October 10, 2011

Spend Down or Perpetuity: Philanthropists Should Make a Choice—and Choose Wisely

Susan Wolf Ditkoff is a partner at the Bridgespan Group and co-leader of its philanthropy practice.

By: Susan Wolf Ditkoff

Susan Wolf DitkoffAn exciting new wave of donors is getting serious about philanthropy. One question they often have is how to give–specifically, should they create a foundation in perpetuity or spend down their funds in a given period? While there are technical issues (such as tax implications) involved in these decisions, here's the really interesting question: Which approach creates the best results and the most social impact?

In the course of our work, we've uncovered good reasons why donors spend down or give in perpetuity; for example, do you want to try to solve problems in your lifetime or ensure that your family is engaged in philanthropy over generations? (See our Spend Down vs. Perpetuity FAQ for more questions to consider.)

Not understanding your motivations can lead to bad, and unintended, consequences. Take, for instance, the challenges faced by one family facing this decision upon the death of its benefactor.

This benefactor had been a tremendously successful entrepreneur, having grown and managed a multi-billion dollar company. In fact he was known for making big bets in business, many of which paid off handsomely. And when he turned his attention to charities, his investment philosophy was no different. He was known for making rapid (and large) decisions, often awarding multi-million dollar grants. As he grew older, his son pleaded with him to articulate how he wanted his foundation to be managed after his death. Unfortunately, he was visibly uncomfortable confronting his mortality, and he never got around to discussing the issue of spend down vs. perpetuity.

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Upon the benefactor's death, the family faced a choice. Out of respect for his legacy, and with no instructions to the contrary, they opted to continue the foundation in perpetuity. They also promised to continue his legacy of making big bets on causes they knew that he cared about. Beyond that, unfortunately, no one felt prepared or empowered to fill his shoes in making those big decisions. It's not that they were uncomfortable with money, but most of the family members, while wealthy, had no experience making professional investment decisions in their careers–for-profit or nonprofit. (Their careers were in education, the arts, law, and the like.) The most expensive decision most of them had ever made was buying or selling their homes. Investment managers had handled their wealth management decisions, quite ably, and their father had managed charitable decisions on his own.

As a result, the board members saw themselves as custodians and stewards of the family legacy–without experience as true decision makers. Fast forward to two years after the benefactor's death: Despite their professed desire to make big bets like the benefactor, their only large investments had been to continue the grants he'd already committed. Every new grant was under $100,000, and even getting enough votes for those was a struggle. This might be understandable: It is hard enough to make big bets with your own money. It's even harder when you feel like your primary responsibility is to preserve someone else's legacy and, on top of that, that you're fundamentally afraid of making big financial investment decisions.

Furthermore, as stewards, the family members could never meaningfully discuss whether they should spend down the endowment. (Any such suggestion was seen by some other board members as practically traitorous.) So the foundation continues to feel its way along but without any way to decide whether the money spent today or saved for tomorrow would have greater impact on society.

To make sure you don’t fall into the same trap, don’t put off the hard conversations until it’s too late, because if you don’t make a choice, a choice will be made for you.

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