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How are you going to give away hundreds of millions of dollars?

That’s a serious question.

It’s definitely a Cadillac type of problem, but there are people who run into it. One of them is a friend of mine and it made me realize that thinking about this can be helpful for little mortals like you and me.

Give Is now better, later or later?

Here is the story.

My friend’s father was a successful businessman. He built a number of companies. He eventually sold enough of them to take care of himself and his wife for the rest of their lives, provide trust funds for their grown children and, yes, trust funds for the grandchildren. The trusts are large enough that the grandchildren have social schedules that would make it inconvenient to have a 9-to-5 job.

The amount of wealth was a complete surprise to all family members.

The millions that were “left”—the bulk of his fortune—went into a family foundation. It had a clearly defined mission, and its adult children were named as trustees and tasked with carrying out the mission.

They were responsible for putting the money to good use. Every year.

The “each year” section is important because the Internal Revenue Service requires foundations to make grants of at least 5% of their market value each year.

So my friend and his brother had to give away about $10 million a year.

It’s hard work, but somebody’s got to do it.

In fact, lending money is a demanding task. I can tell you about the time it takes to evaluate proposals, vet recipients, and determine which issues are the highest priority. But I won’t.

Why? Because my friend was worried about another problem. One that is rarely discussed.

The foundation has developed a life of its own.

The fund has a director and a staff. It also has external investment specialists. And external legal counsel. All are well compensated. And all have personal agendas unrelated to the foundation’s mission statement.

That’s when my friend started worrying about mortality.

Why?

Simple. As long as he and his siblings are alive, they can keep the foundation “on mission.” But they could already see some “mission creep” in the recommendations made by the staff, particularly the director. What would happen, my friend wondered, when he died or was too old to keep up with meetings and decisions?

That’s when my friend asked what he needed. “What if we give a lot more?” now? What if we? planned use up the fund’s assets while we are still alive and well.

Most people don’t think of foundations this way. Even with an annual distribution requirement, the fund is potentially immortal. And most donors hope for something close to immortality. Skeptics should check the abundance of donor names on hospital and university buildings.

But immortality is not a good idea.

Why?

Simple. The longer the life of the fund, the smaller the amount of money that actually reaches the intended goal.

It turns out that the underlying math here is very close to that of pension costs. So I created a rough model in Excel to test how different costs and different rates increase base efficiency. A more complex (and more realistic) model would see returns vary from year to year, with some major ups and some major downs.

Using the current 7% annualized rate of return assumption now commonly used by pension plans and reasonable general fund administration and investment management costs, I found that they could be about 25% annualized in the first year.

Then the annual administrative costs start to increase. How much they rise depends on inflation. Pensioners face the same problem again. I chose 3%.

Spending increases to 32% of the amount donated in year 10 and 42% in year 20. They continue to rise until administrative costs are reduced. More importantly, even if you start with a lower percentage of money spent on operating expenses rather than grants, the percentage grows over time.

The numbers assume consistent annual returns, and as we all know, returns from investment portfolios are anything but consistent. Just as it is difficult to maintain a pension with a high annual withdrawal rate, it is also difficult to maintain a fund with a high annual withdrawal rate.

The bottom line.

Today, not tomorrow, is the best time to give.

When push comes to shove, there isn’t much difference between a large fund, a modest charitable gift fund, or simply putting money in the church’s giving plate. Amounts vary widely, but today is the best time to be generous.

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