Taxes tax exempt under present us law if the annual

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Taxes : Tax-exempt under present U.S. law if the annual minimum payout requirement (currently 5% of asset value) is met. Legal and Regulatory : Governed by state law and Prudent Person standards; ongoing attention must be paid to maintaining the tax-exempt status by strict observance of IRS and any related Federal regulations. Unique Circumstances : The need to maintain real value after grants is a key consideration, as is the 5% of assets requirement for tax exemption. The real return achieved must meet or exceed the grant rate, with the 5% level a minimum requirement. Narrative : Investment actions shall take place in a long-term, tax-exempt context, reflect above average risk tolerance, and emphasize production of real total returns, but with at least a 5% nominal return. c.To meet requirements of this scenario, it is first necessary to identify a spending rate that is both sufficient (i.e., 5% or higher in nominal terms) and feasible (i.e., prudent and attainable under the circumstances represented by the Table 26H data and the empirical evidence of historical risk and return for the various asset classes). The real return from the recommended allocation should be shown to equal or exceed the minimum payout requirement (i.e., equal to or greater than 5% in nominal terms). The allocation philosophy will reflect the foundation’s need for real returns at or above the grant rate, its total return orientation, its above average risk tolerance, its low liquidity requirements, and its tax exempt status. While the Table 26H data and historical experience provide needed inputs to the process, several generalizations are also appropriate: 1. Allocations to fixed income instruments will be less than 50% as bonds have provided inferior real returns in the past, and while forecasted real returns from 1993 to 2000 are higher, they are still lower than for stocks. Real return needs are high and liquidity needs are low. Bonds will be included primarily for diversification and risk reduction purposes. The ongoing cash flow from bond portfolios of this size should easily provide for all normal working capital needs. 2. Allocations to equities will be greater than 50%, and this asset class will be the portfolio’s “work horse asset.” Expected and historical real returns are high, the horizon is long, risk tolerance is above average, and taxes are not a consideration. 28-14
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Chapter 28 - Investment Policy and the Framework of the CFA Institute 3. Within the equity universe there is room in this situation for small-cap as well as large-cap issues, for international as well as domestic issues and, perhaps, for venture capital investment as well. Diversification will contribute to risk reduction, and total return could be enhanced. All could be included.
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