Growing pains & possibilities: planning for growth in your foundation

Let’s imagine a typical foundation started by successful businesspeople in order to make charitable contributions each year to a small constellation of nonprofits in their community.

Fast-forward a couple of decades and the founders have achieved more financial success than they ever expected. While undertaking their estate planning, they have ascertained that even after they take care of their children and grandchildren, there will be a substantial amount left from their holdings to donate to the foundation. In fact, the founders anticipate that upon their death the foundation’s assets will increase from $3 million (current value) to approximately $40 million. The founders realize that this eventual windfall merits advanced planning to best meet the opportunities that come with such a large increase.

If, like the founders in this hypothetical example, you should find yourself confronting an almost-overnight jump in your foundation’s assets, what should you do? How should you plan for such an event and carry your foundation into the future?

The Challenge of Growth

One of the immediate outcomes of explosive growth is a dramatic increase in a foundation’s 5 percent minimum distribution requirement (MDR). The MDR is based on the average value of foundation assets in the previous year, so as assets grow, foundations are required to increase their charitable activities accordingly. Although the increased MDR won’t impact the foundation immediately, a major infusion of capital provides ample reason for the foundation to develop a plan for programmatic growth alongside its financial growth.

Let’s go back to our example above. The foundation had an average of $3 million in assets throughout 2020. Therefore, it has an MDR of $150,000 for 2021. If the foundation were to receive a contribution of $37 million in January 2021, bringing total assets up to $40 million, the MDR for 2022 would be $2 million that would have to be distributed by the end of the year.

Gearing Up Grantmaking

Even though foundations are given some time to ramp up their distributions as a result of sudden growth, they eventually need to bring their grantmaking strategy in line with their new assets. These are questions to guide the development of such a strategy:

What do we want to accomplish as a foundation? This is an ideal moment for board members to consider the foundation’s history and explore the increased opportunities that accompany financial growth. With additional financial assets, the programmatic possibilities open up to tremendous innovation, creativity, and potential impact.

What are our unique qualifications for making a difference? When it comes to achieving impact, dollars aren’t the only important asset. As board members contemplate the foundation’s future, this is an ideal time to take stock of the entirety of resources that the family and its network of contacts might be able to command. Specifically, the board should ask:

• What expertise, skills, and special talents do we bring to the table?
• How much time and energy do we have to devote to our cause?
• What important contacts and connections do we have that can help us?
• What’s our name recognition/credibility/reputation?
• What level of assets can we afford to commit?

Should we expand our scope? With increased assets, some foundations choose to continue supporting their existing areas of interest but expand their geographic focus. So, instead of restricting funding to their hometown, they adopt a statewide or even national agenda. Other foundations have opted instead to widen the scope of their areas of funding. So, in addition to funding a program that provides meals for homeless individuals, a foundation may choose to start fighting homelessness itself by funding research and advocacy, thereby increasing the opportunity for impact.

Where can we achieve the greatest impact? As your foundation ramps up its grantmaking, devoting resources to research and analysis would be money well spent. If you want to build on your foundation’s previous work and expand locally, you might invite local funders or community leaders to help identify unmet regional needs. If you want to pursue an entirely new area of interest, you’ll want to know who else has been working on the problem, what has already been done, and what impact that work has had. In that case, you could hire an outside expert to undertake a “field scan” detailing what other funders and nonprofits have accomplished on that issue to date, whether their efforts have met with success, and where your foundation might achieve the most impact going forward. Not only will this help you avoid directing funds toward ineffective approaches or duplication of other efforts, it might also reveal potential new partners and allies. Because the IRS recognizes that private foundations incur expenses in the pursuit of their charitable purposes, tax law allows foundations to count such expenditures toward fulfilling their minimum distribution requirement.

Can we fund things that fall outside of our mission? With a growth in assets, you can have a separate bucket of funds for grantmaking outside your stated mission. This would enable the foundation to fund exciting programs that either present themselves or are uncovered in the course of executing the planned grantmaking strategy. Setting aside a portion of funds can also serve as a laboratory, enabling the foundation to experiment with promising programs before making a more significant or enduring commitment.

A New Way of Operating

A growth in assets provides you with an opportunity to deepen your commitment to the funding priorities your foundation has previously championed. But such an event also affords you an opportunity to break with the past and chart a new course. Regardless of the path you choose, you would be well served to assess whether the moment necessitates a new approach to foundation operations, including:

Guidelines and applications. To attract more targeted and relevant grant requests and to meet an increased MDR, you may want to solicit proposals from more nonprofits. You also might want to develop funding guidelines and a grant application form.

Detailed budgeting. If your growing foundation ventures into a new funding area, implements a new grantmaking strategy, and incurs additional expenses, an ad hoc approach to budgeting may no longer suit the organization’s needs. With increased size and complexity, it will likely become harder for your foundation to simply make grants until the MDR is fulfilled. At this point, you may want to create an annual budget, allocating specific dollar amounts to key funding areas, ongoing historical interests, and administrative costs.

A growth in assets provides an opportunity to deepen and expand your philanthropic agenda. Establishing clear objectives and taking the time to plan will help you successfully meet that opportunity.