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There are three principal timeframes in which you can donate assets to charity:
- Make charitable contributions while you are alive;
- Arrange for the disbursement of your assets after your death but before a specific date or event; or
- Create or endow an entity that is intended to exist in perpetuity.
These three options are not mutually exclusive. You can make extensive charitable contributions within your lifetime and create a sunsetting entity and establish a perpetual entity. Nevertheless, these are the three basic timeframes in which charitable giving can be conducted. From the perspective of donor intent, there are advantages and disadvantages to each. Donors should think carefully about what they hope to achieve before adopting any one of these strategies.
Giving While Living
If you disburse all of the assets you intend to give to charity within your lifetime, you will have effectively taken care of the issue of donor intent. After all, if there are no assets to entrust to others to disburse, there is no issue of donor intent.
You will, of course, have to grapple with the similar issue of grant compliance—ensuring that the charities you fund use your assets for their intended purposes. As every donor knows, grantees may or may not use contributions for their intended purposes. Or as donors learn more about their grantees, they may decide they want to work with other organizations or in different funding areas. Grant compliance is related to donor intent, but it is not quite the same as establishing the parameters within which your successors are to distribute your assets. (For more on grant compliance, please see Chapter 1.)
Giving while living resolves the issue of donor intent, narrowly understood. Again, this is not to suggest that grantees will always perform to your expectations if you spend down during your lifetime; it is possible to feel enormously frustrated with your grant recipients in the process of spending down. It is rather to say that if you disburse all of your charitable assets within your lifetime, you will not have to create mechanisms to govern the distribution of your assets after your death.
There is another important reason why many donors decide to complete their philanthropic giving during their lifetimes. They often sense that their money will go much further if it is spent immediately, on pressing problems. These philanthropists want to be personally involved in the programs they support, investing their time and business acumen—in addition to their wealth—to address the problems of today. They tend to be confident that later generations will make and disburse new fortunes to address future challenges.
Furthermore, if you spend down your charitable resources during your lifetime, you do not have to confront the potential problems associated with creating a grantmaking entity that will survive you. For example, there is a tendency among grantmaking organizations to drift away from a founding donor’s vision and toward conformity with industry trends and staff preferences. That drift need not be inevitable—indeed, one purpose of this guidebook is to provide strategies for its prevention—but it is nevertheless unmistakable. To the extent that donors spend down their charitable resources within their lifetimes, the issue is taken off the table.
Giving while living likewise avoids another problem common among grantmakers whose founding donors are no longer in a position to control them: the emphasis on asset growth rather than grantmaking. Institutional grantmakers have institutional imperatives, foremost among which is the preservation of the institution. While this tendency can be mitigated by date-certain sunset provisions, it remains pronounced among entities that have perpetuity as a foundational goal. If your board has a fiduciary duty to perpetuate your philanthropy into the indeterminate future, it is unsurprising and perhaps inevitable that its focus will gravitate away from grantmaking and toward asset preservation.
(Indeed, a related institutional problem can afflict the grantmaking activities of many institutional donors: bureaucratic sclerosis. The pathologies to which largely unaccountable organizations are susceptible have been known to plague grantmaking organizations. Again, donors who spend down during their lifetimes are often less susceptible to the problem. “I think the worst thing that can happen is to wind up creating a foundation with 500 people in a skyscraper writing each other reports,” explains Patrick Byrne, chairman and CEO of Overstock.com. “I certainly didn’t work this hard to create something like that.”)
And, of course, even within an organization that stays committed to its founding donor’s vision, cultural and social changes can render the mission obsolete, no matter how forward-looking or principled its original purpose. Diseases can be cured, social ills can decline and even disappear. When Robert Richard Randall died in June 1801, for example, the New York sea captain and merchant left a considerable sum of money for the purpose of creating a “haven for aged, decrepit, and worn-out sailors.” Randall’s bequest, intended to be perpetual, gave rise to Sailor’s Snug Harbor on Staten Island, which by the late-19th century housed more than 1,000 retired sailors on an 83-acre campus with a working farm, dairy, bakery, chapel, hospital, conservatory, and cemetery. By the 1950s, with only about 200 residents remaining, the facility had fallen into such disrepair that it was taken over by the New York City Landmarks Commission. (The retired sailors were moved to North Carolina.) Snug Harbor has since reopened as a cultural center and botanical garden—worthy causes, to be sure, but completely unrelated to the vision of Captain Randall.
Charles Feeney and the Atlantic Philanthropies
Charles (“Chuck”) Feeney is perhaps the leading example of a donor who is committed to spending down his fortune within his own lifetime. Feeney co-founded the Duty Free Shoppers Group, and gave away some $5.5 billion between 1982 and 2011. As of 2011, he planned to spend the remaining $2 billion of the Atlantic Philanthropies’ assets by the end of 2016, and close its doors by 2020. When it shuts down, the Atlantic Philanthropies will be the largest foundation in history to spend itself out of existence. “Today’s needs are so great and varied,” says Feeney, “that intelligent philanthropic support and positive interventions can have greater value and impact today than if they are delayed when the needs are greater.” Or, as he sometimes puts it, “If I have $10 in my pocket, and I do something with it today, it’s already producing $10 worth of good.”
It is not always practical or desirable to disburse all of your charitable dollars within your lifetime. Your giving may be focused on problems that you think will become more critical in the near future. You may be committed to helping a start-up organization build its capacity for some number of years, extending perhaps beyond your lifetime. Or, more fundamentally, it simply may not be feasible to spend all your philanthropic assets while you are alive. In these cases, it may make sense to create a limited-lifespan grantmaking entity that will survive you for a predetermined length of time.
From the perspective of donor intent, a limited-life grantmaking entity can have certain advantages over perpetual entities. Perhaps chief among them is that the founding donor frequently gets to choose the board that will lead the foundation over the course of its existence. (Indeed, for that reason many donors who create limited-life entities deliberately choose board members a generation younger than themselves.) In many, perhaps most, cases, the board will be populated by people who personally knew the founder, who knew his likes and dislikes. Such a board is generally more likely to be committed to fulfilling its donor’s intentions.
Of course, unless board members are chosen carefully, they may steer a grantmaker in a different direction from what the founder would have wanted. There are a number of instances in which grantmakers have departed very dramatically from their founders’ principles within 10 years of their deaths. A personal connection between the founder and succeeding board members often limits professional staff and unsympathetic trustees from straying too far from a donor’s values—but it is not infallible.
Many donors are drawn to the idea of sunsetting because limited-life entities can spend more aggressively, over a shorter, more focused period of time. The more intense pace of grantmaking makes for an outsized spending profile, with annual giving that can be greater than that of larger, perpetual entities that limit their annual payout to the legal minimum in order to preserve endowment. Limited-life grantmaking entities thus tend to have greater philanthropic impact within their prescribed lifetimes.
Consider the John M. Olin Foundation, which exercised outsized influence in the realm of advancing conservative ideas in the latter quarter of the 20th century. Some experts attribute its effectiveness to its being a limited-lifespan foundation, sunsetting 52 years after it was founded. Even though the foundation’s assets totaled not much more than $150 million, during the years it existed Olin had a spending profile of a perpetual foundation with assets of $400–500 million. The Olin Foundation made a deliberate decision to have a profound impact on its time, rather than a lighter one that spanned years into the future.
Perhaps just as importantly, limiting the life of a philanthropic entity tends to produce a greater sense of focus and purpose. Of course, sunsetting in itself does not guarantee that giving will be effective. But the knowledge that a deadline was looming certainly forced the Olin Foundation to act in ways it may not have were it a perpetual entity. Deadlines enforce discipline.
Sunsetting nevertheless presents a unique set of challenges. For example, precisely when a limited-lifespan entity should close up is debatable. Limited-life foundations often intend to spend down within 30 years of the death of the founder, or, frequently, the latter of either the founder or spouse. Some donors create a window of five years. Others have instituted 50-year lifespans. Still others have chosen not to set a fixed time period, but instead mandated a minimum annual payout percentage that is intended to run down principal over time.
There is no set rule regarding when to sunset your foundation; it depends on what the foundation is trying to accomplish. In choosing a closing date, however, your aim should be to find a happy medium between achieving your philanthropic goals and curtailing the deleterious effects that the passage of time may have on your intentions.
Finally, donors considering sunsetting should bear in mind a special problem facing limited-life entities. How should they prepare their favorite grantees—those whose missions neatly align with the vision of the grantmaker’s founder—for the loss of funding that will occur when the foundation spends down? How should they plan to structure their investment portfolio in order to maintain a consistent level of support for grantees? How should they plan to retain key employees in an organization that is slated to shutter its doors? Once the close-out date is reached, what should be done with archival materials, legal documents, and any residual assets?
Again, there is no one-size-fits-all answer to these questions; much depends on the unique circumstances of the funding arrangement. Any donor considering a limited-life grantmaking entity should think about offering guidance to his successors on all of these issues.
Creating a Perpetual Entity
Finally, donors have the option of creating a grantmaking entity that will survive them into the indefinite future. Perpetuity is the most common choice among the founders of grantmaking entities. While an open-ended timeframe complicates plans for maintaining donor intent, it can also offer some advantages. For example, a perpetual grantmaking entity may be an attractive vehicle for a donor whose principal concern is providing long-term support for certain geographic regions, demographic groups, or programmatic causes.
Similarly, it can make sense if a donor wants to make a certain kind of grant (like capital grants) or fund a certain activity (like supporting the arts, substance abuse, or disaster relief) where needs are likely to last forever.
Perpetuity nevertheless poses special challenges for those concerned with securing donor intent. Despite the susceptibility of perpetual entities to deviations from donor intent, there are steps that you can take to help safeguard against the corrosion of your philanthropic purposes. Some donors have employed strategies such as:
- incorporating mission statements and other donor intent documents into their bylaws and articles of incorporation;
- requiring their trustees to sign donor intent statements or to read their mission statement at every meeting of their board of directors;
- including in their founding documents a requirement for regular outside donor intent audits;
- giving outside entities legal standing to take action against the board should it stray from their mission.
All of these practices will be explored in greater detail in later chapters.
Perpetuity is notably popular among donors creating family foundations. According to one recent study, 63 percent of family foundations are established in perpetuity, with another 25 percent considering the option of perpetuity. The same study found that the “vast majority of perpetual foundations (77 percent) have never considered options other than perpetuity.”
Perpetuity is often the default option for estate planners. For some founding benefactors, perpetuity is chosen somewhat unintentionally.
The same study found that one of the two most frequently given reasons for the decision to create an entity in perpetuity is the “desire for family engagement in philanthropy across generations.” It is understandable why many donors hope to use a perpetual foundation in order to unify and preserve their families. Unfortunately, the record on preserving donor intent in perpetual family foundations is mixed. Money, even money dedicated to charitable purposes, can be an enormously destructive force within families. Many founding donors fail to foresee how disbursing the family’s philanthropic assets can become a contentious problem, and one that is often complicated with the introduction of multiple marriages and half-siblings. Others perhaps overestimate the sense of familial fidelity and ancestral deference among individuals three, six, or ten generations in the future.
There are cases in which a perpetual family foundation may not be particularly problematic from the perspective of donor intent. For example, if a donor is confident that future generations will be better positioned to address future challenges, then perpetuity will probably not undermine his intent. Similarly, if his principal philanthropic objective is for his family to give generously to charity, his intent will be honored so long as the charitable assets continue to be disbursed by the family. Similarly, among families with very strong religious commitments and identities, donors often have great confidence that their families will remain committed to a set of common values, and are not particularly daunted by the prospect of establishing a family foundation in perpetuity.
When Honoring Donor Intent Becomes Impossible
What happens if a donor’s intent in fact becomes impossible, impracticable, or even illegal to carry out? What if, say, you create a perpetual foundation exclusively dedicated to curing cancer—and a cure is found? What then happens to the corpus of the foundation? In these rare circumstances, courts may step in and apply the legal doctrine known as cy pres (pronounced either “see pray” or “sigh pray”).
Courts have traditionally used two doctrines—deviation and cy pres—to allow the modification of restricted gifts. Deviation is applied to make changes in the manner that a gift is managed or administered, while cy pres is applied in situations where a trustee or a charity seeks to modify the donor’s purpose. Cy pres, as commonly understood, means “as near as possible” (a rough translation of the ancient Norman phrase, cy pres comme possible), and it provides for the courts to modify the express terms of a charitable trust by making modifications that come as close as possible to the donor’s original intent.
One of the most frequently cited examples of cy pres involves the bequest of the wealthy abolitionist Francis Jackson. When Jackson died in 1861, he left considerable monies in trust to fund “books, newspapers . . . speeches, lectures, and such other means as . . . will create a public sentiment that will put an end to negro slavery in this country.” Four years later, at the end of the Civil War, the 13th Amendment to the Constitution ended slavery, thereby achieving the mission of Jackson’s trust. The family sued to recover the funds, arguing that the purpose of the trust was now obsolete. The Massachusetts Supreme Court ruled against the family in Jackson v. Phillips (1867), invoking cy pres and directing the funds to the “use of necessitous persons of African descent in the city of Boston and its vicinity.”
Another example involves John McKee, who, at the time of his death in 1902 was believed to be the wealthiest African American in the United States. McKee directed that part of his estate be held in trust until the death of his last grandchild, at which point it would be used to build “Colonel John McKee’s College” for “poor colored male orphan children and poor white male orphan children.” McKee left extravagant instructions for the school, down to the height and thickness of the perimeter stone wall and the parade schedule of the music and drum corps. When his last grandchild died in 1954, the trust had assets of about $1 million. While significant, the funds were nowhere near enough to fulfill his instructions. The Pennsylvania courts invoked cy pres, leading to the establishment of “McKee Scholarships,” which continue to fund post-secondary education for fatherless young men from the greater Philadelphia area.
Today, there are three prerequisites for applying the judicial doctrine of cy pres: (1) the gift must be for charity; (2) the donor must have general charitable intent; and (3) the expressed purpose of a gift must be illegal, impractical, or impossible, and the charity must no longer be able to honor a donor’s wishes exactly.
An Unavoidable Decision
If you have decided to dedicate assets to charity, you have to choose a timeframe for your giving. The decision is unavoidable. If you put it off, it will be made for you—and, quite likely, it will be perpetuity. This is not to say that the three principal approaches—spending down, sunsetting, and creating a perpetual entity—are mutually exclusive. But deciding on which of them you plan to pursue, and to what extent you plan to pursue it, should largely be determined by your charitable purpose.
The greatest amount of control that you will have over your charitable giving is during your lifetime. Giving while living, however, gives you the smallest window of opportunity in which to conduct your philanthropy, and may not be the best means of addressing your long-term goals.
Creating a charitable entity that will sunset after your death gives you a bigger window of opportunity in which to give, but somewhat less control over your giving, as your directors will carry out your charitable purpose and retire your giving vehicle after your death.
Finally, a perpetual entity allows you the greatest time horizon for giving, but presents long-term challenges, and therefore requires special attentiveness, to the best way of maintaining your intent.
Carefully thinking through your charitable purpose should be the starting point for determining which of these three means of securing your charitable intent is right for you.
- Alliance Bernstein. Smarter Giving for Private Foundations: A New Approach to Align Spending Policy with Mission. September 2010.
- Atlantic Philanthropies. Turning Passion into Action: Giving While Living. June 2010.
- Beldon Fund. Giving While Living: The Beldon Fund Spend-out Story. March 2009.
- Foundation Center. Perpetuity or Limited Lifespan: How Do Family Foundations Decide? April 2009.
- Ostrower, Francie. Limited Life Foundations: Motivations, Experiences, and Strategies. Urban Institute. Center on Nonprofits and Philanthropy. February 2009.
Thelin, John R. and Richard W. Trollinger. Time Is of the Essence: Foundations and the Policies of Limited Life and Endowment Spend-down. Aspen Institute. 2009.
More Donor Intent Resources from The Philanthropy Roundtable
Protecting Donor Intent by Jeffrey J. Cain
- Get an electronic or print version of this practical guidebook.
- The Philanthropy Roundtable website’s special Donor Intent section where you can find our most recent articles and resources related to protecting donor intent.
Donor Intent Resource Library
- This extensive resource library will direct you to the best articles, books, and discussions on the topic of donor intent.