Foundation
Foundation
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Types:
Independent: charity, education etc. 5% of asset spending
requirement.
Company-Sponsored: further sponsor’s business interest. 5% of
asset spending requirement
Operating:
for funding an organization; 85% of dividends and interest spending requirement
Community:
Public-sponsored; no spending requirement
Objectives:
Return:
long term, beat spending and inflation
Risk:
more risk tolerant as no liability
Constraints:
Time horizon: usually long
Liquidity:
depends on minimum spending rate
Tax consideration: zero; 1% for private foundation; regular
corporate income for unrelated business income
Legal and Regulatory: Uniform Management Institutional Fund Act
(UMIFA)
Endowment:
Permanently
funding some desired activity
No
spending requirement
Earmarked
for specific purposes
Spending rules:
- Simple Spending Rule:
spending_t = spending rate *
market value _t-1
- Rolling 3-year average spending
rule:
spending_t = spending rate
*(MV_t-3+MV_t-2+MV_t-1)/3
- Geometric spending rule:
spending_t = spending_t-1 * R
*(1+I) + (1-R) * spending rate *MV_t-1
I is inflation rate and R is smoothing factor
Objectives:
Return:
1)
total
spending approach: can use liquidity of capital gain
2)
Minimize
spending volatility
3)
Long
term spending rate + inflation < Long term return
Risk:
If
spending is a large portion of the recipient’s overall budget, risk tolerance
is low
Constraints:
Time horizon: infinite
Liquidity Requirement: usually low
Tax Consideration: Tax exempt (So tax exempt bond is not
good); if supported entity generates unrelated business, has to pay tax
(Unrelated Business Income Tax UBIT)
Legal and regulatory: Prudent investor rule applies