4 min read

Donating for eternity?

by Michael Nenning

Foundations preserve their assets and only use the income for the foundation’s purpose – a concept that has symbolised the idea of a gift “for eternity”, for centuries. Increasingly, this model is facing competition from foundations that use not only income but also the assets themselves for the foundation’s purpose. More and more Limited-term Trusts (LtT) are calling the perpetual endowment model into question.

Prominent examples

“I had one idea that never changed in my mind – that you should use your wealth to help people.” This is how Chuck Feeney, the founder of Atlantic Philanthropies, is quoted. His foundations spent their entire endowment of over eight billion US dollars on charitable causes and finally closed their doors in 2021 after 35 years. Declan Ryan’s One Foundation in Ireland was limited to ten years from the outset and invested 85 million euros during this time.

The Crespo Foundation in Germany was converted into a consumption foundation after the death of its founder and will use up its assets by 2039. The Bill and Melinda Gates Foundation will be dissolved, at the latest, twenty years after the death of its founders; if it exists that long. The founders have already declared that they will massively increase the foundation’s expenditure at the expense of their assets during their lifetime.

Focus on social change

What motivates founders to “give while living” or at least not to create a monument for eternity with their foundations; unlike the Fuggers or the Rockefellers, for example? 

The founder of the Crespo Foundation, business heiress Ulrike Crespo, wanted her foundation to exist only as long as she was remembered as a person and patron. Like her, many founders share a certain unease at the idea that one day in the distant future their foundation will be run by people who no longer have any connection to the founder or his family. 

Others are more driven by the thought that there will be enough challenges during their lifetime or that of the next generation that their assets will be used to solve. “Take care of today, the future will take care of itself” could be their motto. Developments in recent years prove them right: five years ago, what founder could have predicted developments such as the coronavirus pandemic or Russia’s war against Ukraine – events with a massive impact on life and social needs. 

The finite nature before our eyes

“We still have 17 years in which we can spend our assets exactly once.” This statement from the board of an LtT vividly illustrates how the mindset changes when the foundation is not, or no longer, set up for perpetuity.

In traditional foundations, the assets generate new income every year. What doesn’t work today can be tried again next year. A completely different “sense of urgency” prevails in LtTs. There is no second attempt for larger and more protracted projects. The foundation team must be prepared to react quickly to developments and carefully consider how its decisions affect the effectiveness of the foundation.

Sharpening the focus on impact

In LtTs, the focus is sharpened on what the foundation achieves externally. Does the foundation only promote certain causes as long as it exists? Which changes will be permanent? Or to paraphrase Chuck Feeney: “What have we got to show for it?”

If the foundation wants to leave a legacy that lasts beyond its end, it needs to align its strategy with its own timeline. One approach is to support people directly, for example with scholarships. Investments in personal development are not lost and ideally continue in subsequent generations.

Another approach is the strategy of transformative philanthropy, which aims to bring about lasting change in organisations and systems. The time factor plays a special role here. Social change often takes not just years, but decades.

Flexibility and adaptability

One of the main advantages of LtTs is their flexibility and adaptability to changing social needs. As they are not only dependent on annual investment income, but can also utilise all or part of their capital stock, they can react more quickly to current challenges and crises.

Special challenges

The management of LtTs poses particular challenges. The investment of assets must be adapted to the planned utilisation so that sufficient liquid funds are always available. If the foundation employs staff, special attention must be paid by the managers: ideally, the best should stay until the end, which may require appropriate incentivisation.

Communication with stakeholders

Typically, LtTs are, or become, grant-making foundations that do not have their own operational projects or prepare exit plans for these in good time. However, the funded organisations must also be able to adapt to the foundation’s plans. 

The transition to the “sunset phase” of a foundation requires real change management, as goals and priorities can change significantly in the final phase. Finally, in the winding-up phase, tax and legal issues arise in connection with the dissolution of the foundation, which must be considered in good time. 

Sustainability and continuity

Despite the advantages mentioned above, traditional permanent foundations also have their justification. As their capital is invested for the long term, they can generate permanent sources of income and thus ensure continuous support for charitable purposes. This is particularly advantageous when it comes to long-term projects that require time, resources and stability.

Prospects for small foundations

In Switzerland, more than 80 % of all charitable foundations have assets of less than CHF 5 million. The situation is similar in Germany. If the foundation is set up for the long term, the endeavour to maintain the foundation’s assets from the income only allows for modest foundation activities, where the appropriateness of the administrative costs becomes increasingly questionable.

If foundations remain permanently small, for example, because expected or hoped-for endowments and legacies fail to materialise, conversion into a consumable foundation can ensure that the existing assets are used effectively and do not just generate permanent administrative costs. Corresponding regulations can be included in the articles of association at the time of establishment.

Intergenerational fairness and legacy

One of the key aspects of permanent foundations is their focus on preserving heritage and values for future generations. They make it possible to fund significant projects and charitable activities for decades to come, which can have a lasting positive impact on society.

LtTs, on the other hand, tend to focus on the short-term improvement of living conditions in the current social environment. Both types of foundation have their justification. With the increasing acceptance of LtTs, the range of options for donors and philanthropists has expanded to include a valuable alternative.