In 1991, the governing committee of the Whitaker Foundation, which had been supporting the development of biomedical engineering since the foundation was established in 1975, felt that the time was ripe for a large investment in the field. They determined that a program of grants to establish and strengthen fledgling university biomedical engineering departments was the best use of the foundation's assets, and in order to pay for that investment, decided to spend down the entire corpus in 15 years. By the time the foundation closed its doors in 2006, it had poured over $800 million into biomedical engineering, effectively jump-starting the field, which now has nearly 80 departments.

Whitaker is an example of a foundation that, driven by its mission, chose a non-traditional path with respect to lifespan and payout. The vast majority of US foundations, which number about 71,000, are set up to exist in perpetuity, replenishing their assets through investment, with the expectation that their money will be around to address the problems of the future as well as those of today. The majority of foundations also pay out, in grants and administrative costs, around 5% of their assets each year, the minimum required by US law. This rate was initially set at 6% by the Tax Reform Act of 1969, and revised to 5% in 1976. Such practices have become the default position for foundations. (For the purpose of this paper, perpetuity and 5% payout are termed "traditional" foundation practices.)

Why is this so? For some foundations, perpetuity is dictated explicitly in the founding documents, but that is not the case for all. Analyses that tackle the issue of the time value of money, attempting to determine the relative value of a dollar spent on philanthropy today vs. in the future, yield contradictory results. The issue of payout percentage has been subject to debate, with various studies taking different positions as to the long-term effect of different rates on the corpus, but the general assumption in foundation circles is still that the 5% payout rate is the number that will enable foundations to maintain their purchasing power into the future. In their 2001 study of foundation payout rates, Askash Deep and Peter Frumkin list five excellent reasons for and five against a payout higher than 5%, which in theory should result in a more diverse payout landscape. However, these scholars found that "the weight of tradition and professional experience" is a critical reason for the convergence of foundation payout rates at around 5%. For example, trustees see their "duty of care" as an instruction to "preserve assets for the future," a large endowment confers status, and, given the many priorities involved in running a foundation, it is easier - and less risky - to do what everyone else does, rather than come up with a rationale and a system for doing it differently. (For more details on the payout debate, see "Money, Mission and the Payout Rule," by Thomas J. Billitteri, an Aspen Institute study.)

However, a number of donors and foundations are challenging these assumptions, taking the position that considerations other than perpetuity and payout should determine the structure of their giving. Some believe that certain fields of interest (for example, the protection of the environment) urgently require more money now. Some feel that higher payout and/or a shorter lifespan will yield more effective philanthropy with greater impact. Some, like Whitaker, see the potential to address - and solve - a single, identifiable issue with more concentrated funds.

Donors may prefer to maintain personal control over their philanthropy, and thus plan to do their giving during their lifetime, and/or establish a time limit for their foundations after their death, in order to preserve donor intent. Some want to see all their money working now. Some dislike the idea of bureaucracy, and feel that the structure of traditional foundations is more oriented toward preserving capital than toward doing good. Some feel that with new fortunes being made and inherited, that future needs will be taken care of by future donors.

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  Resources

• Executive Summary
• Full Report
• Order Print Copies

  Report Contents

• Introduction
• Focus: The Whitaker Foundation and the Helen F. Whitaker Fund
• The Learning Curve: The Beldon Fund
• Retooling for Spend Down: The Atlantic Philanthropies
• Giving While Living: The Richard and Rhoda Goldman Fund and the Lewis B. and Dorothy Cullman Foundation
• Quick Spend Down: The Haigh-Scatena Foundation
• Raising the Payout: Evelyn and Walter Haas, Jr. Fund
• Giving 5.5%: The Lynde and Harry Bradley Foundation
• More than Investment Returns: The Needmor Fund
• Ramping Up: The HKH Foundation
• Using All the Models: Endswell Foundation / Renewal Partners
• A Different Strategy: Omidyar Network
• Conclusion
• Selected Bibliography
• Resources
• List of Profiled Foundations
• Acknowledgements

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  10am - Noon
  NCG Family Philanthropy Exchange and the Stanford Center on Philanthropy and Civil Society are hosting a discussion of Beyond Five Percent: The New Foundation Pay out Menu. This funders only event is free for members.
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