March 30, 2016

Now or Forever: Rethinking Foundation Life Spans

Different ages inspire different questions. In contemporary philanthropy, one big question is how much should be spent now to solve today’s urgent problems and how much should be conserved to deal with future concerns.

Consider a donor ready to commit $100 million for a philanthropic purpose. Does it matter whether the money is distributed today or set aside in an endowment designed to last forever, with only a small portion spent annually?

As more money pours into philanthropy — and as concerns about growing disparities between rich and poor intensify — both donors and policy makers are questioning whether endowments designed to operate forever provide the best approach for donors and society at large.

This is not the first time that people have questioned the value of setting aside charitable assets to last in perpetuity. In 1833 John Stuart Mill wrote that it was folly to make "a dead man’s intentions for a single day a rule for subsequent centuries." Mill went on to predict, "There is no fact in history which posterity will find it more difficult to understand than the idea of perpetuity."

The United States has had its own ambivalent history with philanthropic entities that last forever. For much of the 19th century, perpetual charitable trusts were frequently set aside by courts as contrary to public policy. Courts were generally suspicious of allowing, in the words of one court opinion, "every private citizen the right to create a perpetuity for such purposes as to him seem good."

It's time to decide whether future generations are best served by current saving or current spending.

In the early part of the 20th century, Julius Rosenwald urged his fellow philanthropists to distribute their money in their lifetimes. Mr. Rosenwald was committed to this notion of timeliness — the idea that each generation should donate its money to the projects that concern its own members, which he called "one of the basic prerequisites of worthwhile philanthropy."

In more recent memory, concerns about grant-maker spending and power caused a hot debate over foundation life spans in the 1960s when members of Congress debated whether to impose a limited term on foundations of 40 years.

But Congress put that debate to rest when it passed the Tax Reform Act of 1969. In the end, Congress provided clear rules that embraced the notion that foundations could live forever. Nonprofits (like universities and community foundations) were granted complete autonomy over how much they spent from their endowments, and private foundations were subject only to minimum payout rules that were specifically designed to allow foundations to operate in perpetuity. 

In the wake of the 1969 act, the idea that charities and private foundations should preserve their endowments so they lasted for as long as possible gained wide acceptance. That’s why we see growing university endowments and the development and astronomic growth of donor-advised funds. For private foundations, living forever has become a common goal. According to a 2009 report by the Foundation Center, only 12 percent of foundations expressed an intention to spend their assets, and a full 63 percent planned to make grants forever. (A quarter were undecided.).

Yet in recent years we’re seeing people from both inside and outside philanthropy asking whether charitable dollars should be deployed more quickly.

One reason is that government funds are increasingly strained at a time when charitable resources, especially in family foundations and donor-advised funds, have grown. So social welfare, cultural, educational, and other organizations are looking with greater urgency to philanthropy as their source of funding.

In addition, the world faces catastrophic risks, such as climate change, bioterrorism, and nuclear warfare. If humanity faces the possibility of extinction, what reason could be produced to warehouse philanthropic assets for a long-term future that might not exist? What’s more, faster giving in the near term might actually succeed in warding off these existential threats.

Growing wealth inequality also plays a role in fueling this debate. Inequality has grown to unprecedented rates, and today the wealthiest 0.1 percent of Americans own roughly the same amount of wealth as 90 percent of the population. Charitable giving is often seen as a way to redistribute wealth more creatively and effectively than government spending. But if funds are simply set aside in foundation coffers and donor-advised funds, then that distribution doesn’t happen, at least not for the current generation of have-nots.

These and other factors have resulted in a broader questioning of the speed at which foundations and other endowments should give away money. Indeed, some of these issues have begun to receive Congressional attention

In his 2014 proposal to overhaul the tax code, Rep. Dave Camp, Republican of Michigan (and then chairman of the House Ways and Means Committee) proposed that donor-advised funds be required to spend all their money within five years of contribution. More recently, Congress expressed its discomfort with the funds (and their lack of a spending requirement) by excluding them from qualifying for a special rule designed to make it easier for individual retirement account holders to give to charity without penalty.

Congress has also recently expressed its concern about growing university endowments, particularly in light of the skyrocketing costs of higher education. Congress this year held hearings on the effect of large endowments and this past month sent letters to 56 private universities with endowments greater than $1 billion seeking information about their spending policies.

Those on the front lines of philanthropy have expressed their own concerns about perpetual foundations. Several prominent foundations are completing plans to distribute all their assets in a set time, such as Atlantic Philanthropies and the Bechtel Foundation. Many others have announced plans to spend all their assets in the lifetime of the donors (or soon after their deaths), such as the Gates Foundation and Good Ventures, founded by Dustin Moskovitz and Cari Tuna. Advocates of spending foundation money quickly, like Atlantic’s Chuck Feeney, promote the virtues of "giving while living."

One reason to speed up giving: Government funds are strained but donor-advised funds and family foundations have grown.
So questions regarding the life span of foundations and the relative demands of the present and future on philanthropic resources are increasingly salient. What’s important to notice — as John Stuart Mill did — is that these are not mere technical questions about payout requirements — as with the rule requiring foundations to distribute an average 5 percent of their assets annually, a requirement introduced in the 1969 Tax Act. These are deep and difficult moral questions. How should current philanthropists, as well as policy makers, weigh the interests of future generations? Are future generations best served by current saving or current spending? If foundations are to survive past the lives of their founders, what deference should the living owe to the preferences of the dead?

Indeed, the debate over perpetual or limited-life philanthropy involves dealing with an array of important issues. Among them:

  • To what extent do different charitable entities (such as private foundations, donor-advised funds, and university endowments) raise different concerns about whether it is wise to exist in perpetuity? Has current law drawn the right distinctions?
  • What is the history of philanthropic attitudes toward perpetuity and limited life? When did perpetuity become ensconced as the "default" setting for many donors and grant makers? Have the arguments made to justify one life span over the other changed significantly? How do legal permissions about perpetuity differ across countries?
  • What might the consequences be for the nonprofit and for citizens around the world if more foundations decided to spend their assets over a set period?
  • How should we think about the relationship between the way that wealth is accumulated and the period of time in which part of it is deployed for philanthropic use?

We believe these questions about the relationship between philanthropy and time deserve more attention by people in philanthropy and academe as well as policy makers. To that end, we are jointly hosting an event at Stanford University next week bringing together prominent foundation leaders and scholars to start what we hope will be a broader conversation.

Whatever one thinks about the relative merits of perpetuity versus limited-life philanthropy, the time for conversation is now.

Ray D. Madoff is a professor of law at Boston College and co-founder and director of its Forum on Philanthropy and the Public Good. Rob Reich is professor of political science and co-director of the Center on Philanthropy and Civil Society at Stanford University. He is an editor of the forthcoming Philanthropy in Democratic Societies (University of Chicago Press).