Article from Bradley Lard & Megan Wilson of Bradley Arant Boult Cummings LLP



Making your family foundation’s assets
work as hard as its grants


Family foundations that distribute grants to worthy charitable organizations to accomplish their philanthropic goals are a familiar part of the charitable landscape. While grant making is an important part of the work of family foundations, it is not the only tool in a family’s philanthropic tool kit.
A family foundation may also invest its assets to accomplish its charitable goals using a range of investment vehicles that are often referred to as “impact investments”.

The term “impact investments” means different things to different people, and people use it to refer to a variety of investment vehicles.
In general, impact investments are different from more traditional investments because they take into consideration (to varying degrees) the social or environmental risk or impact of a given investment.
Compare this to a more traditional investment model that looks to generate competitive returns based on profit maximization, without taking into consideration social or environmental concerns. In a traditional model, a family foundation focused on saving the “Crumple-Horned Snorkack” would not take into consideration whether its investment portfolio invests in companies that might contribute to the endangerment of the Snorkack. The foundation would invest to generate competitive returns and to maximize profit, and use that profit to further its charitable work.


The traditional investment model described above has certainly stood the test of time. However, some family foundations have sought out different investment models that seek to generate both financial and social/environmental returns, outcomes or impact.
Generally, such family foundations are motivated by a desire to deploy part or all of the principal assets of the foundation, in addition to its grant making dollars, in furtherance of the family’s charitable mission. When engaging in impact investing, the governing body of the family foundation must determine those investment policies that are most sensible for that foundation in light of its mission, its tolerance for risk, and applicable state and federal law.

Impact investment models may involve the use of negative screens, where investments with high environmental, social or governance risks (or other risks of particular concern to the family) are screened out. Using the example above, the family foundation focused on saving the Snorkack would take into consideration the impact the companies it chooses to invest in have on the Snorkack habitat.
Another strategy used, perhaps in tandem with the negative screens discussed above, is positive screening, where investments are specifically selected because the companies involved have integrated social and environmental concerns into their business models. Again, the exemplar foundation discussed above would use positive screens to make investments in companies with practices that demonstrate a positive impact on the protection or preservation of Snorkack habitat.


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Family foundations might also make direct investments in for-profit or nonprofit organizations to accomplish their philanthropic goals through program-related investments (PRIs). PRIs are specifically defined in the federal tax code – and have been since 1969. Many foundations have been using PRIs to further their charitable purposes for a long time.
To qualify as a PRI, the primary purpose of the investment must be to accomplish the foundation’s charitable purpose; the production of income may not be a significant purpose. For example, a foundation might make an interest-free loan directly to an economically disadvantaged individual to attend college. Or, a foundation focused on revitalizing a severely blighted urban area might provide an incentivising loan to a for-profit business to establish a new plant in that area.
Family foundations might also make direct investments related to their missions that do not qualify as PRIs (e.g., if the profit motives behind the investment are significant or if the charitable purposes are less than primary). These mission-related investments (MRIs) may be made primarily for charitable purposes or for dual purposes – both financial and charitable.
Specific rules apply to determine whether an investment qualifies as PRI or whether an MRI could jeopardize a foundation’s ability to carry out its charitable purposes.
When considering whether impact investing is right for your family foundation, we recommend that you consult with legal counsel to help ensure that the foundation complies with applicable state and federal law.


As a final note, some foundations are trying to maximize the impact of their charitable dollars by spending down their assets during the founders’ lifetimes. Generally, a private foundation must spend annually a minimum percentage of its money or property in furtherance of its charitable purposes. However, a foundation may choose to spend more than the minimum distribution amount each year.
The governing body of the foundation should set an appropriate spending policy (and related investment policies) that aligns with its mission. For example, a foundation that has set an ambitious goal of eradicating a particular blight on society may choose to spend down its corpus to maximize the impact the foundation has in a short period of time. However, for other goals, it might be preferable to maximize the time period during which distributions are available or to stabilize a stream of funding over time.

This article is not intended to express an opinion about what investment model might be right for a specific family foundation. Rather, the purpose of this article is to shine a light on some of the ways in which your family foundation might seek to accomplish its charitable goals.








via Family Business Advocates