Philanthropy’s best-kept secret: the more you have, the less you’re required to give

The 50 largest private foundations in the United States possess a combined wealth of over $535 billion. A key rule dictates that they must allocate at least 5% of this wealth annually. However, research indicates that 17 out of the 40 largest US foundations, which hold the most substantial assets, actually contribute less than 5% over a span of five years.

This observation suggests that the payout requirement is more a reflection of arithmetic than strategic decision-making. The figure of 5% remains static, unchanged since 1969, and has not been modified despite shifts in the tax environment. While tax incentives were once substantial drivers of charitable giving, recent legislative changes have weakened these incentives.

The Individual Taxpayer Relief Act of 2017 raised the federal estate tax exemption to $15 million per person, introducing new floors and caps that reduce the tax benefits of charitable deductions. Consequently, individual filers now face a higher tax threshold before any deduction can apply, and corporations must clear a one percent income threshold to qualify for deductions.

Higher rate donors see their deductions capped below their marginal rate. Despite these changes, the 5% payout requirement remains the sole mechanism left where policy, not personal inclination, influences the pace at which capital moves. FoundationMark's research reveals that a significant portion of private foundations' annual payouts is determined by straightforward calculations against tax forms.

This highlights that the 5% figure, while not aspirational, is a mathematical calculation performed in response to tax obligations. The payout requirement, set in stone since 1969, continues to dominate the philanthropic landscape, even as other factors have evolved.