Perpetuity-Based Foundations from All Angles

Background on Foundations

Fundamentally, when a foundation is created, there needs to be a decision about whether it will last forever (in perpetuity) or for a specified period of time (spend-down). Most major foundations typically adopt the perpetuity method, as about 70 percent choose this option.¹ On the other hand, there has been a significant increase toward time-based foundations, which will give all of their endowment out before a specified time. In fact, there is data that shows this change is happening at a quick rate, as the National Center on Family Philanthropy reported that more than 28 percent of family foundations were considering a change in giving structure over the last five years.²

It is important to explain how a foundation produces grant-giving money from its endowment, which is a large sum of money that grows with interest in a tax-exempt account.³ Basically, a large pool of assets is invested in the market and other financial tools, with an expected growth of above 5 percent annually. These gains, or at least a portion of them, are then redistributed to nonprofits as tax-exempt grant money that the principal produced. While these endowments ensure funding in perpetuity, they also “lock the money in,” where, on the other hand, it could also be used to create immediate impact.

Right now, the current rule is a 5 percent payout, meaning a foundation must pay out 5 percent of the fair market value of its endowment each year.⁴ This rule is done to ensure that foundations eventually pay out their money, but many argue that the 5 percent is not high enough. Typically, with the 5 percent rule, an endowment needs to have a ratio of 20:1 to the specific program cost.⁵ This amount invokes multiple different reactions, all the way from “well why could I not just create 20 of the programs right now?” to “at least once we have the money, we will never have to worry about funding again.” Both of these viewpoints are valid but incomplete. The 20 programs created right now would be financially unsustainable after one year, and the notion of “never having to worry about funding again” is idealistic and unrealistic.

The First Modern Foundation (The Peabody Fund) began in 1867.⁹

The most commonly used example of a perpetuity-based foundation is the March of Dimes, which was founded during the height of the polio pandemic. Once polio was eradicated, rather than shutting down, March of Dimes pivoted to a model of promoting maternal and infant health.⁶ This outcome was one of two possibilities, the other being spending down their endowment. Hindsight is always 20/20, but it is hard to measure whether a different decision would have created more or less impact. Another example is the Gates Foundation, which recently pledged to spend down its principal by 2045.⁸

Clearly, there are uses for both types of foundation types, especially with the current trend toward “billionaire spend-down,” where many wealthy individuals are signing the Giving Pledge, making a commitment to donate most of their wealth by the end of their lives.⁷ So the question is what is more impactful in the long run. Is it better to spend down by a certain point or create continuous returns for perpetuity? There are many questions and unfortunately no crystal ball. But the ultimate answer is that we need both. We need grant-making perpetual foundations to ensure sustainable funding, and we also need a decentralization of wealth. There is a use for both, and they should be viewed as complementary, not adversarial.

Ruesga, Christopher J. Perpetuity or Limited Life: Which Is Better for Foundations? MacArthur Foundation, 2009. https://www.macfound.org/media/article_pdfs/perpetuity-article-final.pdf
Dorothy A. Johnson Center for Philanthropy. “More Foundations Opt for Planned Lifespans and Spend-Down Strategies.” Johnson Center for Philanthropy, 17 Aug. 2021. https://johnsoncenter.org/blog/more-foundations-opt-for-planned-lifespans-and-spend-down-strategies/
Community Foundation for Southeast Michigan. “Endowment.” Community Foundation for Southeast Michigan. https://cfsem.org/ways-to-give-2/endowment/
Farish, Carl. “The 5 Percent Rule Explained.” PFS LLC, 20 Jan. 2020. https://pfs-llc.net/resource/the-5-rule-explained/
Kihlstedt, Andrea. “Endowment Capital Campaign.” Capital Campaign Pro. https://capitalcampaignpro.com/endowment-capital-campaign/
“History.” March of Dimes. https://www.marchofdimes.org/about-us/mission/history
“The Giving Pledge.” The Giving Pledge.https://www.givingpledge.org
“On the Foundation’s 25th Anniversary, Bill Gates Announces Plan to Spend Down the Foundation.” Gates Foundation, 8 May 2025. https://www.gatesfoundation.org/ideas/media-center/press-releases/2025/05/25th-anniversary-announcement
Weiner, George. “17 Historical Nonprofit Moments You Should Know.” Whole Whale.
https://wholewhale.com/tips/15-historical-nonprofit-moments-you-should-know