Should Philanthropy Go On Forever?

Most charitable foundations in this country operate as perpetual giving machines. That is, they manage their funds and grant making in such a way that they will never spend out their entire endowment. In fact, many manage to grow their endowed base, even while awarding out millions of dollars in grants each year.

The IRS mandates that foundations must spend down at least 5% of their endowment each year, or face penalties. The perpetual foundations usually treat that 5% minimum as their set goal, and rarely give above that. The other 95% stays tied up in investments and helps to grow (or at least maintain) the endowment.

Philanthropists will give you two main reasons for setting up perpetual giving machines.

The first reason most people think of is, "to maintain a legacy." If they can't live forever, at least the foundation bearing their name can. It's usually worded something like, "I want to continue to do good long after I'm gone."

Many in the nonprofit field - who would like to get their hands on the foundation money sooner, rather than later - look at this argument as pure ego. "We have problems that need solving now," we argue, "Why grant out the money 5% at a time, when if you grant it all today we could cure cancer and AIDS, develop renewable energy sources, and end childhood hunger in this generation."

The other main reason for the perpetual foundation is a simple economics equation. By managing endowments in a manner that grows them - even while making grants - more money is eventually generated for nonprofits. Basically, would you rather have $10 million today, or $30 million over time?

It's a sound argument in a strong economy. But all one has to do to argue with it is to remember back just a few years to the dot-com bust, and what it did to foundation endowments (particularly those in my area, which were heavily invested in tech stocks). The means for growing endowments are investments, and there are no guarantees.

More and more, in the last few years, I've seen articles about philanthropists who are saying, "To Hell with posterity," and making plans to give their fortunes away entirely in their lifetimes. The latest of these being Howard G. Buffett (son of Warren).

According to the Chicago Tribune, Buffett doesn't intend to let philanthropy go on forever (get passwords here). As you've certainly heard by now, the senior Mr. Buffet is giving his fortune away over the next few years. A portion of that will be going into the foundations of each of his children, including Howard, who intends...

... to try spending the yearly installments of about $50 million from his father as fast as they arrive. He is not considering having his philanthropy operate in perpetuity but expects to set a distant date at which it will disburse its assets and shut down.

Bravo Howard! Let's see who is the next philanthropist to get on board.

Tags: philanthropy, nonprofits, foundations, charity, philanthropists, Howard Buffet