The Institute for Policy Studies Gilded Giving 2026 report raises questions about the growth of private foundation assets and whether foundations are distributing enough to charity. But foundation payout is measured by a federal formula, not creative math, while never-ending growth and societal benefit should not be ignored.
The payout requirement is a legal calculation first established in the Tax Reform Act of 1969. As Philanthropy Roundtable has previously explained, the federal formula generally uses the average value of assets over 12 months that are not devoted directly to charitable purposes. It does not use a single year-end balance of total assets or a single year-end balance. For example, if an endowment doubles in value midway through the year, the calculation reflects six months at the lower value and six months at the higher value.
Simply dividing annual distributions by the larger year-end balance would therefore understate the foundation’s payout rate. The federal formula also accounts for liabilities, a permitted cash allowance, taxes and other statutory adjustments. Qualifying distributions can include both grants and necessary expenses incurred in carrying out a foundation’s charitable mission. It’s complicated.
Timing matters as well. Federal law generally gives a foundation until the end of the following tax year to satisfy its distributable amount. A foundation may therefore appear to fall below 5% when someone divides one year’s distributions by that year’s ending assets, even though it has complied fully with the federal requirement.
This additional time is particularly important for rapidly growing foundations, which must remain responsible stewards of charitable dollars. Sound grantmaking requires due diligence to identify fiscally and operationally strong organizations and determine which opportunities can most effectively advance the foundation’s mission.
That process takes time, and foundations need the flexibility provided by the following-year deadline to make thoughtful grantmaking decisions. The additional year does not eliminate accountability. Foundations that fail to meet the requirement by the federal deadline face an excise tax of 30% on the undistributed income.
These provisions are not “clever accounting.” They are elements of the regulatory framework Congress and the Treasury Department developed to apply the payout requirement fairly across foundations holding different kinds of assets and operating in changing markets. Any evaluation of a foundation’s payout should begin with the federal formula.
The societal benefits of foundation asset growth should also be considered in context. Because the required distribution is tied to the value of a foundation’s investment assets, a larger endowment generally produces a larger required charitable payout. If an endowment grows from $1 billion to $2 billion, a payout of approximately 5% grows from $50 million to $100 million annually.
That is not merely a hypothetical benefit. The Roundtable’s past analysis found that inflation-adjusted private foundation giving roughly doubled over 15 years and quadrupled over 25. Preserving and growing foundation assets generates far more charitable support over decades than spending those assets quickly. It also protects the purchasing power of future grants against inflation.
Donors make different, equally valid choices about time. Some create time-limited, or spend-down, foundations to concentrate their resources on urgent needs or ensure dollars are used as intended. The Gates Foundation, for example, plans to spend its resources and close by 2045. Others like the Rockefeller Foundation are perpetual foundations to benefit society across generations. Spending more than 5% annually increases the risk an endowment will lose purchasing power or be depleted.
In fact, Congress reduced the original 6% payout requirement to 5% in 1976 because the higher rate was draining assets so quickly perpetual foundations risked closing their doors to future generations. Both approaches, time limited and perpetual, are legitimate expressions of donor intent, and both strengthen American philanthropy.
Perpetual endowments provide reliable support to nonprofits through changing economic conditions, leadership transitions and shifts in public priorities. They also give philanthropy the capacity to respond when society faces an unexpected crisis. During the COVID-19 pandemic, foundations were able to mobilize substantial resources for healthcare providers, food banks, schools and community organizations. Endowments can also support major projects that cannot be funded through ordinary annual giving, including medical research, new educational institutions and large capital investments.
The payout debate should not be reduced to whether a foundation’s assets increased or a simplified annual ratio reached exactly 5%. The more meaningful questions are whether the foundation followed federal law, advanced its charitable mission and maintained the capacity to serve present and future generations. A growing charitable endowment is not money removed from society. Properly stewarded, it is a continuing source of charitable capital whose benefits compound over time and protect future generations.
