Limited Life Foundations vs Permanent Endowment Funds
September 19, 2017
There is a debate within the charitable sector focusing around foundations created to exist in perpetuity in contrast to a foundation having a specific life span. Both forms of endowment fund provide donors with the ability to transfer accumulated personal wealth to a foundation to support issues, causes, and organizations important to them. The Philanthropist article Point/Counterpoint: Limited life foundations ensure greater social impact illustrates the realities and benefits of both approaches to achieve personal philanthropy.
Our view is that both approaches have their place in the Canadian charitable landscape. Let’s highlight some of the drivers of both approaches to funding.
Limited Life Foundations
Such foundations are structured by their founders to have their assets actively used within a short period of time. The thinking is that larger grants or funds will make a larger impact on current social, cultural, and environmental issues. The life span of such a foundation is limited by spending and granting capital a rate faster than investment returns or gifts received. The donor intentionally, creates a fund to support a particular cause with the objective of doing so, over a fixed period of time (say 10 to 20 years). Some philanthropists are deeply satisfied by seeing their gifts at work during their lifetime, and knowing that the impact of their gifts may secure big wins. The view is that larger investments now, will positively impact future generations, as opposed to spending only investment earnings. Through bigger bets, donors have the sense is that lasting, positive change is possible.
In some situations, the desire to move from long-term, permanent types of granting to more focused spending can come as the next generation of family members become involved with a family funded foundation. The article argues that “generosity is a renewable resource”. Future philanthropists will emerge to continue funding the important issues prevailing in our society by creating their own foundations.
The counter argument is that continuing grants and income from an endowment represent a dependable, cumulative support for an organization, or a cause. The creators of endowments worked hard to build wealth and want their gifts to be used towards a long-term legacy.
An endowment is a resource where the contributed property results in a fund whose returns support the programs and operations of charitable causes and organizations for many years to come. A healthy endowment can be an important resource to support persistent societal issues. Endowment revenue allows organizations to budget, plan and build a long-term strategy for their mission. The annual returns, over time are a resilient, continuing resource, important, when other sources of funding may vary from year to year, and cannot be fully counted on.
As an example of lasting, sustained value, one of the Ontario Arts Foundation funds was established in 2000, with capital of $107,000. The fund value has grown to $145,000, and importantly has paid out over $80,000 in income or 75% of the original capital. The income will continue, and will increase over time and is a valuable resource for this arts organization.
A permanent endowment can also be a flexible resource over time. If it is structured, and the Board has the authority to shift the area of focus, the permanent fund can (1) continue to support issues and organizations as originally intended, and (2) adapt its purpose as social and cultural issues change, or are resolved and new issues arise over the long-term. The ability of an endowment fund to support emerging needs and priorities, which the founder may not have anticipated, can ensure that long-term support follows the issues of the day. The world and its concerns evolve, do not stay static.
The uniqueness and vision of donors as they create vehicles for long term charitable support are addressed by both forms of charitable entity. Both have their place and are to be encouraged.