The Growth of Private Tax-Advantaged Foundations
The number of private tax-advantaged foundations and the amount of assets contained in them has reached nearly $2 trillion, even as the Trump administration considers imposing new taxes on them.
Research Findings
Foundation assets have grown from approximately $653 billion to $1.8 trillion in assets from 2010 to 2025, according to research from FoundationMark, a market intelligence and benchmarking firm. The number of foundations has grown steadily at about 1.5% per year for over 15 years.
Challenges Faced by Foundations
Despite the growth in assets, approximately 3,000 to 4,000 foundations close each year. On average, there’s a net addition of around 1,000 to 2,000 foundations per year. However, there has been a decrease in the number of foundations with over $100 million in assets over the past decade.
Insights from PKF O’Connor Davies
PKF O’Connor Davies was recently named the market share leader among accounting firms serving private foundations in excess of $25 million in assets in the Northeast by FoundationMark.
Thomas Blaney, a partner at PKF O’Connor Davies, highlighted the challenges faced by foundations that are in the process of sunsetting. He noted that many foundations change their minds about sunsetting, leading to sustainability concerns.
Financial Trends
Foundations pay out $118 billion in charitable disbursements per year, with giving increasing by $42 billion since 2010. However, foundation returns have not kept pace with their asset allocation. Alternative assets can be costly, and large foundations use more sophisticated accounting and investment structures.
Financial Outflows
FoundationMark estimates that $135 billion flowed out of foundations, with the majority going towards grants and charitable operating expenses. Without incoming contributions and investment gains, most foundations would run out of money in 14 years at the current outflow level.
Investment Strategies
FoundationMark CEO John Seitz emphasized the importance of investment teams understanding market opportunities and benchmarking against peers. He noted that capital appreciation foundations have outperformed capital preservation foundations over the past decade.
Tax Considerations
Private foundations pay a 1.39% tax on net investment income, but many utilize tax strategies such as investing in private equity alternative investments and using blocker corporations to avoid unrelated business income taxes.
Regulatory Changes
Last year, private foundations faced the threat of an increase in the net investment income tax, but the provision was dropped from the final legislation. The IRS recently announced plans to revamp Form 990 for nonprofits to require more disclosure about funding sources and fiscal sponsorship arrangements.
Future Implications
Form 990 reform has been a topic of discussion among tax writers and the administration, raising questions about potential changes for private foundations in the future.
Conclusion
Despite the challenges and regulatory uncertainties, private tax-advantaged foundations continue to grow in both number and assets. It is essential for foundations to adapt to changing market conditions and regulatory landscapes to ensure long-term sustainability.
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