What are Private Foundations?
Most people are familiar with the names of some of the largest foundations in the country – Gates, Ford, Rockefeller and Carnegie come to mind, as names associated with both great wealth and great philanthropy. But when it comes to defining a what a foundation “is”, things get a bit confusing. Foundations can be described by the important work they do – fighting poverty, searching for cures to disease or funding education initiatives. Foundations can be looked at as as grant makers, offering financial support to other organizations, all of which is true. But there is another way to think of foundations – as investors.
Why Think of Foundations as Investors? Tax Laws Designed for Investments
Foundations, like other charitable organizations, are exempt from most taxes. However, unlike public or operating charities that solicit outside donations, private foundations are typically funded by an individual or family, often with a single large contribution. Foundation income consists primarily of interest, dividends and capital gains – investment returns. In fact, the primary benefit of creating a private foundation is that its assets can grow tax free, enabling greater charitable impact through higher future payouts.
Put another way, the tax rules governing foundations are designed specifically with investing in mind.
Why Think of Foundations as Investors? Look at their Assets
Foundations must payout 5% of their fair market value each year to avoid penalties including jeopardizing their tax status. In order to maintain (and hopefully improve) their grant making, foundations invest their assets to generate returns. A typical foundation’s assets will consist entirely of stocks, bonds, cash, or other investments (hedge funds, real estate, private equity, etc.), in other words, an investment portfolio.
The more successful foundations are as investors, the greater impact they can make on important causes.
Foundation Advocates mission is to provide news and analysis of foundation portfolios.