you can set up inside that 501c3.

A powerful vehicle, keep the spirit true

So it can be a really powerful vehicle. And again, in looking at that as a potential vehicle, you keep the spirit of it to be true, which is, it really needs to be a charity designed to be a public benefit and help in some area or another. But they're very powerful vehicles. And as long as you follow the rules, there's a lot of creative ways that you can use them to make a difference and potentially also make a difference for the loved ones in your estate.