What Higher Foundation Payout Rules Would Mean for Charities

    Since the Tax Reform Act of 1969, private foundations have operated under strict regulations enforced by the Internal Revenue Service (IRS). Central to these regulations is the 5% minimum distribution rule, which mandates that foundations distribute at least 5% of their assets’ fair market value each year to qualified charitable organizations. This rule serves a dual purpose: ensuring immediate contributions to charitable causes while allowing foundations to sustain long-term support for their chosen beneficiaries.

    Over time, foundation giving has become increasingly significant, accounting for a growing share of total charitable donations. From comprising 11% of total charitable giving in 2000 to 21% in 2022, foundation grants have become a lifeline for numerous charitable organizations, supporting missions that would struggle without such essential funding.

    Critics of the current regulatory framework have proposed raising the payout requirement to 10% or even 12% of private foundation funds. However, using the Ford Foundation as an example, this analysis reveals the potential detrimental consequences of such a change. While a higher payout requirement might initially result in larger grants to charities, it would lead to rapid depletion of foundation assets, ultimately diminishing long-term support for charitable causes.

    A fifty-year projection comparing foundations adhering to the 5% rule with those subject to a 12% payout requirement underscores the significant impact on grantmaking capacity. Foundations following the 5% rule contribute nearly $21 billion more to charity over the simulation period. This highlights the importance of maintaining a balance between short-term impact and sustained, meaningful contributions to charitable causes.

    Furthermore, the analysis extends to the perspective of large charities, such as St. Jude Children’s Research Hospital, emphasizing the tangible implications for organizations dependent on long-term foundation support. While the 5% rule enables consistent and substantial assistance, a higher payout requirement could result in a sharp decline in funding after an initial surge, providing only a fraction of the needed long-term support.

    In navigating discussions around private foundation regulations, it is crucial to consider the delicate equilibrium established by the current regulatory framework. The 5% minimum distribution rule optimizes immediate philanthropic impact and enduring support for addressing complex societal challenges, reflecting the nuanced interplay between short-term needs and long-term sustainability in philanthropy.

    What Higher Foundation Payout Rules Would Mean for Charities

    Download the PDF