For a substantial number of wealthy Americans, establishing charitable foundations and family funds has become an attractive and tax-effective way of channeling their philanthropy, and as a result the proliferation of such vehicles has reached unprecedented levels.
In the United States alone, roughly 100,000 private foundations and 250,000 donor-advised funds today hold some $1 trillion in assets. (For perspective, that’s more than $2,500 for every man, woman, and child in America.)
The bulk of these assets typically are set aside in long-term portfolios whose income underwrites charitable grants in — their founders hope — perpetuity. Let’s call this the going long strategy. Increasingly, however, spending down of charitable assets during one’s lifetime — going big — has become an attractive option for growing numbers of philanthropists.
“Like Bill and Melinda Gates, some believe they can make deep investments to address today’s biggest problems,” says Elliot Berger, managing director at Arabella Advisors in New York City, “and that other donors will emerge in the future to tackle the problems of tomorrow.” Or so the argument goes.
Hundreds of Google citations on the subject testify to the increasing frequency with which family and public foundations, large and small, are deciding to “go big” and spend down their charitable assets rather than entrust future generations with the keys to the “philanthropic safe.”
“Going Long” or “Going Big”?
As reported by the Bridgespan Group, only about 5 percent of the total assets of America’s largest foundations historically has been held by entities in the process of spending themselves out of existence. By 2010, that number had climbed to 24 percent — and, presumably, has grown since.
What are the implications of this shift? What might it mean for the long-term well-being of society if some of the great philanthropic fortunes of our day were to spend themselves out of existence? Is there evidence that accelerated spending today can solve social problems to a degree that will reduce future funding needs?And what about the assumption that the next generation’s wealth will be shared as generously as the present generation’s to address the challenges of the day? What, if anything, does the behavior of today’s privileged young tell us about their likelihood of inheriting the charitable impulses of their grandparents and parents — the Depression-era “greatest” generation and postwar baby boomers? Last but not least, what can be done to prepare future generations to fulfill their collective responsibilities?
Obviously, these sorts of questions deserve a much deeper exploration than I can give them in a few brief paragraphs. Allow me, however, to share a few observations derived from my experience helping families structure their philanthropic giving, and from observing decades of philanthropic success — and disaster — stories.
It’s easy to understand the impulse to “go big” and spend down charitable assets rather than entrust a family’s philanthropic wealth — and responsibility — to future generations. Because spend-downs typically disburse funds at a higher rate than foundations established in perpetuity, donors can be especially impactful if they concentrate their giving in a highly focused area of interest. They may believe that “going big” over a shorter period of time will give them greater influence, produce more dramatic results, and, for some, offer greater personal satisfaction.
Strengthening the spend-down argument, I’ve met more than a few charitable donors who wondered about their children’s future interest in philanthropic giving, or about how their children’s values, identities, and priorities might diverge from their own. These are entirely reasonable concerns. It is surely legitimate for parents and grandparents to worry about whether future generations will share their own commitment to social responsibility in general and, even more so, to their specific values, beliefs, and causes.
At the same time, spending down is fraught with its own risks, based as it is on a series of fairly speculative assumptions that raise important questions: Are today’s priority needs necessarily more pressing than tomorrow’s, since no current funder can know precisely what the future holds? Does sufficient knowledge exist to solve today’s problems once and for all, enabling us to not worry about funding such needs in the future?
Granted, the Bill & Melinda Gates Foundation may succeed in extinguishing malaria during our lifetimes and save countless future lives in the developing world in the process. But what about hunger, poverty, climate change, and the myriad emerging threats to humanity that we may not fully recognize today?
As the title to this piece suggests, I come down strongly on the side of creating sustainable structures for multi-generational family philanthropy, wherever feasible. Wealth earned over multiple generations or through the extraordinary success of one generation should ideally be used to build social capital with lasting benefits, much as museums, universities, and hospitals are built using present capital with the intent of providing for the long-term good.
In my view, and executed correctly, the opportunity to create and sustain a shared space for collaborative, long-term family philanthropy outweighs the short-term benefits of spending down — both for the family and for society. And there is much that can be done to mitigate the risks of the “going long” approach.
Ami Nahshon is principal consultant at Ami Nahshon Strategic Consulting, where he offers consulting and coaching services designed to help nonprofits, foundations, and their leaders optimize their mission, strategy, and performance.
Author: Ami Nahshon