How is the 5% foundation minimum distribution actually calculated?

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AcadiFi · Accepted Answer

The 5% minimum distribution requirement for non-operating private foundations is calculated on the foundation's non-charitable-use assets. Specifically, it is 5% of the monthly average fair market value of investment assets during the prior year, excluding assets used directly in charitable activities (e.g., a building housing the foundation's program staff). Worked example: Hawthornwood Foundation had monthly-averaged investment assets of $120M in 2025. Minimum qualifying distributions for 2026 equal 5% x $120M = $6M. These must actually be paid out by the end of 2026 (technically by the end of the year following the tax year they were computed for) or the foundation faces a 30% excise tax on the shortfall under IRC Section 4942. What counts as a qualifying distribution: grants to public charities and certain operating foundations, amounts paid for direct charitable activities (staff salaries for program work), reasonable administrative expenses tied to grant-making, and program-related investments (PRIs). What does not count: investments in grantees that aren't PRIs, fundraising costs, and investment management fees. Timing mechanics: the foundation has a five-year carry-forward for distributions in excess of the 5% floor. If in 2026 it distributes $7.5M ($1.5M excess), this excess can offset shortfalls in 2027-2031. ```mermaid flowchart LR A[Monthly asset
FMV] --> B[Annual avg] B --> C[x 5%] C --> D[Min qualifying
distribution] D --> E[Pay by
year+1] ``` CFA exam: know both the 5% rule and that qualifying distributions include program expenses, not just grants.

How is the 5% foundation minimum distribution actually calculated?

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