This Isn't Like Inheriting Other Assets
When someone inherits a house, they get a property. When they inherit a stock portfolio, they get investments. When they inherit a private foundation, they get a legal entity with ongoing federal and state compliance obligations, an IRS filing requirement, a mandated annual distribution, and a set of rules so strict that routine business transactions can trigger penalty taxes.
Most people who inherit a foundation didn't create it. They didn't design its governance structure, choose its investments, or establish its grant-making practices. But they're now responsible for all of it — and the penalties for getting things wrong range from excise taxes to personal liability.
If you've recently inherited responsibility for a private foundation, the first thing to know is that this is manageable. The second thing is that you need to get oriented quickly, because the compliance clock doesn't pause for transitions.
The Six Excise Taxes You Need to Know About
Private foundations operate under a set of rules in the Internal Revenue Code (Chapter 42) that public charities don't face. These rules impose excise taxes — essentially penalties — for specific violations. Here are the ones that matter most:
Self-dealing is the biggest trap. The IRS prohibits virtually all financial transactions between the foundation and "disqualified persons" — a category that includes you, family members, board members, substantial contributors, and companies they control. This is absolute. It doesn't matter if the transaction is at fair market value, beneficial to the foundation, or tiny. If the foundation rents office space from a board member, buys supplies from a family member's company, or lends money to a disqualified person, that's self-dealing. The initial penalty is 10% of the amount involved, and if it's not corrected, it jumps to 200%.
The 5% distribution requirement. Every private foundation must distribute at least 5% of the fair market value of its non-charitable-use assets each year. This is called the minimum distribution requirement. Qualifying distributions include grants to charities, reasonable administrative expenses, and program-related investments. If you fall short, the penalty is 30% of the undistributed amount — and 100% if it's not corrected.
The investment income tax. Foundations pay a 1.39% excise tax on net investment income — interest, dividends, rents, royalties, and capital gains. This is paid through quarterly estimated tax payments.
Excess business holdings. The foundation and disqualified persons together can't hold more than 20% of a business enterprise. If you've inherited a foundation that holds a family business, you may have a five-year window to divest. Get this reviewed immediately.
Jeopardizing investments. Highly speculative investments — margin trading, commodities futures, certain alternative assets — can trigger a 10% penalty if the IRS considers them a jeopardy to the foundation's charitable purpose.
Taxable expenditures. The foundation can't spend money on lobbying, electioneering, or grants to non-charities without "expenditure responsibility" — a due diligence and reporting process that many foundations don't have in place.
Your First 90 Days: What to Do
Find the foundation's key documents. You need the articles of incorporation or trust agreement, the bylaws, the most recent Form 990-PF (the foundation's annual return), the current investment policy statement (if one exists), any grant-making policies, and the conflict of interest policy. If you can't locate these, that's your first red flag — and your first priority.
Understand the filing calendar. The 990-PF is due by the 15th day of the 5th month after the fiscal year ends. For a calendar-year foundation, that's May 15. Estimated tax payments are due quarterly. State filings vary. Miss three consecutive 990-PF filings and the IRS will revoke the foundation's tax-exempt status — automatically.
Review the board. Who's currently on the board? Are terms current? Is there a quorum? In many inherited foundations, the board may consist of aging members of the founding generation who are no longer active. You may need to reconstitute the board with people who can actively govern.
Get a handle on the finances. What are the foundation's total assets? What's the current investment allocation? What was the investment return last year? What was the total distribution? Is the 5% minimum being met? Who manages the investments, and under what terms?
Check for self-dealing risks. Review all transactions between the foundation and anyone connected to it. Are any board members being compensated? Is the foundation using property or services from related parties? Even well-meaning arrangements can be self-dealing violations.
Don't make sudden changes. If the foundation has been operating reasonably well, you have time to learn the landscape before making major decisions. The exception is compliance deadlines — those need to be identified and met regardless.
The Ongoing Obligations
Once you're past the initial transition, running a private foundation involves a consistent set of annual responsibilities:
File the Form 990-PF and pay the excise tax. Meet the 5% minimum distribution requirement. Hold regular board meetings and maintain minutes. Review and update the investment policy statement annually. Conduct grant due diligence and document grant decisions. Ensure all board members sign the conflict of interest policy. Monitor for self-dealing risks in all foundation transactions. Complete any required state filings.
None of this is individually difficult, but the volume and the stakes — particularly around self-dealing and distributions — mean that most foundation inheritors benefit from having an operational partner who understands the requirements.
You Don't Have to Figure This Out Alone
The foundation management market is split between expensive advisory firms that charge tens of thousands annually and DIY approaches that leave inheritors guessing. There's a middle path.
If you've recently inherited a foundation and want an objective assessment of where things stand, a Foundation Governance Review examines your governance documents, compliance status, board structure, and operational practices — giving you a clear picture of what needs attention.
If you need ongoing support — someone to help manage operations, ensure compliance, prepare for the 990-PF, and keep the foundation running smoothly — a Foundation Management Retainer provides that structure on a monthly basis, scaled to the foundation's complexity.
And if you're navigating a full transition — new leadership, reconstituting the board, establishing policies and procedures — the Foundation Transition Navigator is designed specifically for inherited foundations going through that process.
The foundation your family created represents a meaningful legacy. Getting the operations right is how you protect it.
Frequently Asked Questions
What is the self-dealing rule for private foundations?
The IRS prohibits virtually all financial transactions between a private foundation and "disqualified persons" — which includes you, family members, board members, substantial contributors, and companies they control. This is absolute: even transactions at fair market value are prohibited. The initial penalty is 10% of the amount involved, escalating to 200% if not corrected. Self-dealing is the single biggest compliance trap for inherited foundations.
What is the 5% distribution requirement for private foundations?
Every private foundation must distribute at least 5% of the fair market value of its non-charitable-use assets annually. Qualifying distributions include grants to charities, reasonable administrative expenses, and program-related investments. If you fall short, the penalty is 30% of the undistributed amount — and 100% if not corrected. Track this throughout the year, not just at year-end.
How do I find the foundation's Form 990-PF?
Search for the foundation on ProPublica's Nonprofit Explorer or Candid (formerly GuideStar) — both provide free access to 990-PF filings. You can also request copies from the IRS directly. The previous administrator, accountant, or attorney may also have copies. The 990-PF is a public document, so there's no confidentiality barrier.
Can I shut down an inherited private foundation?
Yes, through a process called "termination." You can distribute all assets to one or more public charities and dissolve the foundation. This eliminates ongoing compliance obligations but ends the foundation's legacy. Alternatively, you can convert to a donor-advised fund, which is simpler to manage. Both options should be discussed with a tax advisor.
Do I need to keep the same investment advisor?
No. You can change investment advisors, but review any existing contracts first for termination provisions. This is actually a good time to reassess the investment policy — the prior advisor may have been chosen by the original donor under different circumstances. Just ensure any changes comply with the jeopardizing investment rules.
Related Resources
For the annual compliance calendar and filing requirements, see private foundation annual compliance checklist. For more context on foundation services, visit the private foundation resource hub. And for a professional assessment of where the foundation stands, a Foundation Governance Review covers compliance, governance, and operations in a single engagement.