What to Consider When Deciding Whether to ‘Spend Down’ a Foundation’s Assets

The Atlantic Philanthropies committed its final grants in 2016 and plans to close by 2020, and the Bill & Melinda Gates Foundation has decided to spend its endowment within 20 years of the death of its founders. These and other high-profile examples cause many foundation founders and trustees to wonder whether it’s wiser to stay in existence forever (“in perpetuity”) or to spend all of one’s endowment by a set date. Although more than 90 percent of the nation’s foundations are structured to remain in perpetuity, it is worthwhile to review the pros and cons of spending down and to examine how some foundations have chosen to go out of business.

Why some foundations limit their lifespans. The main reason a foundation limits its lifespan is to protect the vision of the founders. Understandably, founders fear their vision will be lost or watered down once they die or an independent board takes over. The apparently apocryphal story of Henry Ford II resigning from the board of the Ford Foundation in protest over the grant maker’s leftward turn still haunts donors whose passion led them to create a foundation.

Another reason is urgency. If the issues are important enough, the reasoning goes, why not give it all you’ve got! Thus, the founder of the Beldon Foundation, John Hunting, gave the grant maker 10 years to make a mark on its priorities of regulating toxic wastes and strengthening environmental advocacy.

A third reason that foundations choose to go out of business is economic: A foundation no longer has sufficient funds to achieve the impact its founders envisioned. For example, the Paul Rapoport Foundation, its endowment devastated by the Great Recession, decided to “turn the economic downturn into an opportunity by pivoting our focus and making larger grants to fewer grantees with the idea of generating deeper, longer-term reach and impact,” according to board chair Kimberleigh Smith.

When to exhaust the endowment. For those foundations that decide to close, leaders must determine when the last grants will be made and how long after that the foundation will remain open. A group can decide that at the outset or after it’s been up and running for years. Andrea and Charles Bronfman established their eponymous philanthropy in 1996 with the intent to close it down by 2016. In fact, it made its final awards in 2012 and closed four years later, as planned. On the other hand, in 2012, without any prior notice, Hitachi unexpectedly announced that it was cutting off support to its foundation, giving it only four years to wind down its affairs.[MOU1]

How to allocate remaining resources. The most important consideration is to use the money in a way that will continue to advance the foundation’s mission. Thus, the Atlantic Philanthropies announced that it would seek “to advance the foundation’s goals for at least a decade beyond the foundation’s life,” and the Hitachi Foundation stated that its final recipients “had to be aligned with the mission of the Hitachi Foundation.” Not only is this good policy, it is a legal requirement in most, if not all, states. It is highly unlikely that a state attorney general would approve the dissolution of a health-care foundation that wants to start, say, a nonprofit radio station with its remaining assets.

Ensuring the legacy. The next big question is how to advance the mission — that is, how can the foundation have an impact after its doors are closed? Foundations have handled this in two complementary ways:

1. They make a few big bets: concentrate resources on a limited number of programs that could have a meaningful impact. “We sought to make bigger bets and assume more risks,” said Laurie Dachs, the president of the San Francisco-based S.D. Bechtel, Jr. Foundation.

   James Binger, founder of the Robina Foundation, indicated that he wanted the foundation to make “transformative grants that would benefit society ” and therefore restricted grant making to only four grantees.

   The seriousness of the AIDS crisis combined with the limited funding for AIDS research motivated the Aaron Diamond Foundation to put nearly all of its resources into finding an effective way to treat HIV/AIDS — leading to the development of drugs that saved and prolonged countless lives.

2. They make final awards to effective and trustworthy people and organizations that foundation leaders have worked with for a long time. The Edna McConnell Clark Foundation specified that it would continue to “provide large infusions of growth capital to effective nonprofits and their visionary leaders,” and it did so through large grants to two of its most effective grantees: Blue Meridian Partners and the Youth Development Fund.

   When John Olin established his foundation in 1953, he required it to end within 10 years of his death. He wanted the foundation to reach its goal ― increasing the influence of conservatives in the United States ― quickly. It met its objective by supporting a limited number of thinkers, writers, and organizations, such as the Federalist Society, that shared the founder’s philosophy.

Practical considerations. Before closing down a foundation, make sure that the endowment is conservatively invested as a buffer against a market downturn; pay attention to personnel by providing incentives to staff members who stay and by offering generous severance packages to those who leave; be as transparent as possible with grantees, other foundations, and the public; and decide where to house the foundation’s archives.

David Morse, who led communications for the Atlantic Philanthropies as it began winding down, says “Decide how you want to end and work backward from there. These are the final awards, and there is no going back.”

The writers are founding partners of Isaacs/Jellinek, a consulting company that works with foundations, and the authors of “Foundations 101: How to Start and Run a Great Foundation.”

Correction: An earlier version of this article mistakenly said that Atlantic Philanthropies closed its doors last year. It committed its final grants in 2016 and plans to close in 2020.