Friends,

I’ve been studying the wealth structures of billionaires and wealthy families for a long time. In the mid-2000s, I was forced into a multi-million dollar bankruptcy in my early 20s, despite having lawyers, accountants, financial advisors, and bankers supporting my bakery. I asked myself – how do billionaires and wealthy families navigate business losses and financial crashes and still maintain their billionaire status?

That led me to study bankruptcy law, tax law, corporate, business, IP, estate, trusts, nonprofits, and foundation structures in Canada, the UK, and the US. I realized the key was strategy, structure, and mindset. The wealthy earn, spend, invest, and reallocate their wealth differently.

For instance, the first time I really understood why billionaires have pledged 99% of their wealth to society, and why wealthy families operate family foundations, was in an LLM program doing a course on tax-exempt structures.

For context, an LLM is an advanced law degree that one takes after their JD – usually a specialization in a particular area of law: I specialized in business and tax law. Less than 10% of lawyers hold a JD, and the lion’s share of them have never taken a course on tax-exempt structures – nonprofits and foundations fall into that sector.

Think about that for a second – access to this information is openly available, yet highly restricted at the same time. Well, let me break down how this works in more depth.

Investing In Yourself And In Humanity.

We are taught to invest for ourselves. Build a retirement account. Buy stocks. Acquire real estate. Build a business. Create an emergency fund. Save for the children. Grow enough capital that one day work becomes optional.

All of that makes sense.

But there is another pool of capital that successful families rarely think about in the same way: charitable capital.

A private foundation can create two parallel investment conversations. One involves investing personal wealth for yourself and your family. The other involves investing assets that have been permanently committed to charity so they can potentially support charitable work for years to come.

The two pools have completely different owners and purposes, but the basic idea is surprisingly simple:

You can build an investment portfolio for your family’s future while also helping build a charitable portfolio for humanity’s future.

1. Personal Capital Can Build Your Family’s Future

Most wealth planning revolves around personal capital.

You earn income, pay taxes and expenses, and decide what portion of the remaining money should be consumed, saved, or invested. Investments can then compound and potentially provide future income, financial security, business opportunities, retirement resources, and an inheritance.

A personal investment portfolio might include:

stocks and bonds;
mutual funds and ETFs;
businesses;
real estate;
cash and fixed-income investments;
retirement accounts; and
other investments appropriate to the investor’s circumstances.

The objective is fundamentally personal. You own the assets. You generally receive the economic benefit. You can sell them, spend the proceeds, transfer them to your children, reinvest them, or use them to support your lifestyle.

That is personal capital.

There is nothing wrong with it. Building personal financial security is one of the most rational things an individual or family can do.

But personal capital does not have to be the only capital a family builds.

2. A Private Foundation Can Build a Separate Pool of Charitable Capital

Now imagine a family decides that $500,000, $1 million, or another amount will be permanently dedicated to charitable purposes.

The family contributes those assets to a 501 (c) (3), tax-exempt, private family foundation. The family members are the only board members and make 100% of the decisions. The earmarked funds are now owned by the foundation and are removed from the personal estate of the donors.

But permanently giving up personal ownership does not necessarily mean the foundation must immediately distribute the entire contribution.

A private foundation can generally hold investment assets, and federal tax law specifically regulates foundation investment activity. The IRS even provides valuation rules for foundation investments including publicly traded stocks, bonds, and mutual fund shares. (IRS, Valuation of Assets – Private Foundation Minimum Investment Return) (IRS)

This creates a second investment portfolio.

Not:

Your portfolio.

But:

The foundation’s portfolio.

Two Portfolios. Two Purposes.

The easiest way to understand the concept is to place the two pools beside one another.

Personal Investment Portfolio

The objective may include:

financial independence;
retirement;
family security;
wealth accumulation;
purchasing power;
inheritance;
business opportunities; and
personal financial goals.

Foundation Investment Portfolio

The objective is different.

The foundation’s investments must be managed consistently with its charitable responsibilities, including consideration of the foundation’s short- and long-term financial needs and its ability to carry out its exempt purposes. The IRS explains that foundation managers should consider factors such as expected return, risk and diversification when determining whether investments jeopardize charitable purposes. (IRS, Private Foundation: “Jeopardizing Investments” Defined) (IRS)

One portfolio exists principally for private financial benefit.

The other exists to help sustain charitable, social, and humanitarian activity.

That is the distinction.

3. Investment Returns Can Help Finance Future Philanthropy

This is where the idea becomes particularly interesting.

Imagine a foundation begins with $1 million.

If every dollar were immediately distributed, the foundation could create $1 million of immediate charitable deployment, but that particular pool of capital would be exhausted.

A different strategy may involve maintaining a diversified investment portfolio while making the qualifying distributions required under the private-foundation rules.

Private nonoperating foundations generally have an annual distributable amount tied to their minimum investment return. The IRS states that the minimum investment return generally equals 5% of the fair market value of assets not used directly for charitable purposes, reduced by acquisition indebtedness (mortgages), although the actual distributable amount requires additional statutory adjustments. (IRS, Minimum Investment Return; IRS, Distributable Amount) (IRS)

To keep the math simple and avoid complications related to distribution requirements, most of the foundations we work with donate the equivalent of 8-10% of the fund value. An active nonoperating foundation may have expenses and other allowed deductions that amount to .5-1% of the fund value, which reduce the 5% down to roughly 4-4.5%. That’s the concept in a nutshell.

The actual calculation matters because the tax exemption status is contingent of complying with the 5% distribution (using the math contained in the code). But, I believe you get the point.

Think Beyond the Original Donation

Suppose a foundation invests part of its charitable assets.

Over time, those investments may produce:

interest;
dividends;
capital appreciation;
rental or other investment income; and
gains from investments.

Investment returns are not guaranteed, and foundations are subject to specific tax and investment rules. But the broader concept is important.

Investment activity can potentially help charitable capital support charitable activity for a longer period.

Instead of thinking:

$1 million donated → $1 million disappears

consider:

$1 million donated → charitable investment portfolio → investment returns → qualifying distributions → charitable impact

The assets are no longer benefiting the donor personally.

They are working for the foundation’s mission. There are many instances where one large donation can fuel the foundation’s activities and grantmaking for several years – that’s the whole point of the investment fund – taxed at a flat-rate of 1.39%.

The Same Investment Principle, Applied to a Different Beneficiary

This is something investors already understand intuitively.

Imagine investing $100,000 for a newborn child.

You would not necessarily expect to spend the entire $100,000 during the child’s first year.

You might invest it. You might allow it to grow. You might make distributions when appropriate. You might manage it with a 20-, 30-, or 40-year horizon.

The objective is to make capital useful over time. A charitable endowment uses a related economic concept, but the beneficiary is different. Instead of building capital for one child, a charitable institution can build capital around a mission.

That mission might be education.

Medical research.
Homelessness.
Veterans.
Children.
Entrepreneurship.
Science.
Arts.
Community development.
Or another qualifying charitable purpose.

Imagine Two $1 Million Portfolios

Suppose a family has accumulated enough wealth to allocate capital to two completely separate objectives.

The first $1 million remains personal.

It might be invested to support:

retirement;
family expenses;
future opportunities;
children and grandchildren; and
long-term personal wealth.

The second $1 million is irrevocably contributed to a private foundation.

That portfolio might exist to support:

scholarships;
medical research;
nonprofit organizations;
community initiatives;
charitable programs; and
future generations of grantmaking.

Both portfolios may own investments. Both may require thoughtful asset allocation. Both may require risk management. Both may have long-term objectives. But economically and legally, they are entirely different.

One belongs to you.

One belongs to charity.

The Foundation Can Potentially Exist Long After the Original Donor

This creates a powerful long-term possibility.

A personal portfolio will eventually be consumed, transferred, inherited, donated, or distributed through an estate.

A foundation can potentially continue operating beyond the donor’s lifetime if properly governed and funded.

The original donor may be gone. The original business may have been sold. The original family home may belong to someone else. But the charitable investment portfolio can potentially continue financing the mission.

Children may participate. Grandchildren may participate. Future board members may participate. The capital can become institutional rather than personal.

That is one of the fundamental differences between wealth accumulation and institution building.

Investing Charitable Assets Requires Prudence

None of this means a foundation can invest recklessly.

IRC §4944 addresses investments that jeopardize a private foundation’s ability to carry out its exempt purposes.

The IRS explains that a jeopardizing investment generally involves a failure to exercise reasonable business care and prudence when considering the foundation’s long- and short-term financial needs. The analysis considers the investment in the context of the foundation’s portfolio as a whole, including expected return, risk and diversification. (IRS, Private Foundation: “Jeopardizing Investments” Defined) (IRS)

The rules are significant.

A jeopardizing investment can trigger excise taxes against the foundation and, in certain circumstances, foundation managers who knowingly participated. (IRS, Taxes on Jeopardizing Investments) (IRS)

A foundation investment portfolio therefore requires governance, judgment and appropriate professional oversight.

There Is Another Category: Program-Related Investments

Private foundations also have access to a fascinating concept known as a program-related investment, or PRI.

A PRI is fundamentally different from an ordinary investment made primarily to generate financial returns.

According to the IRS, a program-related investment generally must have a primary purpose of accomplishing one or more of the foundation’s exempt purposes, cannot have the production of income or appreciation as a significant purpose, and cannot have prohibited political purposes. (IRS, Program-Related Investments) (IRS)

Examples can include certain:

low-interest charitable loans;
educational loans;
investments supporting economically disadvantaged communities;
financing for charitable organizations; and
mission-driven investments structured to advance exempt purposes.

The IRS specifically identifies educational loans to individuals and low-interest loans to certain §501(c)(3) organizations as examples of potential PRIs. (IRS, Instructions for Form 990-PF) (IRS)

This introduces an entirely different way to think about philanthropic capital.

Sometimes the Investment Itself Can Be the Philanthropy

Traditional philanthropy often follows a familiar path:

Foundation → Grant → Charity

The charity receives the money and does not repay it.

A program-related investment can potentially create another path:

Foundation → Mission-Driven Investment → Charitable Purpose → Potential Return of Capital

Consider a qualifying low-interest loan made to advance a charitable purpose.

If the principal is eventually repaid, that capital can potentially be redeployed toward another charitable activity.

This does not mean PRIs are substitutes for ordinary investments or grants, and their legal requirements are important. The IRS emphasizes that significantly furthering the foundation’s exempt activities must be central to the investment. (IRS, Program-Related Investments) (IRS)

But conceptually, the possibility is remarkable.

A charitable dollar may sometimes be deployed, returned, and deployed again.

The Foundation Still Has to Put Money to Work for Charity

A foundation cannot simply accumulate investment assets indefinitely while ignoring its charitable responsibilities.

Private foundations generally must make annual qualifying distributions based on their distributable amount. The IRS explains that qualifying distributions include amounts paid to accomplish recognized charitable and other public purposes, certain assets purchased for direct charitable use, qualifying set-asides, and qualifying program-related investments. (IRS, Qualifying Distributions: In General) (IRS)

The system therefore creates a balance. The foundation may maintain investments. But it must also deploy charitable resources.

Invest. Distribute. Reinvest. Continue the mission.

That is what makes the structure potentially durable.

The Family Can Learn to Invest With Two Different Definitions of Return

Perhaps the most interesting lesson is philosophical rather than technical.

With personal investments, success may be measured by:

portfolio growth;
income;
appreciation;
risk-adjusted returns;
financial independence; and
wealth transferred to the next generation.

With charitable capital, another set of measurements becomes possible.

Success might mean:

students educated;
scholarships awarded;
families housed;
businesses launched;
research funded;
communities strengthened;
nonprofit organizations supported;
diseases studied;
acres protected; or
people given opportunities they otherwise would not have received.

One portfolio asks:

How much financial value did we create for ourselves?

The other asks:

How much human value did this capital help create for others?

A sophisticated family can understand both.

Closing Thoughts: Build Wealth and Build Something Beyond Wealth

Investing for yourself and investing for humanity do not have to be competing ideas.

A family can build businesses, acquire investments, prepare for retirement, provide for children, pursue financial independence and continue growing personal wealth.

Separately, it can decide that some portion of the wealth it has created will permanently leave the personal balance sheet and enter a charitable one.

That capital can then have a different job.

It can be invested prudently.
It can support grants.
It can finance charitable programs.
It can potentially make program-related investments.
It can educate the next generation about stewardship.

And if managed properly, it can potentially continue supporting a mission long after the person who originally earned the money is gone.

That changes the definition of investing. The question is no longer simply:

“How large can my portfolio become?”

There is another question worth asking:

“What if I built two portfolios: one designed to provide for my family’s future and another designed to help provide for humanity’s?”

One creates personal wealth. The other creates charitable capacity. You can invest for yourself and invest for humanity.

That’s it for now. I hope you leave inspired to think about this topic and embrace philanthropy into your business and family legacy as well.

Cheers,
Sid Peddinti
Nonprofit & Tax Lawyer. Researcher. Family Office Architect.

References

[IRS, Minimum Investment Return] Internal Revenue Service, Minimum Investment Return, explaining the general 5% minimum investment return calculation applicable to private foundations. (IRS)

[IRS, Distributable Amount] Internal Revenue Service, Tax on Private Foundation Failure to Distribute Income: Distributable Amount, explaining the adjustments used to determine a private foundation’s distributable amount. (IRS)

[IRS, Qualifying Distributions] Internal Revenue Service, Qualifying Distributions: In General, describing expenditures, assets, set-asides and program-related investments that can constitute qualifying distributions. (IRS)

[IRS, Jeopardizing Investments] Internal Revenue Service, Private Foundation: “Jeopardizing Investments” Defined, discussing prudence, portfolio risk, expected returns and diversification under IRC §4944. (IRS)

[IRS, Taxes on Jeopardizing Investments] Internal Revenue Service, Taxes on Jeopardizing Investments, explaining potential excise taxes imposed under IRC §4944. (IRS)

[IRS, Program-Related Investments] Internal Revenue Service, Program-Related Investments, explaining the requirements applicable to PRIs under IRC §4944(c). (IRS)

[IRS, Form 990-PF Instructions] Internal Revenue Service, Instructions for Form 990-PF, including reporting and examples of program-related investments. (IRS)

Educational purposes only. This article provides a general discussion of private-foundation investing and does not constitute individualized legal, tax, investment, or financial advice. Human and AI-generated content.

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