Foundation Life Spans: a Vexing Issue

For hundreds of years, the degree of power that perpetual philanthropic endowments give to donors has been a topic of divisive debates.

The philosopher John Stuart Mill deplored the irrationality that made “a dead man’s intentions for a single day, a rule for subsequent centuries.” Mill predicted that “there is no fact in history which posterity will find it more difficult to understand, than that the idea of perpetuity, and that of any of the contrivances of man, should have been coupled together in any sane mind.”

It has been more than 150 years since Mill’s prediction, and it has not happened yet. In the private-foundation world, perpetuity remains the overwhelming norm.

Today, perpetuity as a foundation goal is under assault for other reasons — largely from people who object to perpetuity not because it accords too much power to donors’ intent — as John Stuart Mill feared — but because they think a foundation that operates forever inevitably strays from donors’ desires after they die.

Thus, Adam Meyerson, president of the Philanthropy Roundtable, characterizes the history of modern philanthropy as “a story of one foundation after another violating … the most cherished values of their founding donors.” His organization counsels its members to consider setting a date to close their foundation — often referred to as a sunset provision.

The grim economy and its impact on foundation endowments has also led many foundations to question their own perpetuity plans. This is in part because the financial decline swallowed such a large chunk of their assets that foundations find themselves caught between commitments made in more golden days and the goal of preserving adequate assets to guarantee they will have enough money left to give away hundreds of years from now.

So at a time when the economy is forcing more donors to think hard about their giving decisions, what serves society and philanthropists best — setting up perpetual foundations, or those that spend all their money in a set period of time?

A new study by the Urban Institute indicates that the relationship between donor intent and foundation longevity is more complicated than meets the eye — and that it is unwise to pit the ideas of long and short life spans against each other so starkly. For the study, we interviewed 31 trustees and CEO’s from 29 foundations, and compared 70 foundations planning to shut down with 650 whose goal was perpetuity.

When donors set up their foundations, concern about whether the institution will follow their wishes is key to their consideration of whether to require the foundation to shut down after a set period of years.

As one foundation official we interviewed said, “A foundation represents something that a human being feels. I never felt anyone could adequately represent what I feel.”

That feeling is one reason why among foundations where the donor was no longer alive, 91 percent of the limited-life foundations saw adhering to a donor’s intent as a very important way to determine whether a foundation was effective. Only 65 percent of foundations created to operate forever believed that measure to be an important way to determine effectiveness.

Officials of limited-life foundations were also more likely to report that the donor’s interest was a very important criterion when they made grant-making decisions (58 percent) than were perpetual foundations (37 percent).

But donors who are creating foundations cannot automatically assume their instructions to shut down a foundation after a specific time will be followed. We found a small number of foundations whose trustees had considered whether they might circumvent the sunset provision by closing the foundation — and placing the assets in a new foundation that would operate forever.

Yet our study also finds that it is a mistake to assume it is the foundation’s staff members and trustees who present a threat to following a donor’s wishes. In some cases, trustees decided to close a foundation even though the donor did not require that. They took that route because they said they were concerned that, as they aged and were replaced by trustees who didn’t have a connection to the donor, the foundation would drift too far from the donor’s values and wishes.

Sometimes, donors themselves — not trustees or staff members — created the greatest challenges to preserving their intentions by failing to leave guidance about what they wanted their philanthropy to accomplish. Trustees in some instances went to great lengths to find out what donors who left no guidance would have liked them to do, even though such research was in no way required by the law.

In some cases it was not clear that the donors had any specific charitable intentions to preserve. The head of one foundation board, who was a longtime acquaintance of the foundation’s donors, bluntly reported that the couple had not been philanthropic during their lifetimes, and “they started the foundation because the alternative was a ne’er-do-well son who would have [wasted] it away or died of a drug overdose first.”

The issue of donor intent is further complicated by the fact that donors often want multiple things, some of which may lead in the direction of different choices about how long their foundations should live. Donors may wish that their foundations would use the money in the way they want — but they may also want family members, who may have other interests, involved. And, for some donors, a desire for perpetuity is part of their intent in creating a foundation.

Those complex and conflicting desires can be taken into account when donors take a creative approach to setting up their foundations.

Take the example of one donor, who was considering setting a limit on her foundation’s life out of concern that the philanthropy would eventually stray from her interests and wishes. But she had seen foundations with a sunset provision make poor grant decisions out of time pressure, and she wanted to avoid getting into that situation. She also wanted the foundation to stay in her family.

Her solution? She will feel free to give as much as she wants while she is alive, spending a good chunk of the foundation’s endowment. She will leave the rest of the assets in perpetuity for her family, with the hope that the money will always be spent in ways she would wish, but also accepting that it may or may not.

Interestingly, once she resolved her concerns about whether to set up a perpetual or sunset foundation, she wound up feeling happier and freer in her philanthropy — something that would have been unlikely had she been forced to choose one approach or the other.

As this donor’s case shows, perpetuity and sunset need not represent mutually exclusive extremes. Philosophical principles and dogmatic positions about donor intent, sunset, and perpetuity fail to adequately capture the reality of what happens following a donor’s death.

The donor’s approach also demonstrates how essential it is for donors to give greater thought to their motives, goals, and philanthropic needs in relation to what they hope to accomplish in both the short and long term.

When donors and trustees craft creative solutions tailored to their own needs rather than trying to fit themselves into rigid categories, they have a greater opportunity to meet their giving goals. Upon closer inspection, the black and white dichotomies of perpetuity and sunset actually yield to shades of gray.

Francie Ostrower is a professor at the Lyndon B. Johnson School of Public Affairs and the department of theatre and dance at the University of Texas at Austin, and an associate scholar at the Urban Institute. Her report, “Limited Life Foundations: Motivations, Experiences and Strategies,” is available on the institute’s Web site.