October 23rd, 2020
Please note that much of this article alludes to U.S. foundation law. Laws regarding charitable and non charitable foundations differ extensively around the world. Nevertheless, the question of perpetuity applies broadly even if some of the specifics of this article are more limited.
Some years ago, a very prominent Wall Street financier and his wife, herself a very prominent philanthropists, gave a headline grabbing gift to a world-famous museum. The most famous gallery in that museum would henceforth bear their names.
At the time, the story was making the rounds that the museum promised this couple that the gallery would bear their name in perpetuity. The financier asked, “how long is perpetuity?” The museum replied, “75 years.” The couple accepted those terms.
I am not sure if the story is apocryphal, but I was acquainted with the couple and it certainly could have been true. Whether or not, though, it gives an important message about “perpetuity”, one that is worth revisiting at a time when foundation “perpetuity” is on the tables of the philanthropy world.
Before proceeding, it is worth noting that US law does not guarantee perpetuity for foundations. In the US, the law requires a 5% payout plus excise tax regardless of earnings. If the foundation earnings don’t reach that level and beyond, the corpus will shrink; if there are several consecutive years of lower earnings, the corpus will continue to shrink exponentially. If the law wanted to guarantee perpetuity, the law would adjust the spending rate to reflect earnings or at least C.O.L. It doesn’t.
Perpetuity, therefore, is an intention. And indeed, perpetuity is a very, very long time. In my own professional experience, the oldest continuing foundation I have advised was about 500 years old and struggling how or if to continue since all of its legally mandated conditions had long since become irrelevant or expired. Most foundations, even those that aspire to “perpetuity” are much, much younger than that. I wonder how many of them really believe that they will be around in 500 years.
A more accurate description, then, of these foundations is “open-ended with no pre-determined time limit.” The hope of the founder is that successor trustees will align spending, investments, and governance policies sufficiently well to keep it going to make an impact generations hence but history has shown that true immortality requires something more than a large bank account.
This adjustment of the concept is consequential in terms of foundation decision-making. Most of us have been in rooms when one or more trustees makes clear what they believe their role is to be “stewards” of the foundation resources to last for generations. If perpetuity is the defining variable, stewardship is a credible approach to their role, and their approach to the foundation’s philanthropy.
The problem with “stewardship” as the primary motivator of philanthropic decision -making is that it focuses more on the finances and less on what the money can do. This is not to dismiss the authenticity of respecting donor intent, i.e., honoring the legacy of the family and foundation founders, but, functionally, it often means taking the most restrictive approach to the resources. True, if properly conceived, a “perpetual” foundation can serve to keep family connections alive, to remember the impact of the founder, to exert influence in a particular place over time. However, in too many cases, the idea of “stewardship” is so engrained that it instinctively negates public benefit investment strategies, and it serves to diminish the willingness to take even prudent risks with philanthropic dollars.
The flip side of “stewardship” is not “spend-out” – we’ll come to that later. It is, rather, to start from a different mentality that focuses on the philanthropy and not the money, i.e., the mentality of what good can our philanthropic investments and grantmaking make during the time it is under our auspices. The challenges at any given moment, and certainly of any given generation, can never be fully anticipated, no matter how prescient one may be. Therefore, current trustees can feel fully empowered to makes decisions that may respect their legacy while being thoughtfully creative. This approach refuses to kick the hard decisions down the generational road but accepts them now. And it recognizes that each successor generation should feel similarly empowered.
Not long ago, I had the privilege of working with a family foundation the size of which was about to grow well into the upper 9 figures. The family knew that not long from that time, the responsibilities of succession would fall upon them. Yet they were a bit stymied because they couldn’t get the founders’ generation to articulate what they wanted their foundation to do and be. Finally, the widow of the founder made it very clear that she wanted them to be free to decide. After all, she said [here slightly paraphrased], “I could never have imagined what the world was going to be during my lifetime. How can I know what my grandchildren’s and great grandchildren’s world will be like? They have to be free to make their own decisions.”
This decision liberated those generations at the table and those not yet born to be empowered and not simply stewards of inherited wealth. There was no implied message of perpetuity, but there was also no time limit on how long the foundation should continue. The presumption was that subsequent generations need to be empowered to decide that question as well.
Let’s now come to the question of “spend-out” or “time limited” mandates. This is, of course, not a new discussion – Andrew Carnegie and Julius Rosenwald were two extraordinary and influential philanthropists who made quite different decisions. Various Carnegie endowments continue to this day; Rosenwald specified a terminus ad quem for his foundation Most of those who have established endowed foundation assumed that they were to last indefinitely. It is certainly true that most wealth advisors would recommend investment strategies consistent with those assumptions.
There are, though, two significant challenges to the idea of open-ended foundations. One is efficacy, the other ideology.
The efficacy argument is an easy one: if one wants to address a problem – whatever that may be – a dollar spent today is better than 5 cents. Why not throw as much as possible on an identifiable and presenting scientific or social or educational issue on the certainty that it will surely make more of a difference now and may even solve a problem. [e.g., the Diamond Foundation’s successful “all-in” on HIV-AIDS.] And, while no one can anticipate new challenges in the future, the more one can solve today, the more likely those unanticipated ones can be addressed effectively in their time.
The ideological one is quite different. It challenges the very nature of [mostly] tax free accumulation of wealth controlled by those who had nothing to do with the creation of that wealth. [For this article, I will table the much-needed conversation about the shocking transfer of wealth from the middle class to the very wealthy we now have in America. And I will also defer comments on “The Giving Pledge” to another time] A foundation that lasts for generations essentially transfers power from generation to generation, perpetuating a class and economic divide. Those who control perpetual/time-unlimited foundations can exercise that power without accountability for their decisions [other than that required by law]. Indeed, there is no requirement that the intended beneficiaries have any say in the decisions even though they are the ones most impacted. This conceptual challenge is not new but has become vivid and vital during the recent months as the USA has been forced to acknowledge our stark racial and economic divides.
Readers of this piece are well aware of some very welcome initiatives in our field to redress this. In prior articles, we have discussed the work of Participatory Budgeting, Trust Based Philanthropy, CEP, NCRP, and others and many other funders are struggling mightily with what all of this means for them. These initiatives try to readjust the power base, the decision making, and the accountability loop. But, with very few exceptions, these initiatives are agnostic about perpetuity.
A number of prominent foundations have made clear that they fully intend to spend-out their resources within a specified time. But it is not yet clear if those foundations are outliers or part of a new normal. [For the last few years, that is one of the most frequently asked questions when I give presentations on philanthropy trends to funders in the United States and around the world.] Some have already closed and much has been written about their decisions and their exit strategies. As one reads the motivations for doing so, there seem to be two motivations – the efficacy argument presented above, and the ability to make the decisions while still alive to do so.
I am happy to be proven wrong, but I have not seen any of the foundations choose to spend-out for the ideological reasons. One wonders, though, if that will change as an ever larger percentage of funders and philanthropists become self-reflective in the face of the challenges to inherited power, the recognition of endemic racism, and the moral repugnance to the unconscionable economic divide.
There surely is no one right answer to how long our funds should last, but I would urge all of us to drop the concept of “perpetuity” and replace it with “open-ended.” None of us lives forever – and until proven otherwise, neither does a foundation. What matters, in the end, and what makes a difference in how worthy our legacies, is not how long a foundation lives but how thoughtfully its resources are used.
The Institute for Wise Philanthropy has been educating and advising funders, philanthropists, families, and philanthropy associations around the world since 2002.