The High Cost of Immortality 

 How do you go about giving away hundreds of millions?

That’s a serious question.

It’s definitely a Cadillac kind of problem, but there are people who face it. One of them is a friend of mine. It turns out that thinking about this may be helpful for lesser mortals like you and me.

Here’s the story.

My friend’s father was a successful businessman. He built a series of companies. He eventually sold them for enough to take care of himself and his wife for the rest of their lives, provide trust funds for their adult children and, yes, trust funds for the grandchildren. The trusts are large enough that the grandchildren have social schedules that would make it inconvenient to have a 9-to-5 job.

The amount of wealth was a complete surprise to everyone in the family.

Millions to give away

The millions that were “leftover” — the bulk of his estate — went into a family foundation. It had a well-defined mission and his adult children, named as trustees, had the task of fulfilling the mission.

They were responsible for putting the money to good use. Every year. The “every year” part is important because the Internal Revenue Service rules require that foundations must make grants equal to at least 5 percent of their market value every year.

So, my friend and his sibling needed to give away about $10 million a year.

It’s easier to lose money than to give it

Yes, I know: It’s hard work, but someone has to do it.

In fact, giving away money is a demanding task. I could go on, here, and tell you about the time it takes to evaluate proposals, vet recipients and decide which problems should have the highest priority. But I won’t.

Why?  Because my friend was troubled by another problem. One that is seldom discussed.

The foundation has developed a life of its own.

The foundation has a director and staff. It also has outside investment professionals. And outside legal counsel. All are well-compensated. And all have personal agendas that weren’t related to the mission statement of the foundation.

That’s when my friend started to worry about mortality.

Why?

Mission creep

Simple. While alive, they could keep the foundation “on mission.” But they could already see some “mission creep” in the recommendations coming from staffers, particularly the director. What would happen, my friend wondered, when he died or was too old to keep up with meetings and decisions?

That’s when my friend asked a thinking-out-of-the-box question: “What if we gave away a lot more NOW? What if we planned to exhaust the foundation’s assets while we are alive and well?

This is not how most people think about foundations. Even with the annual distribution requirement, a foundation is potentially immortal.  And most donors hope for something close to immortality. Skeptics should check the abundance of donor names on hospital and university buildings.

Abandoning immortality

But immortality isn’t a good idea.

Why?

Simple. The longer the life of the fund, the lower the amount of money that actually gets to the intended cause.

It turns out that the underlying math here is very close to the math of retirement spending. So, I built a rough model, in Excel, to test how different expenses and different rates of increase impact foundation efficiency. A more sophisticated (and more realistic) model would have returns vary year by year, with some major ups and some major downs.

Using the current 7 percent annual return assumption now commonly used by pension plans and reasonable total fund administration and investment management expenses, I found those can amount to about 25 percent of annual giving in the first year.

Then annual administration expenses start to rise. How much they rise depends on inflation. Again, it’s the same problem retirees face. I chose 3 percent.

Expenses rise to 32 percent of the amount gifted by year 10 and 42 percent by year 20. They continue rising unless administration costs are reduced. More important, even if you start with a lower percentage of money being consumed by operating costs rather than grants, the percentage rises over time.

The figures assume a consistent annual return and, as we all now know, returns on investment portfolios are anything but consistent. Just as it’s difficult to sustain retirement with a high annual withdrawal rate, it’s difficult to maintain a foundation with a high annual withdrawal rate.

The bottom line?

Embracing Now

Today, not tomorrow, is the best time to give.

When push comes to shove, there isn’t much difference between a large foundation, a modest charitable gift fund or just putting some money in the church offering plate. The amounts are hugely different but today is the best time to be generous.

Related columns:

Scott Burns, “Giving: Now, Later or After,” 12/18/2021   https://scottburns.com/giving-now-later-or-after/

Scott Burns, “Giving 2.0,” 12/23/2018  https://scottburns.com/giving-2-0/

Scott Burns, “Charitable Gift Funds Make Giving Easy,” 12/22/2013 https://scottburns.com/charitable-gift-funds-make-giving-easy/

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo: by Hernan Pauccara from Pexels

(c) Scott Burns, 2022