Some Past Proposed Specific Time Limits on Tax Benefits for Private Foundations

Ninety-three-year-old Berkshire Hathaway chairman and chief executive officer Warren Buffett told The Wall Street Journal last week that almost all of his massive fortune will be put into a new charitable trust upon his death. He currently owns Berkshire Hathaway stock worth nearly $130 billion, according to the Journal. Buffett’s two sons and one daughter will oversee the trust and must unanimously agree on how to distribute its funds.

With that amount, the trust would about double the Gates Foundation’s current endowment, Inside Philanthropy’s Philip Rojc points out. Rojc also notes what Buffett wrote in his public “Giving Pledge letter” around a decade and a half ago—that “at the latest, the proceeds from all of my Berkshire shares will be expended for philanthropic purposes by 10 years after my estate is settled. Nothing will go to endowments; I want the money spent on current needs.”

At this time, it is unclear whether the new Buffett trust will exist in perpetuity or “sunset,” meaning distribute or spend all of its assets within a certain specified amount of time. Its creation likely will renew interest in and discussion—among grantmakers as well as policymakers—about whether any tax-incentivized grantmaking institutions should exist perpetually. The policy discussion is particularly sharpened in those cases where the original donor is deceased, of course.

Right now, there are no time limits on the special tax benefits accorded charitable trusts, private foundations, or donor-advised funds, and the condition that private foundations “pay out” a certain specified percentage of their assets per year in order to retain their tax benefits has generally not adversely affected the continued growth and expansion of these institutions at all.

One of the best treatments of issues surrounding perpetuity and sunsetting is the Philanthropy Roundtable’s 1996 monograph Should Foundations Exist in Perpetuity? It has two contributions, one by Heather R. Higgins and the other by Michael S. Joyce, for whom my two Giving Review co-editors and I all worked at Milwaukee’s Lynde and Harry Bradley Foundation.

Though Higgins lists a few possible specific time limits on tax benefits for private foundations, both she and Joyce use the old, common-law Rule Against Perpetuities—the life of the donor plus 21 years—as their primary example of such a limit. Higgins considers it and other time limits as a justified policy choice; Joyce sees it, and any limit at all, as a mistake.

Past Proposals

There have been several other specific time limits on tax benefits for private foundations proposed in the past. Their particular contexts may tellingly offer a helpful insight or two into any future discussion and reconsideration of policy about perpetuity and sunsetting during the coming years.

First, for example, when John D. Rockefeller was essentially negotiating with a reluctant U.S. Congress about the terms under which it might grant a special federal charter for his foundation, his representatives conceded to what would have been a time limit of 100 years on its existence, according to Eric John Abrahamson’s Beyond Charity: A Century of Philanthropic Innovation—published by the Rockefeller Foundation itself in 2013, its 100^th anniversary. Rockefeller later gave up on the effort to gain a federal charter, instead securing one from his native New York State.

(Once up and running, the Rockefeller Foundation trustees themselves “continued to put off a decisive resolution to the question of philanthropic time frame,” Stanley N. Katz and Benjamin Soskis report in their introduction to Giving in Time: Temporal Considerations in Philanthropy, citing Abrahamson. “That does not mean they ignored the question; to the contrary, it loomed large over much of their work. They just never settled it,” Katz and Soskis continue. “In 1946, when the Rockefeller board was polled, a majority expressed support for terminating the Foundation with the next quarter-century.”)

For another example, the aggressive Reece Committee—the U.S. House Select Committee to Investigate Tax-Exempt Foundations and Comparable Organizations, chaired by Tennessee Republican B. Carroll Reece, which released its findings in 1954—recommended a 25-year limit on the length of tax benefits for private foundations, as recounted by Peter Dobkin Hall in his seminal Inventing the Nonprofit Sector and Other Essays on Philanthropy, Voluntarism, and Nonprofit Organizations.

New Deal Democrat Rep. Wright Patman of Tennessee—chairman of the House Select Committee on Small Business that also assertively investigated foundations in the early 1960s—individually provides a third instance, also of a proposed 25-year limit. While Patman “had little influence on or the respect of the tax writing committees in Congress,” James J. Fishman writes in a 2020 Pittsburgh Tax Review article, “his allegations of foundation wrongdoing did have a significant impact on public opinion and the development of the private foundation legislation.”

Mistrust

For further precedents, as the Tax Reform Act of 1969 that basically still structures all of nonprofitdom in America was working its legislative way through the U.S. Senate, Democratic Sen. and Finance Committee member Al Gore, Sr., also of Tennessee, “pressed for Representative Patman’s twenty-five year life expectancy,” according to Fishman. But

after resistance in the Finance Committee, a compromise of a forty year life limit on the tax-exemptions on income, estate and gift tax for private foundations was agreed upon. The justification was if tax-exemption was in perpetuity, foundations’ economic power might increase to such an extent they would have an undue influence both on the private economy and on governmental decisions.

The 40-year limit was adopted by the Committee by a vote of 9-8, The New York Times’ Eileen Shanahan reported on October 28, 1969. Democrats constituted a majority of the Committee and, in fact, the entire Congress at the time.

“One foundation official, who had stood outside the committee room awaiting word of the committee’s action, said that the foundations ‘badly underestimated’ the degree of anti-foundation sentiment in Congress, which comes from both parties,” Shanahan writes. “Many liberals appear to mistrust foundations because they represent aggregations of great wealth, over which outsiders have no control. Many conservatives mistrust them because they appear to have financed a preponderance of liberal scholarship over conservative scholarship.”

Telling; “timelessly” so, or at least still somewhat after more than half a century?

The provision with the Committee’s 40-year limit was thereafter voted down by the full Senate, 69-18, the Congressional Recordreflects. Minnesota Democratic Sen. Walter Mondale introduced the amendment to delete the provision. “Sen. Gore grew increasingly distraught that his ideological peers were not lining up beside him,” Katz and Soskis write.

“One of the strangest anomalies in our history,” Gore lamented on the floor, “is that my liberal friends somehow think” the defense of perpetuity

is a liberal cause for which they are fighting. They are fighting for the vested interests of this country, for the vested wealth of this country, to be tied up in perpetuity for descendants of a few people who have waxed rich—sometimes by chance or inheritance from this society of ours.

…

This, throughout history, has been a liberal cause. Yet my liberal friends are worked up by the power of the foundation lobby into thinking that somehow, by fighting for perpetuity for vestment and control of wealth, they are fighting for a liberal cause. Mr. President, they are not.

The Act, without the limit, passed the Senate, 69-22, and was later signed into law by Republican President Richard Nixon. As an admittedly only hypothetical matter, one can very plausibly suspect that he would also have signed a bill with a limit in it.

More-Recent One More

And in a “Conversation with” The Giving Review almost five years ago, former Ewing Marion Kauffman Foundation president and Syracuse University professor Carl Schramm told me “you could basically say, fine, foundations have terms of, like, 20 years. Period. End of story.”

As transcribed, the lively discussion continued:

Hartmann: So that’s pretty bold.

Schramm: Or something even more to the point: your foundation is closed five years after the settlor has died, because there’s not going to be any direction after that at all.

Hartmann: Are you being provocative there to lay out a marker, or is that something you think that would have a realistic chance of being seriously considered? 

Schramm: Well, you know the way intellectuals behave. We’ve bought into a lot of ideas that when they were first announced, it looked totally outside the orbit of reasonable ideas. I actually have come to a view that foundations are mostly mischievous. They eventually become antidemocratic institutions. They don’t help us with great new ideas. They basically reaffirm pretty conventional ideas.

An insight ahead of its time?

This article first appeared in the Giving Review on July 9, 2024.