Many wealthy individuals and families set up private foundations as a way to address specific social problems or to give back to the communities where they achieved their success. Others are motivated by income and estate tax rules that promote charitable giving. The foundation structure gives donors a modicum of control over their charitable giving during their lifetime and can create a family legacy.
In its execution, however, the private foundation structure can prove disappointing for many philanthropists because it fails to achieve the societal improvement the donors intended.
A recent white paper issued by Baird Family Wealth Group argues that while foundation donors have appreciated the tax and legal implications of philanthropy, they have struggled to articulate what their foundations should achieve. “The one important driver of this lack of focus on mission is the IRS requirement to pay out 5% of net investment income. This rule highly influences the spending policy of the foundation and, in turn, the way the assets are invested.”
Mission and Cause Should ‘Drive’
Lost in this process are the foundation’smission and the shape of the problem to be solved, the paper says. “Because the rules are defined and the mission is not, spend policy is predetermined, investment strategy standardized, and mission becomes a tertiary thought.”
The paper, “Move Over, 5%, and Let Mission Drive,” was written by Peter Frumkin (top left), director of the RGK Center for Philanthropy and Community Serviceat the Lyndon B. Johnson School of Public Affairs, University of Texas at Austin; and Christopher Didier and David Klenke (right), managing director and vice president, respectively, at Baird.