How do you go about giving away hundreds of millions of dollars?
My friend's father was a successful businessman. He built a series of companies. He eventually sold them for enough to take care of himself and his wife for the rest of their lives, provide trust funds for their adult children and, yes, trust funds for the grandchildren.
The millions that were "left over" — the bulk of his estate — went into a family foundation. His adult children were named as trustees and had the task of fulfilling the mission.
They were responsible for putting the money to good use. Every year. The "every year" part is important because the IRS requires foundations to make grants equal to at least 5% of their market value every year.
So my friend and his sibling needed to give away about $10 million a year. Giving away money is a demanding task. It takes time to evaluate proposals, vet recipients and decide which problems should have the highest priority.
The foundation has developed a life of its own. The foundation has a director and staff. It also has outside investment professionals. And outside legal counsel. All are well-compensated.
Even with the annual distribution requirement, a foundation is potentially immortal. And most donors hope for something close to immortality. But immortality isn't a good idea. Why? Simple. The longer the life of the fund, the lower the amount of money that actually gets to the intended cause.
It turns out that the underlying math here is very close to the math of retirement spending. So I built a rough model, in Excel, to test how different expenses and different rates of increase impact foundation efficiency. Using the current 7% annual return assumption now commonly used by pension plans and reasonable total fund administration and investment management expenses, I found that those can amount to about 25% of annual giving in the first year.
