Spending down an endowment is drawing increased interest and attention, but donors, foundations and advisors need to understand what's involved, as Strategic Philanthropy's exclusive quarterly contribution to this publication explains.

One of the key findings from a 2009 Aspen Institute study on foundation spend down, Is Time of the Essence: Being Strategic in Spending Down – Or Choosing Perpetuity in Endowments, is that trustees often make the decision to limit foundation lifespan in order to “attack today’s problems with today’s money”.

Increasingly, the issue of limited-life foundations is generating much thoughtful discussion among foundation trustees and their advisors.

The idea is not a new one.

Former Sears, Roebuck & Co President Julius Rosenwald - one of the most influential philanthropists of the 20th century - believed that “real endowments are not money, but ideas”.

He assumed that charitable dollars should not be housed in perpetuity as a monument to one’s self, but instead should be invested in innovative solutions to pressing social problems. As such, he advised foundation trustees to “spend down” their endowments within a specified timeframe in order to address the immediate needs of the day and to trust in future generations to guide their own philanthropy.

While most trusts and foundations in the US and abroad are still established in perpetuity and maintain endowments, the limited life option is beginning to attract more attention.

Indeed, the Bill and Melinda Gates Foundation—the largest private charitable foundation in the world—announced that it will close 50 years after the death of its last founding trustee. In explaining his rationale for spending-down, Gates said, “The more I learned, the more I realized there is no time. Disease won’t wait."

Interest in the spend-down option was evident at a panel discussion last month with the Aspen Institute study’s authors, John Thelin and Richard Trollinger, hosted by the Donors Forum in Chicago.

Legal and Investment considerations

The audience of private client advisors and foundation trustees were interested not only in donors’ philosophical reasons for choosing to spend down their endowments, but also in the legal considerations and investment strategies involved with implementing a spend-down plan.

It was clear that most in the audience had never before considered the issue of timing as it related to foundation spending. In fact, Thelin’s and Trollinger’s research revealed that the majority of foundations do not have any language in their bylaws regarding lifespan.

Based on their study of foundations that chose a spend-down strategy, the authors concluded that while there is no one lifespan approach that all foundations should adopt, consideration of lifespan should be an important part of an advisor’s work with individuals and families when they are establishing foundations.

In explaining donors’ motivations for choosing a spend-down strategy, the researchers provide a helpful guide for advisors interested in understanding for which clients this option might make the most sense:

·         Most often, donors choose to limit foundation lifespan because they are interested in protecting donor intent. Of course, the best way to ensure that one’s original charitable intentions are adhered to is to spend-down the foundation corpus either during one’s lifetime or during the lifetimes of the foundations’ original trustees. The more removed a foundation’s leadership becomes from its founders the less guarantee there is that the endowment will be used to fulfill the founding donors’ wishes (it is very difficult to rule effectively from the grave!).

·         Another common reason for choosing spend-down over perpetuity is the desire to implement a specific grant-making strategy. It may be that the donor believes that spending-down will prevent grant recipient organizations from becoming too dependent on one source of funding. Or, it may be that the foundation’s central goal (e.g. mitigating the effects of climate change) may be better addressed by a large infusion of funds delivered in a relatively short period of time, rather than by stretching smaller donations out over the course of several decades.

·         Other limited-life foundations may adopt a grant-making strategy that focuses on issuing challenge grants to non-profit endowments so that organizations are forced to seek out additional support for their work. By helping your clients to find innovative strategies for leveraging their funding, you can help to ensure that the organizations they care about become sustainable long after the foundation closes its doors.

·         Spend-down can also be a means by which philanthropists give the next generation an option about how to engage in the family’s philanthropy. Should the younger generations of a family have interests that diverge from the founders’ intentions, older generations may consider passing a portion of the foundation’s endowment to younger generations for use in perpetuity while spending down other funds. In cases such as that of renowned philanthropist Charles Bronfman who chose to spend down his foundation, the Charles and Andrea Bronfman Philanthropies, by 2016, the decision was fueled by his children’s desire to establish their own foundations.

Attractive option for donors

In our conversations with clients, we have found that spend-down has become an increasingly attractive option for donors who have become more concerned with their ability to exert control over the investing and spending of their assets due to the economic crisis. Should your clients decide that their foundations need not exist in perpetuity, it might be helpful to take into account the following considerations as you work with them to implement a spend-down strategy:

·         Advise clients to choose trustees who possess expertise in the foundation’s funding priority areas (e.g. early childhood education, food security, etc.) and who share your clients’ passion and vision for their philanthropy.

·         Consider the effect a spend-down policy will have on investment strategy. In a spend-down situation, investments typically become more conservative and are aimed at preserving assets rather than growing them.

·         Help clients to consider innovative ways to maximize their support of grant recipient organizations, whether through challenge grants, project-specific grants or capacity-building/technical assistance grants aimed at strengthening organizations’ infrastructure for the long-term.

·         Advise clients to measure the impact of their support. Evaluation of a limited-life foundation’s impact is critical to informing trustees’ decisions about how and who they want to fund in order to accomplish their goals by the spend-down date. Building in evaluation tools and systematic reviews at a foundation’s inception can ensure that these planning tools become part of the foundation’s culture.

Regardless of whether or not your clients initially choose a spend-down strategy, decisions about timing should be revisited periodically to ensure that they remain aligned with your clients’ philanthropic goals. Even if clients do not choose a spend-down strategy at the time of their foundations’ inception, they can adopt one at any time should they determine this to be the most effective course of action for carrying out their foundations’ mission. 

By challenging the “rule” of perpetuity, private advisors can help their clients to consciously and strategically make decisions about foundation lifespan that will maximize their potential to creatively and meaningfully contribute to the improvement of society.

Meg Lassar is an analyst for Strategic Philanthropy, Ltd., a philanthropic advisory practice based in Chicago. The firm works with individuals, families, closely-held and family-owned businesses, helping them plan, assess and manage their charitable giving.