The 501(c)(2) Title-holding Corporation:
A Way to Protect Your Charity From Liability Claims

With lawsuits engulfing our tax-exempt organizations, and liability concerns mounting, some §501(c)(3) organizations are looking for ways to protect their real estate and other assets. An effective management tool to consider is to transfer the organization's real estate to a subsidiary §501(c)(2) title-holding corporation. Such an entity provides a tax-free means of managing and protecting real estate and other assets. A title-holding §501(c)(2) corporation is exempt from federal tax.

Whether such a transfer of real estate by your §501(c)(3) organization to a §501(c)(2) title-holding subsidiary is the thing to do is a matter for discussion with your tax-exempt legal counsel.

The overriding reason why tax-exempt [§501(c)(3)] organizations transfer this real estate to a title holding §501(c)(2) subsidiary is to place their organization's property out-of-reach of any creditor's unfunded liability.

If the management of your §501(c)(3) organization is concerned about possible uninsured or underinsured liability claims which could be satisfied by your organization's real estate, then a transfer of the real estate to a title-holding §501(c)(2) corporation may be the answer.

What's involved in organizing a §501(c)(2) title-holding corporation? There are three important elements, viz.:

1.   recognize that a title-holding organization is a nonprofit corporation recognized by the IRS as a §501(c)(2) tax-exempt corporation;

2.   the title-holding corporation must be organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount, less expenses, to its tax-exempt parent corporation (see Rev Rul 66-102), and

3.   the title-holding corporation should be established as a subsidiary corporation wholly controlled by its parent, also a tax-exempt §501(c)(3).

There are, of course, other considerations - but these are the essentials. If you want to explore further how a title-holding corporation could benefit your §501(c)(3) tax-exempt organization, please contact us.