What are the major differences?
Life vs. Non-life is more important
– private and company foundations have 5% spending requirement – operating foundations must spend 85% of dividend/interest income – foundations are taxed at 1%, endowments tax free life vs non-life – non-life has shorter time horizon, more liquidity needs – life more heavily regulated – life more interest rate sensitive
Actually it says some private foundations are taxed at 2%(excise tax) and they are reimbursed 1% if they can fulfill spending requirements. No spending requirement for public foundations.
Key deiffernece is foundations have a legally required spending rate (usually 5%)whereas Endowments don’t. For Endowments know the 3 spending rules (simple, rolling, and geometric) Depending on liquidity inssues, both are usualy more suited for long-term illiquid investments (PE), endowments more so than foundatoins. For legal reuirements, UMIFA and prudent inv rule are usually prudent for both. One thing to consider is risk profile is that endowments can usually still have cash inflows so this increases their ability to take risk. Foundations are a case by case issue but if no cash inflows then ability to take risk is a bigger question mark.
endowments need less volatile investments the three S’s for return objective Stable sustainable substantial
I remembered endowment rate usually between 4-6% otherwise will eat into principal. Operating foundations must pay 85% of div and y.