What exactly is the difference between a foundation & endowment. Is there is any specific difference in the way the IPS is built for each of them… It looks pretty much the same except that foundation seems to have a bit more constraint in terms of spending (5% min) vs endowment… Am I missing something? - BN
5% is required for private foundations, all others aren’t required to do 5% spending p.a. both are taxed on unrelated business income and I think foundations are taxed on 1% of investment return…
Actually… Operating Foundations are required to pay out 85% of their dividends/income and may also have minimum spending requirements outside of these income payments. I hope I have that right… But you’re right, the main difference is the spending requirement. While we’re on the topic, I know Pension Plans are governed by ERISA but aren’t Foundations governed by UMIFA? In addition, Endowments will also have some constraints around acceptable or allowable investment securities within the portfolio in some cases.
^yes and I think that spending requiremetn on Operating Foundations is 3.33% plus the 85% of dividends/income. And yes tehy are subject to UMIFA
is private foundation means a foundation established by an individual?
Private Foundation can be an individual, family or group of peeps.
Oh, and the only real difference from a Public Foundation is teh private’s can’t solicit from teh public.
PJStyles Wrote: ------------------------------------------------------- > Actually… Operating Foundations are required to > pay out 85% of their dividends/income and may also > have minimum spending requirements outside of > these income payments. I hope I have that > right… > > But you’re right, the main difference is the > spending requirement. While we’re on the topic, I > know Pension Plans are governed by ERISA but > aren’t Foundations governed by UMIFA? In > addition, Endowments will also have some > constraints around acceptable or allowable > investment securities within the portfolio in some > cases. Ok! Why are we talking about all this? This exam is not about knowing the US laws applicable to Foundation or Endowments. Those spending requirements are applicable wrt US only. So, I don’t think CFAI expects us to write those numbers explicitly. I know it’s not gonna hurt anyway. But, it should not be our focus. I think foundations have more flexibility in terms of their spending requirement and the maintaining portfolio value while endowment has to comply with the spending requirement to maintain the tax free status. Endowment should also preserve the capital in order to sustain it for future beneficiaries.
Also if you do the Schweser Pro questions, for some reason, one of the question seem to believe that Foundations can have a finite life as opposed to Endownments which have infinite life. Not sure if anyone picked up on that…I still think that if asked both are technically set up to provide grants/funding in perpetuity, unless stated otherwise.
Foundations can have a finite life…
bigwilly Wrote: ------------------------------------------------------- > Foundations can have a finite life… is it not the other way round? Foundation can have a limited time horizon, eg. 10 years. (not 100% sure if this is for F or E though) - sticky
Finite = limited infinite = unlimited
The Olin foundation is an example of a finite life foundation. It was designed to have its initial endowment (in this case meaning the initial AUM) spent in something like 50 years, supporting conservative economics and foreign policy. It ran out of money fairly recently (as scheduled), and there was a discussion in the foundation world about whether it had substantially more impact because there was a much higher spending for conservative policy research during its time than would have been possible with a perpetual foundation. So, foundations can have finite lifetimes for sure, but are usually perpetual. I don’t see why one couldn’t structure an endowment that way either, but usually these are perpetual as well. I seriously don’t think that knowing that trivia is going to be important on the exam. Maybe just the issue of not being thrown for a curve if the fact pattern suggests that it is a non-perpetual foundation and so the time horizon is whatever length they say it is.