Should families establish perpetual foundations or should they create foundations, donor-advised funds, and other giving vehicles designed to “sunset” or spend out their endowments at a certain point in their lifecycle? Or might both options be appropriate? While perpetuity—or, at least, perpetuity for the foreseeable future—is by far the most commonly chosen option among foundations in America today, a growing segment of philanthropists are choosing to set end-dates for their philanthropic ventures. The reasons for choosing to spend out are as diverse as the families, their missions, and the circumstances they face.
In an upcoming issue of our Passages issue-paper series, National Center Contributing Editor Deanne Stone explores how and why families are choosing a particular lifespan for their philanthropy—whether perpetual or limited—and how their choices affect the practice of that philanthropy.
Establishing a Perpetual Endowment
In determining the life-cycle of your family’s philanthropic vehicle, it is important to consider what your family intends to accomplish through its giving. If your primary goal is to encourage collaboration and cohesiveness across generations and branches of your family through a shared mission of giving, a perpetual giving vehicle with long-range financial and grantmaking plans may work best for you. Similarly, if your family wishes to establish a community-based institution that can provide reliable and consistent support to your neighbors in need, perpetuity may be the most appropriate option.
Suppose you and your two siblings inherit a significant sum of money from an elderly uncle, Victor Kronenberg. You all feel suitably stable financially and decide that the bequest should be donated to charity. After exploring several options and having several long discussions, you decide that you will have more impact if you pool your resources. You gather at several successive family holidays to discuss Uncle Victor and how your inheritance can be used both to honor his memory and to affect change in the community. You remember his commitment to his craft as a cellist, and that despite an extremely busy schedule with several orchestras, Uncle Victor was always willing to give his time, energy, and money to the local arts high school and its students. After much debate you and your siblings decide that the best way to celebrate Uncle Victor’s life would be to use his money to sponsor a dozen underprivileged and artistically-gifted elementary school students through their academic careers.
While you feel that sponsoring a dozen students would be a great way to improve the lives of those children and to contribute to the vitality in the artistic community, you and your siblings begin to have grander plans. The more you discuss your plans, the more involved you become as a family in the project, and your enthusiasm is contagious. The less important it seems to simply find something to do with Victor’s money and the more important it seems to have a lasting impact on successive generations of students and on successive generations of your family.
In the end, your family decides to establish a perpetual foundation in the name of Uncle Victor. You and your siblings sit down with financial and philanthropic advisors to plan accordingly. You discuss investment plans that will allow you to continue to support causes that your family believes in—including sponsoring the art students—for years to come. You and your siblings discuss ways to include your children in the grantmaking process, tap into their philanthropic impulses, and prepare them for future board service. The Kronenberg Endowment is begun!
Focusing on an Immediate Cause
But suppose your family discussions lead you in a slightly different direction. Suppose there is an immediate need in your community for a particular resource or program. Perhaps it’s the need for medical research to combat a disease like Alzheimer’s or AIDS, where an influx of funds can facilitate innovation and accelerate results. Or perhaps a national or international disaster, like the recent tsunami, catches your family’s attention and demands that you act.
In this case, you and your siblings recognize that the arts were very important to Uncle Victor, but you also notice that your community has an immediate and pressing homelessness problem. A recent economic slump and the relocation of a nearby automotive plant have left many in the community struggling to make ends meet. You notice more people being turned away from local soup kitchens and shelters, crouching under bus shelters, and panhandling on local highway medians. Uncle Victor’s gift seems like a well-timed solution: some pennies from heaven. One sibling visits local community leaders to get an idea of the situation, its contributing factors, and how you can help.
You decide to establish a foundation in Uncle Victor’s name, but after meeting with community leaders and philanthropic advisors you decide that you can have maximum impact if you set a date to sunset your foundation. This will free-up a more substantial proportion of the foundation’s funds for distribution every year and allow you to be more generous with grantees. In discussing this option, you and your siblings consider how sunsetting the Kronenberg Endowment will change the scope and impact Uncle Victor’s legacy. You consider his boundless energy, enthusiasm for change, and love of his hometown, and decide that the immediate and profound impact that this option will have is a fitting way to direct your inheritance.
Setting a sunset-date for a foundation is not without its complications, however, and must entered into with appropriate planning and consideration. Families must consider not only what a limited lifespan will mean financially for the foundation during its existence, but also what the end of the foundation and its funding will mean for grantees and the community at large.
Increasing Payout and Perpetuity: Mutually Exclusive?
It should be noted that temporarily increasing one’s payout and planning for perpetuity are not necessarily mutually exclusive options. Deciding to be a perpetual foundation does not mean that you cannot respond aggressively when needed to the current needs of your community.
Suppose that a few years after establishing Uncle Victor’s foundation as a perpetual endowment, a hurricane hits his home town, destroying homes and businesses and leaving hundreds dispossessed. You and your siblings call an emergency meeting, and decide that your foundation should respond to the current disaster. Since you have already committed to this year’s grantees, you seek advice from your financial advisors on increasing your payout for the year and free up funds for emergency grantmaking. Although this strategy may temporarily reduce the size of the foundation’s endowment, your experts agree that this dip in asset size should even out over time and that it should not significantly affect the foundation’s ability to support its causes in years to come. In the meantime, your foundation has played an important role in helping the community you support to live through a very difficult period.
Additionally, decisions regarding perpetuity or spending out do not necessarily need to be made immediately, nor do they have to be etched in stone. These decisions, like any families make regarding their philanthropy, should be fluid enough to reflect the changing needs and goals of the family.
Suppose the 15th annual meeting of the board of the Kronenberg Endowment is approaching, you and your siblings continue to be enthusiastic about your giving programs. You hope that your children and grandchildren will be equally excited about the work you are doing, but at the moment they are just getting off the ground: graduating college, getting married, starting families of their own, and have little time to attend board meetings or review grantee proposals. You and your siblings are beginning to consider the future of your philanthropy and what your retirement from the board will mean for the endowment. You have always engaged your children in your philanthropic pursuits, but are concerned that with their busy schedules they will view board service as a burden or an additional stressor. You and your siblings decide to invite your children to the board meeting to discuss Uncle Victor’s legacy, the future of your family’s philanthropy, and their involvement in it. At this meeting, perhaps with the help of a philanthropic advisor, you and your family can consider your philanthropic journey thus far and make decisions that will impact its future.
Alternatives to Perpetuity: Preparing to Sunset Your Family Foundation, profiles several family foundations, including the Aaron Diamond Foundation, the Eckerd Family Foundation and the Beldon Fund, that have either spent out their endowments or are in the process of doing so. It explores how and why families decide to sunset their foundations, and how this decision has impacted their financial and grantmaking strategies, and their relationships with their grantees. It also presents several important lessons for perpetual foundations based on the experiences of the foundations profiled.
Resources on the Spending Out and Perpetuity Debate
- Considering the Question of Perpetuity in Investment Issues in Family Funds from the National Center for Family Philanthropy
- A Conversation with Irene Diamond in Foundation News & Commentary
- High-Impact Spend Down in Philanthropy at the Philanthropy Roundtable
- Insider’s Guide to Spend Down: Switching off the Lights at the Olin Foundation in Philanthropy at the Philanthropy Roundtable.
- Spending Out the Markey Way in Foundation News & Commentary