Perpetual or Spend Down?

When is it wise to "spend down" a foundation, or use all of its assets by a certain time?

Only about 10% of private foundations are set up with the intention they will spend their money within a set period, says Daniel M. Schley, chief executive of Foundation Source, a company that provides support services for private foundations. Investor Warren Buffett's recent decision to donate over time the bulk of his wealth to the Bill and Melinda Gates Foundation -- and to require that at least one of the Gateses remain actively involved in the foundation for his donations to continue -- spurred further talk about whether wealthy people should form their own foundations and how long they should last, Mr. Schley says.

Among the reasons for establishing a perpetual foundation: Some social problems, such as poverty and education, aren't going to go away anytime soon; a small amount of money given consistently over years can produce continuous change; it can be difficult to wisely spend a great deal of money in a short time; and a family may want to preserve its legacy through a foundation.

The rationale for a short-term foundation is that some donors have a specific mission they want addressed over a few years, and a large infusion of money may be more effective.

Some donors worry that long-term foundations can create bureaucracies and that future generations may have different values. "I have strong feelings [against] having foundations last in perpetuity -- that's when all the hanky-panky starts," says 87-year-old philanthropist Lewis Cullman, whose own foundation will close soon after he dies.

[Excerpt of an article by Robert J. Hughes, The Wall Street Journal]