Cover Story

Most foundations are set up in perpetuity, but some donors specify that their foundations must spend all assets within a limited time. Spending down requires different investment and funding strategies, and can get pretty complicated. So before the Lucille P. Markey Charitable Trust closed its doors for good in 1997, the trustees decided to produce a spend-down handbook so others might benefit from Markey’s experience.

Although considerable energy goes into the process of establishing a foundation, the odds are that much less thought—if any—is given to the likelihood of its eventual closure, and what that would entail.

Lucille Parker Markey, whose estate funded the charitable trust named for her, mandated, however, that all its assets and income would be distributed within 15 years of her death, which came in 1982. Thus, plans for setting up the trust also had to include plans for shutting it down.

The Lucille P. Markey Charitable Trust officially closed its doors on June 30, 1997, after awarding some 200 grants totaling more than $500 million for basic medical research. The trust also left a small legacy of special interest to foundations: a book detailing how it went about closing up shop; the questions that had to be answered; options that were available; decisions that had to be made, and why they were made.

Decisions, Decisions
Closing a foundation can be far more complicated than establishing one. It’s not just a matter of zeroing out the checkbook and turning off the lights. Closing a charitable organization requires passing muster with complex federal and state laws and regulations, as well as addressing issues that have broader societal legal implications.

The Markey trustees began working with Caplin & Drysdale, a Washington, D.C., law firm experienced in such matters, shortly after the foundation was launched. Federal law permits only a limited number of private foundation termination procedures, all of which ensure that private foundation assets remain committed to charitable activities. Administratively, the trustees’ choices included

• folding the foundation into another private foundation;     
• creating an endowment or making an unrestricted grant to an eligible public charity, such as a community foundation;     
• entering into a grant agreement with another charitable organization under which that organization would use the grant to pay any post-closure expenses and keep any funds left over;     
• establishing a so-called “administrative year” whereby the foundation would have one year after the formal date of closure to manage its own close-out activities.

Predicting Income and Outlays
The trustees selected the “administrative year” approach, and set June 30, 1997, as the official date for shutting down. A major objective then became coordinating the income from the assets bequeathed by Lucille Markey’s will with grant commitments and administrative expenses so that all would read “zero” on that date. The challenges they faced included

• obtaining reasonable returns on investments without undue risk;     
• accurately predicting how much in grants could be awarded and maintaining a regular timetable for payments;     
• managing final payments on grants whose terms extended beyond the foundation’s life;     
• estimating closing and post-closing expenses;     
• establishing procedures for handling administrative activities, such as audits, tax returns, pension payments and disposition of records, which could not be completed before shutdown.

With the help of a financial consultant, the Markey trustees also developed a computerized “business plan”—updated quarterly—to predict the foundation’s asset balance, based on estimates of income earned and grants awarded, as of the June 30, 1997, closing date.

A key component was a “commitments/payments” plan for future grants that showed how variations, such as front-loading or delaying payments, would affect the balance on closing day. The computer model and the plan enabled trustees to monitor both the earnings rate of assets and total obligations for grants.

Another challenge was managing the grants themselves, as this would determine the flow of funds out of the trust. Most grants were multiple-year, making the task of managing them even trickier. Because Markey’s grant agreements called for a distribution timeline and a reporting schedule, payouts could vary from original budgets, depending on the grantee’s performance. Performance, or lack of it, could result in rescheduling of payments, changing the terms of the grant or even terminating it.

But, as Nancy Weber, director of Markey’s program administration observed, “When a trust is closing, all administrative activities change.” In particular, Weber noticed that, as the foundation’s closing date approached, and grants neared the end of their terms, it became increasingly difficult to obtain progress reports from recipients as scheduled in the grant agreements.

As long as there was hope of additional funding, grantees were fairly prompt in reporting progress. But when the trust was “terminal,” compliance with reporting requirements plummeted to where, in December of 1996, the trust finally had to get tough. It issued a formal warning to 40 grantees that if reports due were not in hand by the trust’s closing date, they would lose some $19 million in funds. All outstanding reports were filed within four months.

Managing the Office
Yet another challenge was managing the trust’s human and physical resources.

On the personnel side, critical tasks included close attention to staffing patterns—given the finite life of the trust—and coordinating individual and institutional needs as the termination date drew near. An early decision by trustees to make fewer but larger grants meant a small staff, supplemented by extensive use of consultants.

To attract top quality staff, trustees decided to offer a first-rate benefits program, including a generous pension. In its final year, the trust established a special employee severance pay plan. Substantial legal assistance went into crafting the plan so it would not run afoul of federal pension regulations. In addition, a 100 percent salary bonus was offered to clerical staff who agreed to stay until the end, and all did. Federal law also dictated some procedures related to disposing of the trust’s office equipment, furniture and other materials. In Markey’s case, all was fully depreciated by the closing date, so it did not have to be sold or auctioned off.

Although these goods could be given to a wide range of individuals and charitable organizations without complications, managers and trustees of the foundation could not accept any asset unless its value was assigned to them as taxable income and noted on their W-2 forms as part of their compensation. Plus, every employee’s whole compensation package—including receipt of office equipment—must be within a reasonable range.

The problem of disposal of some major assets was eased through the use of leases for office space and some equipment that were written to terminate with the close of the trust. Distribution of the rest of the equipment, office supplies and other items, including the library, required varying approaches.

The library, a small but well-selected collection of books and periodicals devoted almost exclusively to basic medical research, was donated to the University of Miami’s Medical College Library. The library staff did the screening and cataloguing, thus relieving the trust staff of that task.

Most of the rest of the furniture and equipment was offered first to staff, then to charitable institutions in which the staff had an interest. Remaining items were donated to a program of the Dade County, Florida, Public School System that makes donated materials available to teachers.

The to-do list also included such mundane tasks as closing bank accounts and safety deposit boxes, and determining when to close out health, disability, liability and other types of insurance.

Lingering Legal Obligations
The Markey trust also dealt with questions of whether the trustees and officers might face any continuing legal obligations after the closing date.

Some questions were specific to the Markey trust, such as whether any liabilities would stem from possible environmental problems or damages because it owned oil and gas leases. But others were applicable to any private foundation preparing to shut down, and included such issues as

• whether the trustees or officers could be sued personally after the trust closed;     
• whether the trust could be liable for additional taxes and, if so, how they would be paid if all funds were expended upon closure;     
• whether there were any outstanding liabilities related to the trust’s pension plan, i.e., whether former employees or their heirs could sue for additional benefits;     
• whether grantees could sue the trust after it had officially closed;     
• whether former employees could sue the trust for any reason.

Archiving: What, Where and How Long?
The trustees also faced the question of archiving the foundation’s records. They needed to know not only what to keep and for how long, but also where to house the materials so they would be organized, cared for and accessible to those who would need them.

For example, personnel and financial records, such as tax returns and pension files, had to be kept at least three to six years under federal pension law and IRS regulations. Legal requirements also governed retention of other papers, such as liability insurance contracts for directors and officers.

Employment records might be needed by departing staff to document work histories in applications for new jobs, insurance or pensions, whereas a historical record of the trust’s activities would enable others to learn from the its experience.

Different objectives require different types of repositories. If the principal reasons for saving documents have to do with personnel matters or meeting legal requirements, and a limited life is expected, retention by a law firm might be suitable.

The Markey trust, with an eye on history, opted for an archival library, but that raised a new set of questions, such as whether the archive’s collections included similar materials, whether it had the capacity, facilities and staff to take in and manage a new collection and how maintenance costs would be handled.

After a five-year search, the trust chose the Rockefeller Archive Center in Westchester County, New York, which houses the archives of the Rockefeller Foundation and Rockefeller University as well as a number of other private foundations. A one-time grant from Markey to the archive covered indexing, processing and maintenance costs.

The trustees also had to decide what materials would be accessible, when and to whom, and what materials would be destroyed, and when. The trustees decided that all business records not otherwise governed by law, such as minutes of meetings, contracts, canceled checks, bank statements and payroll records would be kept for ten years and then destroyed. They also decided that access to the general files would be limited for ten years to the trustees or their designates, appropriate government agencies and researchers interested in the trust.

Putting Together and Taking Apart
If setting up a private charitable foundation is akin to assembling a giant jigsaw puzzle, shutting one down is no less so. In such a “disassembly,” each “piece,” or step, needs to be examined to see how it fits into the final picture.

The Lucille P. Markey Charitable Trust was not the first foundation to opt for a limited life span. But, in describing how it went about planning for and implementing its own demise, the trust has provided a pattern that foundation officials facing their own shutdown challenge can follow.

Mrs. Markey’s Giving Goal: Stop the Pain

Long interested in health matters, Lucille Parker Markey had seen friends and family suffer from illnesses associated with aging, such as cancer, arthritis and glaucoma, with which she was afflicted. She once needle-pointed this sentiment onto a pillow: “A good day is when nothing new hurts.”

Her second husband, Gene Markey, a retired Naval officer who died in 1980, had been treated for colon cancer at the University of Kentucky, and, before her death in 1982 at age 94, Mrs. Markey led the way in establishing the Lucille Parker Markey Cancer Center there. She also gave a grant to Rockefeller University for research on arthritis. When the trust bearing her name was established, it was no surprise that its focus would be basic medical research.

In addition to her interest in medical research, Lucille Markey was probably best known as the head of Calumet Farm, a name that is virtually synonymous with the Kentucky Derby. Her first husband, Warren Wright, Sr., whom she married in 1919, had inherited the farm in 1931. He and Lucille made it perhaps the best known stable in the history of thoroughbred racing with an all-time record of eight derby winners.

The wealth of the trust originated with the Calumet Baking Powder Co. of Chicago, which had been founded by Wright’s father. In 1928, Wright, who had become its president, sold the company to General Foods. When Wright died in 1950, Lucille took over Calumet Farm. Meanwhile, the principal source of her wealth became oil pumped from a west Texas ranch that Lucille inherited from Wright. At one point, the Arab embargo of the early 1970s pushed oil prices so high that her income reached $2.75 million a month.
—Jerry Lipson

Merging Interests and Assets

For the Charles E. Culpeper Foundation, a 59-year old private foundation in Stamford, Connecticut, the decision to turn its assets over to another private foundation came relatively easy. Culpeper announced in June that, effective July 1, 1999, it would merge with the Rockefeller Brothers Fund of New York City.

The decision followed a year of conversations between the institutions’ boards, made smoother by the fact that Colin Campbell, vice chairman of Culpeper’s board, also happens to be president of RBF. Impetus for the talks had been the death of one Culpeper board member, the retirement of several others and the desire of Chairman and President Francis J. McNamara, Jr., to retire after more than 30 years of service. Given the changing of the guard taking place, the Culpeper trustees chose to find another charitable entity to manage the legacy instead of closing it down or seeking a new generation of management. The donor, who earned his fortune as head of the Coca-Cola Bottling Company of New York, had died in 1940 and there was no family to carry it on, either.

Says RBF Communications Director Priscilla Lewis, “The merger reflects a real understanding of the philosophy, programs and style of operations that each had of the other.” The major programs of both institutions will continue as before, including the Charles E. Culpeper Scholarships in Medical Science and the Charles E. Culpeper Biomedical Pilot Initiative. Last year the Rockefeller Brothers Fund spent $17.5 million on grants and program management; Culpeper spent $8.7 million. The combined current market asset base is estimated at $650 million.
—Jerry Lipson

The Community Foundation Option

Ray Smith thought long and hard about what would happen to the Raymond C. Smith Foundation, the private charity he had started in 1954 with a $500,000 gift, upon his death. He had never married, and had no immediate family to carry it on.

Smith was very much a hands-on manager. Until his death in 1994 at age 97, he kept the foundation books himself, recording in longhand every gift it made. Recipients of Smith grants ranged from the Detroit Symphony Orchestra to inner-city job training programs and low-income housing developments.

Smith’s forebears had operated a chain of food stores in Detroit, and he had made his own fortune in real estate there. For Smith, his choice about the foundation’s destiny came down to this: “What’s good for Detroit?”

During several years of conversations with one of Smith’s trustees, his cousin and long-time friend William Rands III, the choice was made for the private foundation to become part of the $250 million Community Foundation for Southeastern Michigan, where, as the Raymond C. Smith Foundation Fund, it would continue to be active in Detroit in perpetuity.

As part of the “integration” process, Smith attended community foundation activities, and a community foundation board member joined Smith’s board. Mariam Noland, executive director of the community foundation, noted that Smith was particularly interested in neighborhood development. “When he was no longer as able to get out into the neighborhoods, we provided his eyes, and legs,” says Noland.

Now that Ray Smith is gone, the community foundation fund in his name continues to support “what’s good for Detroit.”
—Jerry Lipson

So Much Money, So Little Time

As the story of spending out the Lucille P. Markey Charitable Trust shows, a key challenge is matching income with grant awards and payments so it all balances out on “zero” day. The Markey trust used computer models to project market fluctuations that would affect the value of its assets and the revenues thrown off.

But what if the models don’t work, the cash floods in faster than forecast, and closing day is but seven years off in 2006? That is what Miles J. Gibbons, president of the Whitaker Foundation in Arlington, Virginia, recently called his “splendid dilemma.”

The foundation is named for U.A. Whitaker, an electrical engineer who died in 1975 and left his wealth to a foundation that would focus on research and education in biomedical engineering.

In issuing Gibbons his spend-out orders, the board was merely following Whitaker’s belief that foundations should have a finite life. That was in 1991, just before the stock market took off. The very next year, even though some $19 million in grants were awarded, Whitaker’s assets jumped 23 percent to $228 million.

Gibbons boosted spending by 50 percent the following year, and has increased awards every year since, but the foundation’s portfolio had nearly doubled to $436.4 million at the last accounting.

Gibbons’ latest model—assuming 8 percent growth—calls for him to spend more than $70 million annually by January of 2006, and even then Whitaker will still have $37 million left to finish out that final year.
—Jerry Lipson

“Melting” After Each Generation

Julius Rosenwald, one of the geniuses behind Sears, Roebuck & Company, was an early proponent of time limits for foundations, and his heirs are proving the acorn doesn’t fall far from the tree.

As is well-known in philanthropic circles, Rosenwald gave $20 million in Sears, Roebuck stock to the Julius Rosenwald Fund in 1928 on condition it shut down after 25 years—a goal the charity beat by actually spending out in 15 years. Rosenwald wrote in an often-quoted 1929 Saturday Evening Post article that “like manna of the Bible, which melted at the close of each day…philanthropic enterprises should come to an end with the close of the philanthropist’s life or, at most, a single generation after his death.”

Perhaps less well-known is the Rosenwald family legacy of leaving no legacy. Edgar Stern, a wealthy New Orleans philanthropist who married Rosenwald’s daughter Edith in 1922, also limited (to 50 years) the lifespan of the foundation he established in 1936. Edgar and Edith Stern’s son Philip continued on that pathway when he decreed that the Stern Family Fund he established in 1959 would close 25 years after his death. Philip’s son David, asked about this restriction in an interview after his father died in 1992, replied that his dad “did not want the dead hand to rule.”
—Jerry Lipson