Endowments vs Operating Foundation

As per Schweser book 2: Operating Foundation - established for the sole purpose of funding an organization Endowment - … for the expressed purpose fo permanently funding some desired activity. now here’s my question: foundations have a constraint to spend at least 5% of its assets every year whereas endowments do not have that requirement… so why would anyone want to set up an operating foundation over an endowment if it appears that an endowment is less restrictive?

An operating foundation is formed to fund a particular purpose - like a research project for example and is probably dissolved after the purpose has been met. An endowment on the other hand is formed to provide grants to universities and hospitals to support their activities and is perpetual in nature. The spending requirements are also different for both - an operating foundation is required to spend a minimum of 85% of the investment interest and dividends to support the purpose for which it was formed. It may even have additional spending requirements. An endowment can set its own spending rules. So a major difference between the two is the purpose/objective for which they are formed.

stating the obvious - to constrain the foundation for spending at least 5% of the asset base. I’m sure there are some other tax or legal nuances beyond the CFA curriculum that we might be missing, but i wouldn’t worry too much about why set one up over the other. For this exam we need to be concerned with how they’re run (IPS)