More Family Foundations are Paying More than Five Percent Annually. Here’s Why.

NCFP’s Trends 2025 study showed that the majority of respondents are paying out more than five percent annually. Here, Maggie McGoldrick covers the various reasons that a funder might significantly increase their payout for a discrete period of time, including to make a big bet, account for programmatic shifts, or respond to a crisis.

The IRS requires private foundations to payout five percent of its assets each year. Funders have traditionally treated that five percent as the default payout, but many are beginning to think about five percent as a minimum rather than a ceiling, balancing their payout with their purpose and lifespan goals.

NCFP’s Trends 2025 study shows that just 25 percent of family foundations are now spending the minimum five percent, a significant change from Trends 2015 when 38 percent of respondents reported doing so. Twenty-six percent are spending between six and ten percent annually, a 62 percent increase over the last decade, and 20 percent report that they anticipate increasing their foundation’s payout rates in future years. From listening to and talking with our network, we know that family foundations increase their payout rates for many reasons, including a significant opportunity to meet their mission, a time of increased need in the communities they support, legacy grants, or because they intend to spend down.

Making Big Bets

Following the death of second-generation family member Bruce Duchossois in 2014, the Duchossois Family Foundation (TDFF) shifted from being a pass-through foundation to being endowed with a $100MM gift from Bruce. Simultaneously, the third generation became more closely engaged in the work of the foundation, with a particular interest in funding wellness and economic opportunity. The board ended up recommending a cutting-edge grant funding at the intersection of immunology and the microbiome, resulting in the creation of the Duchossois Family Institute at the University of Chicago. The foundation contributed $50MM over five years, matched by a personal gift from Janet and Craig Duchossois.

The foundation had never made a single grant of this size toward a new science, and the gift sent them far over their five-percent payout minimum, but the family was comfortable with taking some risk in this investment and was willing to make a big bet. Despite such a large gift, the foundation’s endowment has continued to grow and they have continued to spend at higher rates in recent years— 9.1 percent in 2022 and 11.8 percent in 2023. “With positive investment returns, we’ve proven that the endowment can still grow even when spending more,” said foundation president Mary Ann Roeser in a recent conversation with NCFP.

Meeting the Moment

Many funders are moved to spend more in times of crisis, such as when a natural disaster affects the communities they support, or when meeting their mission is particularly threatened.

In 2020, NCFP Fellow Dimple Abichandani, then executive director of the General Service Foundation (GSF), published an article about a “balancing test” approach to foundation spending. Unlike traditional spending policies, GSF’s balancing test takes into account far more than administrative costs and expected investment returns. Among the factors that GSF considers in its spending policy is the concept of “meeting the moment.” This component of Abichandani’s balancing test asks funders to consider whether this is a time of particular need for the foundation’s grantees and to weigh that against other factors that affect their spending practices, like perpetuity, investment returns, and values. Abichandani makes a compelling case that funders may wish to weigh “meeting the moment” more heavily in times of crisis and opportunity.

Covid-19

The advent of Covid-19 prompted many family philanthropies to consider what meeting an unprecedented moment looked like for them. For many, spending more than what they had planned was critical to supporting their grantees. The General Service Foundation, for example, responded by spending 10.5 percent in 2020.

The Duchossois Family Foundation’s (TDFF) approved budget seemed similarly insufficient to meet the unexpected needs of 2020 and the board strategically chose to allocate an additional $5MM in general operating support to several of the social service organizations it was already funding when the lockdown commenced in March 2020. For TDFF, spending 15.4 percent in 2020 was a values-led decision. The board was very concerned and agreed that “the needs of our community outweighed the budget in the conversation” said Roeser, who also notes that the TDFF board recognizes that sometimes “budgets and policies need to be loosened to be responsive to our communities.” Prior to Covid-19, TDFF projected its year-end assets to be nearly $137MM. Despite the additional $5MM gift outside of the anticipated budget, TDFF ended 2020 with assets of approximately $142MM—clearly demonstrating that increasing payout does not always result in immediate decreases to one’s endowment.

Threats to Democracy and Civil Society

Today, many funders are trying to meet a new moment—one in which nonprofits are contending with decreased federal funding and uncertain policies about diversity, equity, and inclusion. The MacArthur Foundation announced that it would increase its spending to at least six percent in 2025 and 2026 to support civil society. The Freedom Together Foundation (formerly the JPB Foundation) plans to spend up to ten percent for the next two years to “realize its mission and to protect and strengthen democracy,” according to an article from Inside Philanthropy.

Lemon Street Fund, a collection of 501(c)(3) and (c)(4) vehicles, does not use a private foundation for philanthropy and therefore is not bound to the same IRS regulations. Instead of using the lack of regulation as a reason to spend less, Lemon Street Fund co-founders Emily and Teo Valdés are increasing their funding. “We recognize the ways that new government policies, including but not limited to federal budget cuts, directly impact the work of organizations we support,” says Teo Valdes. “We completed all of our budgeted grants for multiyear partners and then an additional 20 percent in the first quarter.” The Lemon Street Fund anticipates spending approximately 120 percent more this year than it had projected on January 1.

And, many more foundations are publicly committing to action, including by increasing their payouts, to meet the moment in a trust-based way.

Legacy Grants

Another common impetus for increasing payout is legacy grants. Often occurring upon the death of a founder or family member or to mark a celebratory milestone, funders may issue legacy grants in honor of an individual or couple. Legacy grants may be given on top of the previously planned gifts as a way to celebrate the life of someone close to the foundation, resulting in a higher payout.

Programmatic Shifts

For a variety of reasons, donors may choose to shift the programmatic focus of the philanthropy. In these cases, thoughtful funders frequently give larger, final grants prior to sunsetting a program. This helps to support those grantees through a time of transition. Or, like the Diane and Norman Bernstein Family Foundation, funders might recognize that they have to spend more to have a significant impact on the issues they care about. Diane and Norman Bernstein Family Foundation Executive Director Kelly Lynch noted that, upon revisiting the foundation’s work at the passing of the founders, “one big revelation was the five-percent payout rate and preservation of capital for legacy purposes seemed in direct odds with our belief that in order to move the needle we need big, bold investments that meaningfully improve outcomes for people in our community.”

Payout in Uncertain Times

It’s easier to argue for increased payouts when the economy—and your investments—are thriving. But many leaders argue that it’s when investment returns—and future grantmaking budgets— are also at risk may be when it is most important for funders to step up. “We must commit to be counter-cyclical in our spending,” writes John Palfrey, president of the John D. and Catherine T. MacArthur Foundation in a recent LinkedIn post. “Spend more when the need is greatest and when the social return on our gifts is highest. That is the only sound answer in my book. We just have to figure it out.”

In balancing their payout with their purpose and their lifespan goals, philanthropies must take into consideration what opportunities they might miss to meet their mission by clinging to a steady spending rate—and what opportunities they can seize in being responsive to the immediate needs of their grantee partners and communities.

Stay tuned for more NCFP content that unpacks data from Trends 2025.

Maggie McGoldrick is a senior manager of marketing and communications at NCFP.