NCPA - National Center for Policy Analysis

Some Foundations Adopt New Motto: Spend It All

September 10, 2002

Charitable foundations have traditionally aimed at self-perpetuation -- allowing their core capital to grow year-by-year so they can continue to fulfill their mission ad infinitum.

But some foundations are adopting precisely the opposite strategy: self-liquidation through immediate grants and endowments over a planned, finite period. Their founders want to see results within their own lifetimes, figuring future generations of benefactors will rise to address future goals.

  • A federal tax code change in 1981 relieved foundations of the obligation to distribute at least as much as they earned on their assets each year and, since then, pay-out rates have drifted down to near the legal minimum of 5 percent of assets.
  • Consequently, during the same period, foundation assets have increased from $47.6 billion to $486.1 billion in 2000.
  • Last year, foundations paid out about $29 billion.
  • Traditionally, instructions from donors -- who have often seen their institutions as memorials to themselves -- obligate foundations to maintain their endowments in perpetuity, but aging foundations can become sclerotic.

Foundation sponsors who want their institutions to distribute all funds over a predetermined period of, say, 10 or 15 years argue that a large grant made today may be several times more socially valuable than smaller grants stretched out over years.

The recent stock market decline, in which some foundations saw 15 percent to 30 percent of their capital disappear, also argues for immediate give-aways, some benefactors reason.

Source: David Bank, "Shocked by Stocks, Some Foundations Spend What's Left," Wall Street Journal, September 10, 2002.

 

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