How To Leverage Private Foundation/501(c)3 Non-Profits To Grow Your Passive Investment Income

Despite strong career performance and disciplined financial habits, many high-income earners struggle to break free from the "rat race." 

For those earning $150k or more, traditional investment strategies and savings plans usually won’t get them the financial freedom they need. This can be attributed to a few critical factors:

• High Taxation: Taxes can eat up a significant portion of earnings, particularly for those in high tax brackets.
• Lack of Passive Income Streams: The majority of income may come from active work, meaning a continued trade of time for money.
• Traditional Investing Shortcomings: Common financial advice around 401(k)s, IRAs, and stocks may lead to incremental gains but not true wealth-building.

We help our clients break free from their financial constraints by exploring alternative investments and advanced tax strategies to significantly improve net worth and cash flow.

One notable strategy is the use of a Private Foundation. This is a self-funded nonprofit organization accomplishes a few things for you:

• Shelter Income from Taxes: Up to 30% of annual income each year can be sheltered inside a Private Foundation, allowing for significant tax savings.
• Invest Tax-Efficiently: By directing investments through a foundation, you can bypass traditional capital gains tax and take advantage of a much lower excise tax rate, which allows you to grow your investments faster.
• Gain Financial Flexibility: Unlike other tax shelters like IRAs, there are no penalties for withdrawing funds from a Private Foundation, providing more freedom and control, and allows you to turn the Foundation into a passive income stream.

Will Establishing a 501(c)3 Attract Suspicion From the IRS?

Is this legal? 

Many skeptics, including accountants or attorneys, might claim that using a Private Foundation will lead to legal trouble. However, this concern is largely unfounded. 

First, you should understand that there are two types of 501(c)(3) organizations: Public Charities and Private Foundations. 

Private Foundations are well-recognized and legally established entities often used by high-net-worth individuals. You’ve heard of a few of them:

• The Bill and Melinda Gates Foundation
• The Ford Foundation
• The Getty Foundation
• The W.K. Kellog Foundation
• The Bloomberg Family Foundation

The confusion and doubt usually arises because:

• CPAs are conservative and avoid advising unfamiliar strategies that require legal expertise, not to mention that they will be talking you out using their other tax services.
• Attorneys lack knowledge of tax codes and want to avoid potential liability, which means they won’t recommend this strategy unless they specialize in non-profits and understand it in depth.
• Investors often repeat advice without truly understanding how it works, which means they are telling you what their CPA or attorney told them.

Don’t worry,  the Private Foundation is a “white hat” strategy and is a completely legitimate and tax-compliant vehicle for financial freedom, used by the ultra rich as well as savvy investors to accelerate their wealth-building process.

You Can Draw A Salary From Your Private Foundation

A director of a Private Foundation can receive a salary. Director compensation is based on asset performance, and their wage should be “reasonable,” usually determined by standard HR practices for compensation analysis.

The salary must be covered by the Foundation's passive income, along with the mandatory 5% annual donation of its total value. 

Here’s the trick: A founder of a nonprofit can be its director. That’s you.

The goal is to build capital quickly to eventually replace your current income. Unlike typical directors, Royal Legal clients also manage investments, handle legal, tax, and bookkeeping tasks, and support the Foundation’s operations—all with our support.

Real-Life Application: Tax Saving and Wealth Accumulation

Consider this typical scenario: Our client earns $250k per year and pays 20% in taxes. Under our guidance, she uses a Private Foundation to shelter $75k annually. 

This reduces her taxable income, saving her around $15k in taxes every year. 

After accounting for mandatory donations to charity, she is left with a true tax savings of over $11k annually, which she can reinvest.

By creating the Private Foundation, our client not only saves on taxes but also can invest those savings in high-yield opportunities, allowing her money to grow more quickly and efficiently than it would have with traditional investing methods.

By investing through a Private Foundation, she gets more of her returns by avoiding high capital gains taxes, allowing the wealth to compound much faster.

Comparison of Financial Growth Over Time

When using the Private Foundation for both income sheltering and high-performance investments, the difference in growth is substantial. Over a 5-year period, the compounding effect can lead to a considerable gap between traditional investing and tax-optimized, high-yield strategies.

This happens because instead of paying capital gains tax, which can easily be 20-30%, you are paying a tiny excise tax which makes those investments grow nearly tax free.

When you invest in high performing alternative assets, you can achieve annual returns between 20-30%. Then instead of paying your regular income tax and capital gains, you are paying the 5% donation and a small excise tax. This allows you to save tax on the front end and as you grow, which allows you to turn the Foundation into a passive income machine which you can use to achieve financial freedom faster than you thought possible.

How Much Can You Save?

The following table outlines tax savings based on different income levels and tax brackets.

These numbers are based on a 30% donation of annual income to the Foundation, which is the maximum amount that qualifies for tax savings.

Building the Right Investment Portfolio

The tax savings that come from directing your own nonprofit can be invested in assets like real estate, small business investments, energy & machinery funds, and market-based investments. These alternative asset classes offer 20% or higher returns, but it’s essential to always vet each opportunity thoroughly as there are many scams with high return claims and you need to make sure you are only investing in legitimate deals.

While high-return investments can propel you to financial freedom quickly, it's essential to de-risk your portfolio by:

• Only investing what you can afford to lose. Don’t sell your house and go to Vegas!
• Pulling out your initial investment once returns have accumulated to that amount, this allows you to play with “house” money.

By adopting a conservative approach to risk while targeting high yields, investors can safely build wealth without jeopardizing their financial future.

The Private Foundation strategy is one of the best tools we know for rapidly achieving financial freedom by replacing your W2 (or active 1099) income with a passive director’s salary for managing the Foundation.

Ready to learn more? Reach out to our team today and get started … You’ll soon be the CEO of your own wealth-building company and the founder of your own charitable foundation!