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Time for a raise? – Foundation payout rules in question

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Private U.S. foundations would risk depleting their assets if they had to pay out more than the five percent of their endowments currently required by the Internal Revenue Service each year, the Washington Post reports.

A report titled “Sustainable Payout for Foundations,” completed by a Boston-based investment firm for the Council of Michigan Foundations, found that increasing the required distribution amount to six percent per year would deplete assets in real terms.

The study found that over a 30-year period, a six percent payout would result in a 12 percent decline in the real value of a foundation, the Post said.

Rick Cohen, president of the National Committee for Responsive Philanthropy, questions the study and argues that the U.S. Congress should increase the required distribution amount to six percent per year.

“What are the needs in society that this tax-protected capital should be used to address? We think that the needs that are out there, particularly for disadvantaged populations, warrant a higher payout rate,” Cohen told the Post.

The payout debate centers on whether individual foundations should be allowed to exist in perpetuity. While most foundations plan to exist indefinitely, some choose to liquidate over a fixed time, the Post reports.

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