How long should foundations live?

To the Editor:

Leslie Lenkowsky’s essay (“A Question Not on the Agenda: How Long Should a Foundation Operate?,” May 3) suggesting limitations on the life span of charitable foundations and trusts is worthy of consideration, although it is unclear which group would come forward to champion such a regulatory change.

The early drafts of the 1969 Tax Reform Act had a 20-year life span written in, but that was replaced by the provision to spend a certain portion of assets annually for gifts and grants. That percentage jumped around for a few years, and then was fixed at 5 percent, where it remains today.

When some nonprofit leaders suggested that the percentage should have been increased a few years ago, the foundation community, to put it mildly, went nuts.

The proper percentage of charitable distributions required of a foundation, with its carry-forwards and exclusions, will always be difficult to determine and may seem arbitrary.

A 5-percent payout when foundations are getting returns of 20 percent, as they were in the late 1990s, might seem trivial. That same percentage in 2002, however, when many foundations were showing negative returns, might seem draconian. Most importantly, the whole payout conversation is probably beside the point.

The point, as Mr. Lenkowsky rightly states, is whether charitable trusts and foundations should last forever.

The Uniform Trust Code, now adopted whole by 20 states, and in the main by dozens more, says no, in the case of noncharitable trusts at least. For those trusts, a 21-year life span is anticipated. Some states allow for longer life spans for some trusts, such as those dealing with cemetery plots, for example, where perpetuity may indeed be in the common interest.

Twenty-one years may not be long enough for charitable trusts. Twenty-one years after Bill and Melinda Gates set up their foundation, they are likely to be very active in their philanthropy. But some time limitations are worthy of consideration.

Time limitations on foundations could instill a renewed sense of purpose, even urgency, to a foundation staff and board that perpetuity could never kindle.

What about 21 years, with the opportunity to apply for an additional 21 years? This reapplication is common practice for copyrights and patents, and would flush out the “nobody’s home” foundations that litter the philanthropic landscape.

Should donor-advised funds and supporting organizations have the same life span? I would argue yes.

For a community foundation to monitor the payout of each of its hundreds, often thousands, of donor-advised funds would create an expensive administrative nightmare. But every community foundation, and every proprietary donor-advised fund, knows precisely when each fund is created. At the end of 21, or 42, years whatever money is left in each donor-advised fund could be swept into an unrestricted grant pool. Some community foundations already have such limitations, but they are all over the map.

When I ran the California Community Foundation, our policy with donor-advised funds was the life of the donor plus 20 years. In almost 25 years in that position, and after the creation of a thousand such time-limited funds, I never received a single complaint.

Mr. Lenkowsky is right. We should limit the life span of charitable foundations and trusts. It would provide a solution to the payout arguments roiling donor-advised funds and would reinvigorate the foundation field. It’s about time that the phrase “the end of the day” had some meaning in philanthropy.

Jack Shakely
Senior Fellow
Center on Philanthropy and Public Policy
University of Southern California
Los Angeles