Helping Clients Plan for Growth in Their Private Foundations

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Let’s imagine a typical foundation started by successful businesspeople to make charitable contributions each year to a small constellation of non-profits in their community.

Fast-forward a couple of decades and the founders have achieved more financial success than they ever expected. While undertaking their estate planning, they have ascertained that even after they take care of their children and grandchildren, there will be a substantial amount left from their holdings to donate to the foundation. In fact, the founders anticipate that upon their death the foundation’s assets will increase from $3 million (current value) to approximately $40 million. The founders realize that this eventual windfall merits advanced planning to best meet the opportunities that come with such a large increase.

If, as in this hypothetical example, your clients find themselves confronting an almost-overnight jump in their foundations’ assets, what should they do?

How can you help them plan for such an event in a way that is consistent with their wealth management objectives and carry their foundations into the future?

The challenge of growth

One of the immediate outcomes of explosive growth is a dramatic increase in a foundation’s 5% minimum distribution requirement (MDR). The MDR is based on the average value of foundation assets in the previous year, so as assets grow, foundations are required to increase their charitable activities accordingly. Although the increased MDR won’t impact the foundation immediately, a major infusion of capital provides ample reason for it to develop a plan for programmatic growth alongside its financial growth.

Let’s go back to our example above. The foundation had an average of $3 million in assets throughout 2020. Therefore, it has an MDR of $150,000 for 2021. If the foundation were to receive a contribution of $37 million early in 2021, bringing total assets up to $40 million, the MDR would become $2 million for 2022. And though your client would have until December 31, 2022 to distribute that $2 million, doing so thoughtfully requires significantly more planning.