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Abstract: 

Under IRC §4942, each year, a private foundation must make qualifying distributions in an amount roughly equal to 5% of the net value of its non-exempt-use assets. A typical grant-making family foundation satisfies most of its minimum distribution requirement by making grants to public charities. Certainly, during the COVID-19 pandemic and resulting economic downturn, public charities face unprecedented need. A foundation looking to make grants would find no shortage of grateful recipients and could easily meet its distribution requirement by supporting worthy organizations during the pandemic. But, current grant-making might not be desirable. A foundation that wants to fund a specific project may find that the project is impossible to implement while stay-at-home orders are in place. And, a foundation might be reluctant to sell investments at a loss in order to have cash to distribute. Set-asides create an avenue for foundations to meet the minimum distribution requirement without making distributions currently. The concept of set-asides permits a private foundation to treat money saved for specific future charitable projects—rather than paid out currently—as a qualifying distribution for purposes of the IRC §4942 mandatory payout rules. All foundations have the ability to make set-asides using the “suitability test.” New foundations also have the ability to make set-asides using the “cash-distribution test.” Both methods have a place in the advisor’s box of tools to help foundations weather the current storm.

Keywords: The Suitability Test; Cash-Distribution Test; Recording and Reporting Set-Asides

Affiliations:  1: Clark Hill PLC.