Spending Down

Do you want to have greater impact now? Are you concerned that only a small portion of your money is really making change? Do you have a small endowment and a big dream?

Spending Down is a powerful, underutilized funding strategy for making change. Instead of building a foundation that gives grants in perpetuity, create bigger goals now and spend down your capital to achieve them.

  • What is Spending Down?

    Spending Down is a term used for endowed foundations. This Indie approach means you are limiting the lifespan of your foundation by spending your capital faster than you replenish it, either through investments or gifts.

    Private foundations are legally required to spend 5% of their assets each year. If you are Spending Down, you are using more than that. Most likely, you have created a timeline for completing the distribution of your assets.

    Spending Down is also sometimes called spending out, spending up or sunsetting.

  • Why is Spending Down important?

    Spending Down is a powerful innovation in funding, challenging traditional wisdom that foundations should operate in perpetuity. This Indie funding approach can:

    • Secure big wins in your lifetime. Sometimes, big dreams need big money. Spending only the earnings your capital makes annually might mean those dreams are put on hold. You may find that making larger distributions now is more effective than making smaller grants over time, and by spending down, you can be witness to the larger legacy you leave behind.
    • Leverage windows of opportunity. You may believe we live in a critical moment in history–that what we do now will impact all future generations. You may see an opening for transformation in a beloved field. Whatever your reason–this may be the moment to give a cause everything you’ve got, and leave nothing on the table. By doing so, you will infuse your work with greater self-scrutiny and a renewed sense of urgency.
    • Ensure your money is truly aligned with your values. If your philanthropic assets are in financial investments with dubious social benefits, you may actually be fueling the problems that your funding is trying to curb. By moving money out of financial markets and into the hands of great values-aligned organizations, you put it to work in service of people and the planet. See Indie Investing for more on this topic.
    • Support community self-determination. Some private family foundations have operated for generations, and it’s not uncommon that the younger generation is either not interested in being involved, or has different values than those upheld by the foundation’s mission. That new generation might consider a whole new approach: distributing the foundation’s remaining assets to community-based foundations that are led by the people most affected by various systemic problems. This can be a win-win–where the younger family members are freed up to focus their time and attention on what matters most to them, and others are empowered to distribute the assets where they can have the biggest impact.
  • What are the limitations and challenges of Spending Down?

    There are downsides to Spending Down that have inhibited many foundations from taking the leap. With this Indie approach, it’s possible you will:

    • Lose institutionalized structures. When you spend down your foundation’s assets, the world loses an institutional force for change. If you choose this approach, consider ways to transfer institutional muscle to your grantees, such as by helping them build up their own endowments and engines of sustainability to ensure they live beyond you. You might consider choosing one or more grantee partner organizations to support in a major way, enabling their work to grow and outlive your foundation’s support.
    • Eliminate jobs. When your foundation gives away its assets, trustees and staff will no longer have the jobs that the foundation provided. If the foundation offered salaries, meaning and an important community of colleagues and friends, people can feel the closing of doors as a significant loss. Be sure to create a plan for everyone to transition to new opportunities before the foundation writes its final check.
    • Reduce funding options for grantees. As a philanthropist, your grantees have relied on your funding. Once you are gone, be sure they have a realistic plan in place for how they will replace the funding you provided for their important work.
  • How can I take the next step?  

    Spending Down is a big decision. Whether you are starting a new foundation, setting up a donor-advised fund, or are part of an established foundation considering a mid-life transition, here are a few ideas to get you started.

    1. Learn how and why others have decided to spend down. Read the stories in the next section about peers who have made big impact using the sunset approach. Consider reading a report on this topic:
      Perpetuity or Limited Lifespans: How Do Families Decide?
      Limited Life Foundations: Motivations, Experiences and Strategies
    2. Start conversations with your fellow decision-makers, sharing what you’ve learned and why you are considering this as a possibility. If Spending Down entirely isn’t a viable option, consider pursuing other alternatives to the legally-required minimum 5% payout. This report has ten stories of foundations creatively approaching payout: Beyond 5%: The New Foundation Payout Menu.
    3. Take the leap and create a plan. Below are steps to consider:
    • Get Clear on Where You Are Going. Whether you are a new foundation or an existing foundation, you will need to start by taking a look at your foundation mission and goals.  Because you will only get one shot, make sure you are positioning yourself for success with a clear mission and strategy for change.
    • Adjust Payout Schedules and Timeframe. Then ask yourself, what funding levels and time frame do we realistically need to meet these goals? Adjust your payout levels accordingly. Your timeframe could be over a short span of a few years, or it could be set in the distant future with a vague ending point such as ‘5 years after the death of the founder.’ You might also choose to decide on an end date after you’ve started to get a better feel for what is needed to achieve your goals. Investment strategies may need to be adjusted to reduce risk and volatility, or increase liquidity to accommodate a shorter lifespan.
    • Consider Your Communications Strategy. You’ll also want to determine your communications strategy. For example, do you want your spend down strategy to be public, or do you want to keep it private? If the latter, make sure everyone involved knows this.
    • Check Your Legal Documents. If you are starting a foundation, build the spend down strategy into your charter. If you are part of an existing foundation, check your charter to make sure you are able to spend down, as some charters prohibit this type of arrangement. If you have a donor advised fund, you generally have the freedom to payout on whatever time schedule you wish.
Spending Down Spending Down means an endowed foundation is intentionally spending money faster than that money is being replenished.

Read stories of other funders who have mastered this method

We felt our spend-up represented a chance to say "Don't pull back because your endowment has dropped, instead spend more or spend everything because the needs are incredibly urgent.
-Quixote Foundation