Spend-Down Funds

Date: January 1, 2012 Author: aque Categories: Latest News

"I want my charities to be able to swallow my bequest, not choke on it," said our wise 82-year-old donor to Aqueduct Foundation. She had three charities she had supported for years and wished to include in her will. One was her 100-year-old parish church, one was an arts organization, and one was a local social services agency.

When planning her estate, we had discussed outright gifts to the charities and the idea of creating an endowment, but she chose the option of a "spend-down" legacy fund. A spend-down fund functions like an annuity. It distributes all capital and income over a set term – for example, five or ten years – and then ceases to exist. The structure provides the charities with significant, steady support for a defined period with the goal of starting something new, addressing a capital need, or just to operate well.

Spend-down funds also provide checks and balances. Our donor had witnessed a protracted debate within the parish – “at times it was a bare-knuckle fight,” she remembered – over the use of a bequest. Rather than restrict the use of her gift, our donor wanted her church and the other two charities to determine their greatest needs on an annual basis.   She stipulated that each charity make a short annual proposal to make everyone take the process seriously and to ensure the funds are well used. The funds would be held in her fund at Aqueduct Foundation and granted in her name each year.

Spend-down funds are mid-term charitable structures – sitting between direct outright gifts and long-term endowments.

Malcolm D. Burrows