Newly sworn-in Vice President J.D. Vance has long been a notorious skeptic of the philanthropy sector. Yet populist times make for strange bedfellows, and nonprofit leaders now say he could well play an influential role in shaping the Trump administration policy toward the sector in a way that massively benefits nonprofits.
Given Vance’s tactical policy shifts and more recent proclivity for throwing anti-woke red meat to his base — he once told Tucker Carlson the Ford and Gates foundations are “fundamentally cancers on American society” — there’s been an understandable tendency to wave away some of his more envelope-pushing ideas.
Consider the following “simple” proposal that Vance spelled out in a 2021 Newsweek op-ed: “Any charitable organization with an endowment over $100 million must spend 20% of its endowment each year, or else it loses its 501(c)(3) status and the preferential treatment of its income.”
Assuming it’s still something Vance favors several years on, this idea of a dramatic increase in the 5% payout rule to “encourage ‘charities’ to spend a little more time on their core mission” puts Vance on the same page, at least conceptually, with an array of nonprofit leaders, progressive thinkers, academics and donors who have been calling for similar reforms. While the percentages differ — Donor Revolt for Charity Reform, for instance, proposes increasing the payout to 10% for funders with assets over $50 million, and 7% for those with fewer assets — the proposals hinge on the premise that money is power and that nonprofit leaders, rather than foundation trustees, should wield that power.
There’s a crucial difference between progressive reformers and the “Hillbilly Elegy” author, however.
Individuals in the former group, broadly speaking, believe a higher payout would unlock more foundation dollars, according to Donor Revolt, on behalf of “the causes that desperately need it.” In contrast, Vance views a 20% payout as a blunt instrument that would, in effect, bleed the Fords and Gateses of the world dry. For Vance, power — or more specifically, power wielded by progressive funders — shouldn’t be shared as much as liquidated.
But if money truly is power, a 20% payout could have the opposite effect, by strengthening a generation of exactly the type of nonprofits Vance disdains. And make no mistake: There’s a lot of money on the table.
Foundations are sitting on $1.55 trillion that can be used for grantmaking
On January 14, FoundationMark, a research firm that tracks the investment performance of private foundations, reported that U.S. foundation assets rose by 11.5% to $1.64 trillion in 2024.
It’s a mind-numbing amount of money, but it’s worth remembering that foundations are not required to disburse 5% of total assets. Instead, the IRS stipulates they allocate 5% of noncharitable-use assets like stocks, bonds and private equity.
In an email to IP, FoundationMark founder and President John Seitz said noncharitable-use assets typically amount to 95% of total assets. Using that as a reference point, the 50,000-plus foundations with over $1 million in assets in Seitz’s data set are sitting on approximately $1.55 trillion — an equally mind-numbing figure that’s larger than the GDPs of all but 15 countries — that could be used for grantmaking.
And a significant amount of that money isn’t making its way out the door under the current rules.
Last August, Seitz crunched Form 990 data from the 40 largest U.S. foundations by total assets and determined that 17 of the 36 for which information was available for the last five years failed to hit an average 5% payout during that time frame. The list included many familiar names like the Hewlett Foundation (4.4%), Chan Zuckerberg Initiative (4.2%) and Knight Foundation (3.4%). And remember — those percentages include other qualifying distributions, like travel expenses and salaries.
The Council on Foundations notes that grants typically constitute 90 to 95% of qualifying distributions for the typical foundation, but that figure can vary significantly. Knight has offices in eight U.S. cities and, if its website is any guide, about 60 employees. According to the foundation’s Form 990 for the fiscal year ending December 2023, grants accounted for 78% of qualifying distributions. At least 15 senior staffers earned salaries of $200,000 or more, and nine trustees were paid $40,000 each.
Contrast this with lean private foundations helmed by living donors, such as Panda Express founders Andrew and Peggy Cherng, tech billionaire John Morgridge, and Michigan-based givers Ronda E. Stryker and William D. Johnston. Thanks to annual contributions that reduce the donor’s tax liability, they often blow past the 5% payout without jeopardizing the foundation’s grip on perpetuity. In addition, these foundations may have only a handful of staff and earmark as much as 100% of qualifying distributions toward grantmaking, with the catch being that support may only flow to a handful of organizations. (Vance’s living donor grantmaking nemesis, the Gates Foundation, isn’t so svelte. Last year, the New York Times’ Anupreeta Das reported that Warren Buffett severed ties with the megafunder due, in part, to “what he saw as bloat and inflated operating costs” of his erstwhile philanthropic partner’s charitable vehicle.)
Bottom line? Foundations are sitting on an incomprehensible amount of money. But all too often, only a fraction — or more specifically, a percentage of a fraction — of that money makes its way to nonprofits, even in an era of burned-out staff, impending cuts to the social safety net and a fundraising climate where overall charitable giving continues to decline.
Is it any wonder that individuals across the political spectrum are fed up with the status quo?
A defense of the 5% payout
The most coherent public defense for the 5% payout that I’ve come across is from the conservative Philanthropy Roundtable’s Jack Salmon, who wrote that the percentage “effectively balances short-term impact with long-term support for crucial societal needs” and that a proposal to raise the payout rate to 10% “would significantly stifle the long-term grantmaking capacity of foundations.”
Many reformers won’t dispute this point and its underlying math. Rather, they’d argue that the benefits of a higher payout now — aggressively tackling existential challenges that would otherwise grow exponentially in severity, making larger grants to build nonprofits’ long-term sustainability — override and may even obviate long-term capacity concerns, especially since, if the past is any indication, there will be plenty of money to spread around in 10, 50 or 200 years.
Nonetheless — and despite a few refreshing exceptions — many legacy foundations aren’t on board with reform. In addition to the Philanthropy Roundtable, the Council on Foundations and the Community Foundation Awareness Initiative “actively lobby against any reasonable change,” as Donor Revolt puts it — and they’re not alone.
Other powerful “charity lobby” players are the financial services companies that manage foundations’ endowments. If Congress were to raise the foundation payout rate, endowments will decrease and, assuming the foundations don’t receive additional contributions, investment managers will take a smaller cut since they’d be managing fewer assets.
Money is power, but it’s also a finite commodity. What would be a windfall for nonprofits would be bad for Wall Street’s bottom line.
Related Inside Philanthropy Resources:
For Subscribers Only
An increase in the payout must be complemented with other reforms
I bring up these factors to underscore the significant challenges facing Vance and others who have called for an increase in the 5% payout. But for the sake of argument, let’s work through two highly improbable hypothetical scenarios.
Imagine Congress passes Vance’s 20% payout rate without any additional reforms to the current law. It would be time for nonprofits to break out the champagne, right?
Not exactly.
A foundation can hit the 10% threshold by, for example, channeling a commensurate amount of money to a donor-advised fund. Foundations would be acting within the letter of the law, but not its spirit, since there’s no mechanism in place to ensure that money sitting in a DAF actually flows to nonprofits — ever.
Cognizant of what are, in effect, loopholes that allow foundations to divert funding to non-grantmaking activities, Donor Revolt’s “Call to Action” — which, for the record, I endorse — asks Congress to pass a package of changes to the tax law.
Beyond increasing the minimum payout requirement from 5 to 7%, and 10% for private foundations with assets over $50 million, the group demands that foundations cap management expenses that can be counted toward payout at 1% of assets, exclude compensation to family members from payout calculations and, among other DAF-related reforms that haven’t landed well with the investment management community, exclude private foundation grants to DAFs from counting toward payout.
An increase in the payout would expand foundations’ influence
This brings us to the second hypothetical scenario. I haven’t come across anything suggesting Vance supports Donor Revolt’s package deal, but let’s say all of its demands become law, only instead of 7% or 10%, Congress implements Vance’s 20% figure.
Had the VP really thought this through back when he floated the idea?
According to the Ford Foundation’s Form 990 for 2023, it had $15.6 billion in noncharitable-use assets and disbursed $951 million in qualifying distributions, giving it a payout ratio of 6.09%. If, however, it was subjected to a 20% payout, it would have earmarked $3.1 billion in noncharitable-use assets that year toward grantmaking, hosting conferences, travel expenses and other qualifying distributions.
Ford would become, to paraphrase Vance himself, a “social justice hedge fund” on steroids.
Nor should Vance expect that funders, regardless of their political persuasion, would be forced to disburse themselves out of existence since, presuming no further changes to the law, foundations (particularly those backed by living billionaire fortunes) could replenish their coffers with incoming contributions. FoundationMark’s John Seitz’s recent data analysis alludes to this point, noting that 25% of foundations’ 11.5% growth in total assets from 2023 to 2024 can be attributed to incoming contributions.
Add it all up, and Vance’s “simple proposal” to raise the payout rate to 20% is anything but. It would only reliably unlock more money for charities if it was packaged with a series of complementary reforms that face significant pushback from the financial services lobby seeking to preserve assets under management, and from foundations, including those on the conservative side of the spectrum, whose perpetual status could be threatened by such a high payout rate.
Oh, and the increased percentage would likely empower the very progressive foundations Vance is seeking to attenuate.
Given all of these moving parts and the fleeting nature of political capital, it probably won’t come as a huge surprise that IP’s No. 1 philanthropy prediction for 2025 was that the Trump administration “won’t attack philanthropy after all.” With so many juicier, less-complicated targets to go after, can you really blame them?
