INSIGHT

Minimum Distribution Planning for Private Foundations 

Daniel Figueredo • March 26, 2026

Industries: Nonprofit

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Running a private foundation means juggling mission, relationships, and compliance — none more consequential than your private foundation required minimum distribution. The IRS requires private nonoperating foundations to distribute at least 5% of their non-charitable assets each year, but meeting that requirement strategically is where real financial stewardship begins.  

This article walks through how the minimum distribution requirement works, how to calculate it correctly, and how smart planning can help your foundation do the most good at the right time or over the longer term. 

Understanding the 5% Distribution Requirement 

Under Internal Revenue Code Section 4942, your foundation must make “qualifying distributions” equal to at least 5% of its average non-charitable assets each year. Miss that threshold, and the IRS imposes a 30% excise tax on the foundation for shortfall — a painful penalty that’s entirely avoidable with proper planning. Fail to make the remaining required distributions within 90 days of an IRS notice of deficiency, and you can add another 100% excise tax on the remaining amount undistributed at that time. 

What counts as a qualifying distribution? Grants to public charities are the most common form, but the definition is broader than many foundation managers realize. Qualifying distributions also include:  

• Reasonable administrative expenses tied to charitable activities (salaries, professional fees, and supplies)  
• Costs of running direct charitable programs  
• Amounts paid to acquire assets used for charitable purposes 
• IRS-approved set-asides for future charitable work 
• Program-related investments (PRIs) 

One important caveat: expenses considered to be part of “net investment income” do not count, such as investment management fees and other operating and administrative expenses allocated toward investment oversight (i.e., salaries and benefits, legal, accounting, occupancy, etc.). Know the difference before you file. 

Private operating foundations are a special designation within foundations that are not required to calculate the private foundation required minimum distribution. However, they have other stringent tests that must be met each year with how they demonstrate they are operating charitable programs directly. 

How to Calculate Your Private Foundation Required Minimum Distribution 

The calculation has a few moving parts, but once you understand the logic, it becomes manageable. 

Start by calculating the average fair market value of your foundation’s assets for the year. You exclude debt used to acquire investments and any charitable-use assets, like a building your foundation occupies. From there: 

• Cash is averaged using the first and last day of each month 
• Marketable securities use a monthly average 
• Alternative assets can be valued annually, and real estate every five years 

Once you have that average, you reduce it by 1.5% (the IRS’s allowance for operating cash), leaving you with 98.5% of your average assets. Multiply that figure by 5%. Then subtract any excise or income taxes paid during the year and adjust for PRI activity. The result is your distributable amount. 

Your foundation then has 12 months after the close of the tax year to satisfy that requirement. Therefore, if you didn’t distribute enough during the current tax year you don’t need to panic, but you must ensure any shortfall is distributed the following year. Undistributed income is tracked on the IRS Form 990-PF. You could theoretically be short the entire minimum distribution for the tax year, which would require at least that amount be distributed the next year to remain compliant. You have no room to distribute less the following year, even if the stock market has a major correction in the year you must payout. 

Maximizing Impact Today or for the Future? 

This may feel counterintuitive, but distributing exactly the required 5% — rather than a more generous amount — can produce greater philanthropic impact over the long term. 

Here’s why: a foundation that gives away 7% annually depletes its asset base faster, which reduces future distributions. A foundation giving 5% preserves and grows its corpus, allowing cumulative distributions plus remaining assets to surpass the more aggressive payout strategy by year 20 or beyond.  

That said, the right payout rate depends on your foundation’s goals. For example, spend-down foundations may feel their mission is urgent or their time horizon is more limited, and so a higher distribution rate may make sense.  

There is a real need for foundations to provide necessary funding to public charities to accomplish their missions today, so if you find that you need to exceed the private foundation required minimum distribution for a period of time, you are given credit for excess carryover distributions for the trailing 5 years. If you fall below the private foundation required minimum distribution in future years, you can use the carryovers toward the remaining requirement. 

If you’re building for perpetuity, staying closer to the minimum may serve your beneficiaries better over time. If you are targeting a long-term rate of return of 7%-8%, there may not be much excess left after inflation to spend much higher than the 5% average. 

Timing Your Distributions Wisely 

Many foundations make grants in the same year they’re calculating average assets — essentially working ahead. This creates unnecessary guesswork since you won’t know your final average asset value until the year is closed. 

A cleaner approach: make grants in the subsequent year, once asset values are finalized. This eliminates estimation errors and gives you a clear target. If you over-distribute in a given year, the excess carries forward for up to five years and can offset future required distributions. 

Additional Strategies Worth Exploring 

Beyond the basics, a few planning strategies can help your foundation stretch its impact: 

• Harvest capital losses to offset realized gains and reduce your 1.39% excise tax on net investment income. 
• Make in-kind grants of appreciated securities directly to charities to avoid an excise tax on net investment income on the granted securities. 
• Grant to a public charity’s donor-advised fund (“DAF”) program. A note of caution that you must disclose on your IRS Form 990-PF when grants are made to DAFs and explain how they are made for charitable purposes described in section 170(c)(2)(B). Also, grants to DAFs by private foundations have received attention and interest from the IRS for some years. 
• Incorporate program-related investments to recycle dollars toward mission-aligned lending or equity activity 

Working With BPM  

Private foundation required minimum distribution planning sits at the intersection of tax law, investment strategy, and mission alignment — and getting it right takes more than a spreadsheet. BPM’s nonprofit industry solutions team works with private and family foundations of all sizes to build distribution strategies that satisfy IRS requirements while protecting long-term philanthropic capacity. Our professionals understand the nuances of foundation compliance and bring practical, mission-focused thinking to every engagement.

If your foundation is ready to take a more intentional approach to private foundation required minimum distribution planning, we’d love to help. To start the conversation, contact us.