Posted by The Happy Tutor
New York Review of Books: Lewis Cullman, "Private Foundations: The Trick": The next time you read about a rich person donating $100 million to charity, you should be aware that this seemingly generous gift may never actually reach the institutions that need it. The chances are that the donation is being used to set up a private foundation. The gift will earn the donor a full deduction against income or estate taxes. But the little-understood trick of this form of philanthropy is that the $100 million that launched the foundation need never go to charity.
The truth in what Cullman is saying is that private foundations, other than operating foundations (such as museums), do not generally provide services for society. Rather they are philanthropic middlemen. They take money from donors, hold onto it, and then distribute a certain percentage, currently by law not less than 5% including expenses. The distributions (grants) then go to the philanthropic delivery systems -- the charities that do the work of feeding the poor, helping battered women, providing humanitarian aid, or whatever it might be. By contrast, certain donors prefer to "cut to the chase" and make direct gifts to the charities themselves. This cuts out the attorney who would create the foundation document, the financial advisor who would manage the money, the trustees of the foundation who might get trustee fees, and the paid staff, if any. Cullman according to his bio seems to be a donor of the "cut to the chase type," Cullman is major contributor to not-for-profit institutions, including the New York Public Library, the American Museum of Natural History, Lincoln Center for the Performing Arts, Human Rights Watch, Planned Parenthood, and the American Academy in Rome. He is the chairman of Chess in the Schools.
Overall, I would say that the Cullman kind of donor is revered by the charities because he does not dribble out the interest on the gift, keeping the principal tied up in a foundation forever, but gives the whole wad directly to the charity. Cullman-style largescale direct giving is probably not as common as it should be, when compared to gifts to foundations and other such vehicles that "tie money up," provide ongoing donor control, such as donor-advised funds, and charitable remainder trusts.
The real question for a donor, though, has to be: What are you trying to accomplish, for yourself, your family and society? Only when those issues have been considered, can you say whether a direct gift or a foundation would be more appropriate. Foundations can help donors instill a tradition of family philanthropy in children, can bring families together with a common purpose after the founders have died, and can also develop specific programmatic expertise, seeking out and funding charities and projects that might otherwise be neglected. Vanity is also a strong motive, immortality, as it is sometimes called by the promoters of foundations. While vanity and immortal longings are easily satirized, in a real situation the wealth-holder might be talking about either buying a baseball team, collecting antique cars, buying a new jet, or setting up a foundation. Vanity might be the constant, and the foundation the most productive from the standpoint of social good. Cullman deserves great credit for doing all he can right now, with present gifts, instead of waiting for his heirs to trickle out the interest on his principal. For pressing social needs, now may be the best time to put the money to work. (Thanks to Jonathon Delacour for the link, via email.)
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