Introduction
Through private foundations, Americans have established an unrivaled reputation for their exceptional commitment to philanthropy, generously providing private funds to serve the common good. Philanthropy Roundtable’s vision is to foster and sustain a dynamic American philanthropic movement, where private foundations continue to play a pivotal role in fortifying our free society. Charitable organizations are instrumental in strengthening our communities and are fueled by private foundations that provide a consistent and reliable source of funding for charities and their initiatives.
Foundations reflect a vibrant diversity of charitable goals and their long-term financial commitments allow for strategic planning and the implementation of impactful, creative projects. While many charitable initiatives require strategic long-term giving, there are also major charitable projects that require large one-time investments.
For example, the initial investment of endowing a chair at a university, building a new museum or medical research facility, creating a scholarship endowment fund, or establishing a new school all require a large one-time investment.
According to the latest available data, there are around 125,000 domestic grantmaking foundations registered in the United States. In 2022, private foundations provided over $105 billion in charitable giving, up from almost $103 billion in 2021. Even after adjusting for inflation, private foundation giving has roughly doubled over the past 15 years and quadrupled over the past 25 years.
As our charitable sector seeks to address society’s most pressing problems and to provide aid to those in need, it is confronting mounting policy challenges. To help support this work, lawmakers must refrain from imposing additional barriers and restrictions on the charitable endeavors of private foundations dedicated to fulfilling their organizational missions and serving their communities.
This report reviews the historical background that led to the establishment of the 5 percent payout requirement for private foundations, analyzing the reasons behind the selection of this specific figure. Additionally, it provides an overview of contemporary criticisms surrounding the distribution requirement, with some asserting the rate is inadequate or should exclude specific charitable expenses.
Subsequently, the paper offers an extensive examination of comprehensive data and literature concerning foundation payout patterns. This analysis encompasses payout rates, investment returns of foundations, distributions by family foundations, and the legal, albeit rare, transfer of funds from foundations to donor-advised funds.
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Private Foundations and the 5 Percent Payout Rule
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