5 secrets of savvy philanthropists

Here’s a look at strategies that today’s advisers are using to enhance the charitable giving of their clients and their foundations.

When it comes to charitable giving, the vast majority of philanthropists and foundations make the bulk of their donations in cash, giving directly to 501(c)3 organizations. But they may be overlooking opportunities to make those gifts even more valuable.

Among the many benefits of using a private foundation as a vehicle for charitable giving is its ability to efficiently take advantage of a number of investment- and tax-related strategies. Over the course of our work with thousands of private foundations, we’ve identified five creative techniques that the most experienced and knowledgeable foundations integrate into their charitable giving plan.

Of course, these are complicated strategies that most foundations don’t execute on their own. Rather, they work with sophisticated and well-versed advisory professionals who can help them determine the most effective ones for their foundation. Advisers with competencies in these and other techniques often have a competitive advantage over their peers — and, more importantly, are able to better serve their clients.

Here’s a look at five strategies that today’s advisers are using to enhance the charitable giving of their clients and their foundations:

1. Implementing program-related investments

Foundations can make program-related investments into businesses to achieve one of the foundation’s philanthropic goals. For example, a foundation with the mission of eradicating a specific disease might invest in a company that is developing a vaccine against that disease. Foundations are increasingly looking at PRIs as a sustainable way to meet their 5% annual minimum distribution requirement, or MDR — the amount a foundation is required to distribute annually based on its fair market value that year.

Since PRIs are investments, rather than grants, they may have the additional benefit of generating a return for the foundation. Proceeds from PRIs go back into the endowment, and the foundation can then use these for future PRIs or grants. These investments often work well for foundations run by sophisticated, active investors, angel investors or venture capitalists who have experience analyzing and valuing companies.

2. Leveraging expenses

Expenses that further the foundation’s mission count toward the 5% MDR in the same way that a cash distribution would. Paying for those expenses essentially becomes part of the foundation’s grant-making.

For example, one of our client foundations has a mission to expand access to higher education for disenfranchised populations. That foundation commissioned a study to understand the proximity of community colleges to bus and rail lines, then used that information to lobby for change. It was able to fund the study through its MDR, since the expense was directly related to its mission.

3. Donating stock

Many foundations liquidate their stock holdings to make distributions in cash, but in some cases, it makes sense to give the shares themselves directly to a grantee. For instance, families running a foundation may own closely held stock they’re uncomfortable selling, or the holders may expect a stock to appreciate further. In the latter case, if the grantee holds the investment, it could become far more valuable in the future.

4. Over-distributing in up markets

Foundations that distribute more than the required 5% in a given year can bank credits for up to five years for the amount above MDR. That then provides flexibility in future years, which can be very useful, for example, when markets are down and when liquidating part of the portfolio could lock in losses and potentially damage the foundation’s corpus.

Our data show that foundations distributed an average of more than 7% of their portfolios last year, following an average 7.5% distribution in 2020. Those over-distributions in years of double-digit market growth provided the additional benefit of insulating these foundations from forced withdrawals during 2022’s more volatile market environment. The nearly 1,000 foundations in our study have amassed a cumulative $924.6 million in excess grant carry-overs for the five-year period from 2017 to 2021.

5. Using illiquid assets

Making illiquid assets available for grantees to use is another way foundations can meet their MDR without having to sell securities. For example, a foundation might rent a piece of real estate to a nonprofit at a below-market rate. That both benefits the nonprofit and potentially provides a small amount of income to the foundation.

In addition, since the asset is in use, the foundation can exclude it from the MDR calculation, thereby reducing its disbursement obligation. If a foundation uses a portion of the building for noncharitable activities, an accountant can help determine how to best track and report that.

The most suitable MDR approach for a given foundation depends on its specific goals and how actively the donors wish to be involved. In many cases, the most efficient approach entails some combination of the above strategies alongside direct cash grants. Consulting with a foundation and tax professional can help determine what would work best for you.

Josh Stamer is senior managing director at Foundation Source.