The Big Beautiful Bill: Why This New Tax Law Is Reshaping Endowment and Foundation Investing

A New Tiered Tax Structure

Before the OBBB, private foundations and endowments were subject to a flat 1.39% excise tax on their net investment income (NII). It was a straightforward, predictable drag on returns.

Now, things are different. The new law introduces a tiered, progressive rate structure:

Private Foundations:

• Under $50 million: Still pays the original 1.39% rate

• $50–250 million: The rate doubles to 2.78%

• $250 million–$5 billion: The rate jumps to 5%

• Over $5 billion: The rate reaches a staggering 10%

University Endowments:

• Student-adjusted endowment levels determine rates up to 8%, depending on their per-student asset levels.

This isn't just an increase; for the largest institutions, it's a dramatic sevenfold hike that fundamentally alters their operating environment.

The Compounding Cost Is Material

Every extra dollar paid in taxes is a dollar that can't be used for grants, research, or scholarships. This is a material change because the impact is immediate and, more importantly, compounding. A slower rate of return year after year means that the drag on a portfolio's value snowballs over time, shrinking its future grantmaking capacity.

Nationally, this is projected to result in $15.9 billion less in grants over the next decade. This projection comes from an analysis by the Center for Charitable Economics. The new tax regime doesn't just affect individual portfolios; it reshapes the philanthropic landscape. It's a behavioral necessity: portfolio turnover, fund structure, and advanced tax strategy are no longer niche concerns—they're central to the mission.

The OBBB's Dollar and Percentage Impact: A Comparative View

The following table highlights the impact of the OBBB Act on portfolios of various sizes, showing the direct dollar cost and the resulting percentage decrease in after-tax returns:

Endowment Size	Pre-OBBB After-Tax Return	Post-OBBB After-Tax Return	Tax Increase (Dollar Impact)	Tax Increase (Percentage Impact)
$50 Million	7.979%	7.979%	$0	0.000%
$100 Million	7.958%	7.917%	$41,700	0.524%
$200 Million	7.958%	7.917%	$83,400	0.524%
$1 Billion	7.958%	7.850%	$1,083,000	1.361%
$5 Billion	7.958%	7.850%	$5,415,000	1.361%

Analysis for a $100M Endowment

Consider a $100 million endowment with a 70/30 allocation:

	Pre-Bill	Post-Bill	20-Year Dollar Impact
Gross Return (8%)	$8,000,000	$8,000,000
NII (3%)	$3,000,000	$3,000,000
Excise Tax Rate	1.39%	2.78%
Tax Owed	$41,700	$83,400
Net Return After Tax	$7,958,300	$7,916,600
Real Net Return	4.96%	4.92%
Reduction of Assets due to new tax drag	$0		~$2.0M

While the annual difference might seem small, the table shows the power of compounding—that small difference grows exponentially over time.

Analysis for a $200M Endowment

Now let's apply the same logic to a larger, $200 million endowment, which falls into the same 2.78% tax bracket:

	Pre-Bill	Post-Bill	20-Year Dollar Impact
Gross Return (8%)	$16,000,000	$16,000,000
NII (3%)	$6,000,000	$6,000,000
Excise Tax Rate	1.39%	2.78%
Tax Owed	$83,400	$166,800
Net Return After Tax	$15,916,600	$15,833,200
Real Net Return	4.96%	4.92%
Reduction of Assets due to new tax drag	$0		~$3.9M

For a $200 million endowment, the new tax bill doubles the annual excise tax, from $83,400 to $166,800, representing a substantial new drain on returns and future spending capacity.

Analysis for a $1B Endowment

The tiered structure truly comes into focus with larger endowments. A $1 billion endowment falls into the 5% tax bracket:

	Pre-Bill	Post-Bill	20-Year Dollar Impact
Gross Return (8%)	$80,000,000	$80,000,000
NII (3%)	$30,000,000	$30,000,000
Excise Tax Rate	1.39%	5.00%
Tax Owed	$417,000	$1,500,000
Net Return After Tax	$79,583,000	$78,500,000
Real Net Return	4.82%	4.71%
Reduction of Assets due to new tax drag	$0		~$59.3M

For a $1 billion portfolio, the annual tax owed more than triples, increasing from $417,000 to $1.5 million. This translates to a notable decrease in the real net return and a significant amount of lost mission-driven capital.

Analysis for a $5B Endowment

Finally, let's analyze a $5 billion endowment, which also falls into the significantly higher 5% tax bracket:

	Pre-Bill	Post-Bill	20-Year Dollar Impact
Gross Return (8%)	$400,000,000	$400,000,000
NII (3%)	$150,000,000	$150,000,000
Excise Tax Rate	1.39%	5.00%
Tax Owed	$2,085,000	$7,500,000
Net Return After Tax	$397,915,000	$392,500,000
Real Net Return	4.96%	4.85%
Reduction of Assets due to new tax drag	$0		~$487.8M

For the largest endowments, the impact of the OBBB Act is magnified. The annual tax owed increases more than threefold, resulting in a more significant drop in the real net return compared to smaller endowments.

The High Cost of High Turnover and UBTI

The new tax structure makes portfolio turnover a critical variable. Portfolio turnover measures how frequently investments within a portfolio are bought and sold over a specific period, typically one year. The excise tax applies to net investment income (NII)—which includes interest, dividends, realized capital gains, and other earnings. The rate of turnover directly determines how much NII is recognized annually, and therefore, how much excise tax is owed.

Understanding High vs. Low Turnover Strategies

• Low-Turnover Portfolio (Buy-and-Hold Strategy): A long-term investment approach with minimal trading. This results in lower realized gains, modest NII, a smaller excise tax bill, and a portfolio that grows faster after taxes.

• High-Turnover Portfolio (Active Trading Strategy): Frequent buying and selling of securities. This generates much higher realized gains (NII) every year, exposing a greater proportion of assets to the excise tax and leading to a substantial after-tax return reduction.

The Dramatic Impact on Tax Bills

A portfolio with high turnover realizes more net investment income (NII) annually, which in turn subjects more of the fund to the higher excise tax rates:

Strategy	Low Turnover ($200M)	High Turnover ($200M)	20-Year Dollar Impact
Realized NII (% of assets)	3%	8%
Excise Tax Owed	$166,800	$444,800
Reduction of Assets due to new tax drag	$0		~$3.9M (low-turnover) vs. ~$10.5M (high-turnover)

As you can see, a high-turnover portfolio for a $200 million endowment can nearly triple the annual excise tax bill, magnifying the drag on returns.

An even more severe threat comes from Unrelated Business Taxable Income (UBTI). Onshore funds in the U.S. that use leverage or engage in direct operating activity can trigger a separate 21% corporate tax on top of the new OBBB excise rates. This double-taxation is a powerful disincentive. The solution is often an offshore blocker structure (such as a corporation in Cayman or BVI), which can shield the endowment from UBTI, passing only passive income that is subject to the lower excise tax.

The Net Cost on Returns

To further illustrate the impact, here are the calculated net rates of return for a $200 million portfolio after accounting for the new excise tax:

• Low-Turnover Portfolio: The net return after the new excise tax is approximately 7.92%

• High-Turnover Portfolio: The net return after the new excise tax is approximately 7.78%

This is a powerful illustration of the direct impact of the OBBB Act. It's important to remember that these figures only account for the new excise tax and do not include other potential fees or costs, which would further reduce the final return.

Advanced Strategies for Proactive Response

Forward-thinking organizations are already adapting by building a tax-mitigation strategy into their core investment policy. Here are some of the key advanced strategies:

• Tax-loss harvesting: Strategically sell losing positions to offset gains and shrink your annual NII.

• Income deferral: Favor investment vehicles like private equity or real assets with long holding periods and low distributed income.

• Asset location optimization: Place high-yield or high-turnover assets in sub-entities that are subject to lower tax rates.

• Strategic spending: Manage the timing of grants and spending to help manage year-end asset levels and avoid higher excise rate brackets.

• Manager due diligence: Select managers and fund structures that are explicitly designed to be tax-aware and UBTI-conscious.

• OCIO partnerships: Partner with specialized firms who can integrate all these strategies in a disciplined, mission-driven way.

The new reality rewards those who are proactive. Building tax mitigation, turnover control, and structural selection into your policy will protect capital for future generations and ensure resources go to charitable missions, not unnecessary taxes.

Final Thoughts

The "Big Beautiful Bill" changes the rules of the game. For large private foundations and university endowments, excise taxes have doubled, tripled, and in some cases, increased sevenfold. Tax-aware and UBTI-aware management is no longer an optional luxury—it's a necessity for sustainability and mission fulfillment.

The compounding effects mean that early action is critical; every year of inaction makes it harder to recover lost value. The new era rewards the disciplined and the proactive, ensuring that more capital remains dedicated to its intended charitable mission rather than flowing to unnecessary tax obligations.

For institutions affected by these changes, the message is clear: portfolio turnover, investment structure, and tax strategy are now central to preserving charitable capital and maximizing mission impact. Those who adapt quickly will maintain their philanthropic capacity, while those who delay risk seeing millions of dollars diverted from their charitable purposes to government coffers.

For more information and personalized guidance, please feel free to reach out to Vistamark Investments LLC. You can contact us at 312-895-3001, visit our website at www.vistamarkllc.com, or send us an email to info@vistamarkllc.com.