Should private foundations spend down their endowment?

by: Kyle Anderson
May 31, 2022
A calculator and dollar bills

Family foundations are almost always established with the noble intention of creating a philanthropic legacy that can span across generations. Traditionally, these foundations are designed to endure indefinitely, providing a steady and consistent stream of funding to public charities year after year. Typically, foundations adhere to the legal obligation of distributing approximately 5% of their endowment each year, thereby ensuring their sustained viability without excessive diminishment of their asset base.

However, in recent decades, a new philosophy has been gaining momentum within the philanthropic sphere. A small but growing number of foundations have chosen to limit their lifespan and spend down their assets within a specified timeframe. This emerging philosophy has been inspired by the actions of well-known philanthropists who have publicly declared their intention to distribute the majority of their fortunes during their lifetimes. A prime example is the Gates Foundation, which plans to give away its entire endowment within 20 years after the deaths of Bill and Melinda Gates. Similarly, Warren Buffet has announced that upon his passing, all his remaining Berkshire Hathaway shares will be liquidated and utilized for philanthropic purposes within a 10-year period. Numerous other prominent billionaires have also made similar commitments regarding significant portions of their total assets.

Reasons to spend down:

Sense of Urgency:

Foundation leaders often feel a pressing sense of urgency regarding their mission, driving them to opt for the spend down approach. Certain causes are viewed as deteriorating exponentially over time, with the potential to become uncontrollable if not promptly addressed. In such cases, it becomes crucial to swiftly marshal resources and focus on specific areas. Climate change serves as a prominent example that resonates with many individuals.

Impact during the Donor's Lifetime:

Another compelling reason for spending down the endowment is to enable the original founder to witness firsthand the difference they are making within their own lifetime. The act of giving to help and support others instills a profound sense of personal satisfaction and development. Being part of something greater than oneself and participating in significant accomplishments holds immense value for many philanthropists.

Moreover, adopting a strategy of making larger, more substantial distributions in the near-term can prove to be a highly effective approach compared to dispersing smaller grants over an extended period. To illustrate, let us consider the scenario of a highly polluted superfund site. In such a case, it is far more logical and efficient to allocate a significant amount of resources to expedite the cleanup process, rather than relying on a slow trickle of funding that prolongs the remediation efforts. By concentrating substantial resources into a concentrated effort, the impact of the cleanup can be accelerated, ensuring a swifter restoration of the site and mitigating the potential risks and long-term consequences associated with its pollution.

Maintain Philanthropic Intent: 

Many donors harbor strong convictions regarding the problems they aim to address with their philanthropic resources. It is common for new philanthropists to carefully think through the best utilization of foundation resources to ensure alignment between the foundation's mission and the founder's values. As foundations mature, they may experience mission creep, deviating from their original goals over time. For instance, an archived article from the New York Times from 1977 recounts how Henry Ford IIresigned from his role with the Ford Foundation due to concerns about itsdeparture from its initial ideals. However, some philanthropists perceivemission creep as a natural occurrence, believing that future generations willadapt their focus to changing times.

Reasons to exist in perpetuity

Addressing Continuing Problems:

Certain societal issues cannot be resolved through a one-time infusion of resources. Persistent social-service needs require sustained, long-term funding because definitive solutions remain elusive. Hunger and drug addiction are examples of intractable problems that are likely to persist in the world for generations to come. Foundations structured to exist in perpetuity play a vital role in providing long-term support for such challenges.

Family Engagement Across Generations:

Many founders hope that a family foundation will foster stronger family ties and facilitate the transmission of family values across multiple generations. This concept holds particular appeal for young foundations. The prospect of successive generations actively contributing to positive change in the world while upholding family connections is deeply attractive to many founders. Moreover, a foundation can enhance the influence and prestige of a family, serving as a platform for valuable learning experiences for younger family members.

Leaving a Lasting Legacy:

Renowned philanthropists of the past such as Rockefeller, Ford, and Carnegie have left indelible legacies that endure to this day. However, the concept of legacy extends beyond well-known foundations; it holds meaning for family foundations of all sizes. While an excessive focus on legacy can lead to vanity, the desire to leave a positive impact and improve upon the world is inherently commendable. Establishing a foundation in perpetuity ensures an iterative and ongoing legacy that can be carried forward by succeeding generations.

In conclusion, the decision of whether foundations should spend down their endowment varies depending on the leaders of each foundation. The "right" answer intertwines with values, intent, family dynamics, and the foundation's specific circumstances. While the majority of foundations will likely continue operating in perpetuity, the notion of accelerating giving within the near future deserves careful consideration and evaluation. By exploring the possibilities of spending down, foundations can seize opportunities to make a substantial and immediate impact on the causes they hold dear.

Seeking expert guidance? We're here to help!

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