Should private foundations spend down their endowment?
Family foundations are typically created with the intention of building a philanthropic legacy that can last generations. They are customarily designed to “last forever” and have a reputation for providing a slow but steady stream of funding to public charities year in and year out. Many foundations give out the minimum amount required under the law each year, which is approximately 5% of their endowment.
For the last several decades a new philosophy has been gaining momentum. A small but growing segment of foundations has decided to limit their own lifespan and spend down their assets in a limited period of time. This new philosophy has been spurred on by the visibility of well-known philanthropists who have announced plans to spend down the vast majority of their fortunes. The Gates Foundation, for example, has announced it will give away its entire endowment within 20 years after the deaths of Bill and Melinda Gates. Likewise, Warren Buffet has announced that all the Berkshire Hathaway shares that he still owns upon his passing are to be liquidated and used for philanthropic purposes within 10 years after his estate has been settled. Many other famous billionaires have made similar pledges for significant portions of their total assets.
Reasons to spend down
Sense of Urgency:
The greater foundation leaders feel a sense of urgency for their mission, the more likely they are to decide to go the spend down route. Some causes are viewed as getting exponentially worse as time goes on with the potential to become uncontrollable. If that is the case then resources should be marshalled quickly and employed in highly focused areas. The poster child issue here for many people is climate change.
Impact during the Donor’s Life:
Another reason to spend down the endowment is so that the original founder can bear witness to the difference they are making within their own lifetime. Giving to help and support others provides a pleasing sense of personal satisfaction and growth. It feels good to be a part of something bigger than yourself and many donors want to see big wins with their own eyes. It is also possible that making larger distributions in the near-term is simply a more effective strategy than making smaller grants over time.
Maintain Philanthropic Intent:
Many donors feel very strongly regarding which problems they hope to address with their philanthropic resources. It is very common for new philanthropists to carefully think through how to best use foundation resources to ensure the foundation’s mission is aligned with the values of the founder. Many foundations, especially the most mature foundations, have been known to experience mission creep with the foundation branching out from its original goals as time goes on. For example, there is an interesting archived article from the New York Times from 1977 that describes how Henry Ford II resigned from his role with the Ford Foundation because he felt the foundation was drifting away from its original ideals. On the other hand, many philanthropists are not troubled by the possibility of mission creep because they consider future generations changing their focus with the changing times to be a natural occurrence.
Reasons to exist in perpetuity
Address Continuing Problems:
There are some issues in society that cannot be solved with a one-time infusion of resources. There are many persistent social-service needs that require sustained, long-term funding because a decisive solution just doesn’t exist. For example, we should expect that the problems of hunger and drug addiction will still exist in the world a century from now. This type of intractable problem lends itself to foundations structured to exist in perpetuity that can provide long-term funding.
Family Engagement Across Generations:
Many founders hope that a family foundation will help strengthen family ties and help pass family values across generations. Young, newly formed foundations find this idea particularly attractive. It is appealing to many founders that successive generations will have a greater chance to sustain family connections while doing good together in the world. The foundation can also increase the influence and prestige of the family and serve as a source of good learning opportunities for young family members.
Many great philanthropists from the past have names that still echo with familiarity—Rockefeller, Ford, Carnegie—but legacy is not just for the well-known foundations. Rather, legacy is meaningful for family foundations at all scales. Although focusing on legacy can lead to vanity if taken too far, a desire to leave things better than you found them is a very good thing. By setting up a foundation in perpetuity, one’s legacy is iterative and ongoing, and can be carried into the future by succeeding generations in a very real way.
So, should foundations spend down their endowment? The answer is different for the leaders of each foundation. The “right” answer intertwines with values, intent, family and place. The majority of foundations will undoubtedly maintain the status quo of existing in perpetuity but accelerating giving into the near future is certainly worth consideration.
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