Private foundations should be distributing more money during bull markets and retrenching when things are more volatile (like now).
That’s the wisdom being shared by Foundation Source, a provider of management services for private foundations, which are usually supported by wealthy families.
Foundations are required to distribute 5% of their assets each year. But when they give more than that, they can get bank credits for the excess. That means the 5% minimum doesn’t have to be met in later years when the market is more uncertain, Foundation Source said.
Private foundations seem to be taking this advice to heart. Data compiled by the company shows that private foundations distributed an average of 6.6% of their portfolios in 2022, 7% in 2021 and 7.5% in 2020. The higher distributions in 2021 and 2020, which were years of double-digit market growth, insulated foundations from forced withdrawals during 2022’s more volatile market, Foundation Source said.
The nearly 1,000 foundations studied by the firm collectively amassed more than $1 billion in excess grant carryovers for five years from 2018 to 2022 as a result of consistently giving more than the 5% minimum. That can give organizations an important cushion for the years when the market is more volatile and when making distributions carries more risk for deflating an organization’s funds.
Such tips can be found in Foundation Source’s “Guide to the Giving Season 2023” report, released Wednesday. The guide provides both tips and resources for advisors, charitable organizations and families to help them maximize the money available for distribution.
“In a turbulent economic and sociopolitical environment, the need for generosity is greater than ever, and these tools aim to provide guidance for creating impact while maximizing tax benefits,” Foundation Source said.
The guide also advises foundations to give stock and tangible assets when it’s feasible rather than converting the assets to cash and then giving the money to charities. Some donated assets, such as real estate, can be of use to the charities. And when stocks are donated they could possibly increase in value until they’re used, Foundation source said.
“These tips and others detail creative strategies that the most savvy philanthropists use, often with guidance from professional advisors, to achieve tax-wise social impact,” Foundation Source said. The guide also details how foundations can “navigate giving season in a year filled with natural disasters and humanitarian crises.” And it suggests strategies for balancing immediate and longer-term support for charities.
It also includes commentaries from foundation leaders, who pass along ideas for their peers.