Private foundation trustees and staff oversee countless activities, from setting direction and selecting grantees to reviewing policies and investing assets. Several foundation tasks—some mandatory, some voluntary—call for additional care.
All are worth your careful consideration to help you be financially savvy and legally compliant, and to help you take full advantage of your foundation’s flexibility.
Reducing your excise tax
Foundations must pay a small excise tax on net investment income each year. The tax is currently 2% of net investment income minus certain expenses, although it is possible to qualify for a 1% rate if, generally speaking, your current year’s expenditures exceed by 1% of net investment income your average expenditures over the past 5 years.
It is difficult for private foundations to qualify for the reduced rate every year without forever increasing their payout rates and depleting their assets, but many foundations miss the opportunity every few years. To see if a small increase in distributions would qualify you for the 1% rate, be sure to calculate your qualifying distributions a month or two before the year’s end. Some foundations accelerate their distributions to qualify.
Engaging in transactions with foundation insiders
Self-dealing rules prevent private foundations from entering into a broad range of transactions with foundation insiders, known as disqualified persons, unless specific exceptions apply. No topic within the private foundation rules raises as many questions and concerns as self-dealing, because the rules can be counterintuitive and the penalties steep.
To avoid self-dealing in all cases, be sure to understand the rules and take care when hiring or leasing space from foundation insiders, inviting guests to galas or fundraisers, paying personal pledges, compensating trustees and staff, and paying for family travel with foundation funds—activities that lend themselves easily to self-dealing. Consult knowledgeable legal counsel before engaging in any transactions with insiders.
Choosing alternative investments
A relatively new class of investments, known as alternative assets or alternatives, has become an increasingly popular way to address limitations in traditional equities and fixed income securities.
Alternatives offer a range of risk, return, and diversity and encompass a wide array of products, including hedge, private equity, real estate, venture capital, and commodity funds, and funds of funds. They may be limited partnerships, limited liability corporations, regular corporations, or trusts.