Excess Business Holdings

If you manage money for a family that has a private foundation, or you’re helping a business owner who is thinking about creating one, there’s a set of tax rules worth getting comfortable with early in the relationship. They’re known as the “excess business holdings” rules, and they limit how much of an operating business a private foundation may own.

The reassuring news is that most foundation portfolios never come anywhere near these rules. Publicly traded stocks, bonds, mutual funds, and most hedge funds and investment partnerships aren’t affected at all. The rules only come into play when a foundation holds a meaningful stake in an active business. Even then, the law builds in generous grace periods, often ive years or more, to adjust.

So why learn them? Because the situations where these rules do matter are exactly the ones you’re likely to see: a client who wants to donate stock in the family business to a foundation, a client selling a company and funding a foundation with the proceeds, or a family member adding to a position in a company the foundation already owns. An advisor who understands the basics can spot these moments early and guide the family toward the right sequence of steps. This primer gives you that working knowledge in plain terms.