Easier Said Than Done: Shifting Private Foundation Assets to Offset Proposed Tax Could Prove Difficult

President Donald Trump’s policy agenda includes higher taxes on private universities and foundations. For the latter, shifting asset allocations to avoid the tax could be especially difficult.

The tax itself would keep foundations with fewer than $50 million in assets at the current 1.39% tax rate, but larger ones would face steep increases: 2.78% for those with between $50 million and $250 million in assets, 5% for those with between $250 million and $5 billion, and a 10% rate on the largest foundations. The tax is expected to produce $15.88 billion in federal revenue over 10 years, according to the congressional Joint Committee on Taxation.

The tax would apply only to capital gains, so longer-term investments such as private equity or venture capital could, in theory, serve as a hedge, minimizing a foundation’s tax exposure while also having the potential of generating long-term returns.

“You could see more people taking the approach that says, ‘Well, if we’re going to get taxed, then we are going to have to raise the bar for the return component,’” says Jonathan Hook, who was the CIO for the Harry & Jeanette Weinberg Foundation for nine years before retiring in 2022. He also previously served as CIO for Baylor University and Ohio State University.

Liquidity Tug of War

The Weinberg Foundation, which had $1.75 billion in assets in 2023, according to its most recent Form 990, would face the 5% tax starting January 1, 2026, if the legislation clears Congress.

The difficulty for foundations, Hook says, is the constant tug of war between liquid and illiquid investments. Since private foundations are required by law to give away at least 5% of their assets each year, they have a greater need for liquidity. Therefore, tying assets into illiquid investments makes it more challenging to secure the necessary liquidity.

For example, foundations typically hold about 65% of their assets in stocks and bonds, with 18% invested in alternative investments and 7% in cash, according to FoundationMark, whereas Harvard University, which has the largest university endowment in the U.S. and would be hardest hit by an endowment tax, held 39% of its investments in private equity and had only 3% cash on hand in fiscal 2024, according to its most recent financial report.

“The biggest thing we always prepared for every year was liquidity,” Hook says. “The foundation was always going to make X dollars’ worth of grants every year.”

Hook, who dealt with the 1.39% tax during his time at the Weinberg Foundation, describes that tax as an annoyance, but says that as foundations consider how to reduce exposure to the tax, the greatest risk is they pay out fewer grants.

Still, private foundations would need to make some portfolio changes if the bill passes, unless they were willing to accept lower after-tax returns.

Private foundations “can seek higher investment returns which entail greater risk to maintain a similar level of after-tax real return and stable distributions; or they can maintain a consistent portfolio strategy, accept lower after-tax returns and reduce distributions,” stated a J.P. Morgan research paper that encouraged foundations to consider tax-advantaged investments such as municipal bonds.

Tough Decisions With ‘Long-Term Implications’

However, in uncertain times, or when disaster strikes, foundations have proven more likely to increase their charitable giving, not pull back. The MacArthur Foundation, for example, pledged in February to increase its annual payout to at least 6% over the next two years to assist the social sector “in a time of crisis.”

“We must commit to be counter-cyclical in our spending,” wrote John Palfrey, president of the MacArthur Foundation, in a LinkedIn post. “Spend more when the need is greatest and when the social return on our gifts is highest. That is the only sound answer in my book. We just have to figure it out.”

Meanwhile, the Gates Foundation announced plans to double its giving to more than $200 billion through 2045, when the foundation expects to shut its doors, according to a blog post by Bill Gates last month.

“In this unpredictable environment, foundations are grappling with tough trade-offs,” says Bill Burckart, CEO of the Investment Integration Project, where he advises private foundations. “Is the answer cutting staff? Scaling back program requirements? Or is it increasing exposure to riskier investments to preserve grantmaking levels? None of these decisions are easy, and they all carry long-term implications.”

While private foundations can invest in more tax-aware strategies to lower their tax burdens, doing so puts them at risk of having less money to give away in the future, Burckart says. Unless a foundation simultaneously increases its returns or, like the Gates Foundation, sets a closing date, it would need to consider shifting its asset allocation to balance its portfolio.

“The more foundations expand programmatic spending, the less capital is compounding at market rates to grow the endowment,” Burckart says. “That can ultimately constrain the foundation’s growth and, over time, reduce the pool of funding available for future programs.”

For now, the bill’s future rests with the Senate, which has set a July 4 deadline to pass its version of the bill.

“Until Congress gets through with its sausage-making, it makes it hard for a lot of people to plan completely,” Hook says.

Tags: Asset Allocation, Endowment, private foundation