How Understanding Endowment Law Is Key to Liberating Philanthropic Assets

Philanthropy today is a system of wealth hoarding. Total charitable foundation assets reached $1 trillion in 2019, growing to $1.5 trillion in five years. As intersecting crises intensify in our age of racial capitalism and climate colonialism, why are foundations holding onto all of this wealth?

The reasons are multiple, but often, leaders claim that the law compels their behavior. In other words, foundation (also known as fund or endowment) law is manipulated to encourage wealth hoarding among actors who at least claim to prefer not to hoard wealth. Here are three particular common legal myths of this type:

• Myth: Most foundations have endowments and a legal mandate to preserve them. (No, they don’t.)
• Myth: Foundations need to preserve most of their assets and give away 5 percent per year. (Five percent is the minimum! Most foundations could give away all their assets immediately.)
• Myth: When they aren’t giving funds away, foundations need to invest and grow their assets. (This is probably not true; we’ll look at the nuances.)

In following the footsteps of finance, foundations become vehicles—typically White-led—for the perpetual accumulation of stolen wealth.

Too often, foundation law is obscured and misunderstood as an impediment for change. Understanding the legal context of foundation assets and endowments can support organizing to liberate philanthropic assets.

Endowments in an Age of Extinction

Foundations usually follow a conventional finance approach to managing their assets. The formula is relatively simple: 95 percent of their assets are handed over to Wall Street or private equity fund managers to maximize returns, and the remaining 5 percent is granted to charitable causes. In following the footsteps of finance, foundations become vehicles—typically White-led—for the perpetual accumulation of stolen wealth. Those paying close attention may notice that the drive for endless accumulation caused the very crises philanthropy should work to address.

However, a growing number of voices from within philanthropy—such as donor-organizers at Justice Funders and Resource Generation—are calling for philanthropic assets to be liberated from extractive Wall Street funds and channeled to grassroots movements fighting for transformation. This is urgently needed, as Wall Street investing perpetuates and profits from the prevailing extractive economy, characterized by unchecked militarism, exploitation of land and labor, and overconsumption.

A few foundations are responding with bold commitments to divest all of their assets from Wall Street—routing assets instead to CDFIs, credit unions, and community-led funds. Others are devising movement-aligned strategies for spending down rather than existing “in perpetuity” (as if this were possible).

At their best, these approaches dedicate all of a foundation’s assets to long-term grassroots power building. Movement organizations—those that remain scrappy, radical, and wary of nonprofitization and cooptation—will need all the resources they can get to win a just transition, abolition, decolonization, and ensure self-determination and flourishing for all humans, communities, and ecosystems.

The US legal system—designed to further colonial, capitalist accumulation—does not make liberating assets for social transformation easy. Legal information is also often made inaccessible by professionals looking to charge high fees. My workplace, the Sustainable Economies Law Center, strives to decommodify law and create values-aligned legal resources to nourish movements for transformation. Looking closely at the law of foundations, we see that almost all foundations could maneuver the law to free their assets from Wall Street and into social movements.

Does the Foundation Even Have a Real Endowment?

In philanthropy, the language of “endowments” is used to refer to money that the foundation doesn’t want to or doesn’t think it can touch. You might overhear, “Sorry, we can’t increase our grantmaking; we have to preserve our endowment.”

If the board created an endowment, then the board also has the power to terminate the endowment and spend those funds.

Unfortunately, this language can be misleading because it doesn’t specify how endowment funds are restricted. For example, a foundation might cite a fund restriction that they themselves could freely remove. Let’s distinguish between three types of funds that people may refer to as “endowments”:

1. Capital “E” Endowment: These are assets restricted by the donor when they were transferred to the foundation. If the donor restriction is something to the effect of “you must preserve these funds in perpetuity (but maybe you can spend the interest you earn on them),” then the foundation has a capital ‘E’ endowment. The restriction may be permanent or only for a certain amount of time.
2. Lower-case “e” endowment: These are assets that the foundation itself designates as an endowment fund. Basically, the foundation—typically through a board resolution—sets aside some of its funds to be preserved and invested. This is sometimes called a “quasi-endowment” or “board-designated endowment.”
3. Not-an-endowment: Foundations may use the word “endowment” to refer to the sum of their assets, even when they are not restricted. This colloquial use implies a desire to preserve assets regardless of a formal restriction.

The type of restriction at play determines how difficult the funds are to spend. In the case of lower-case “e” endowments, the funds are easy to spend—at least legally speaking. If the board created an endowment, then the board also has the power to terminate the endowment and spend those funds. Meanwhile, in the case of not-an-endowments, there’s no legal mandate to preserve the funds.

Capital “E” endowments are harder to spend from a legal perspective. For context, at the Sustainable Economies Law Center, our team checked the tax disclosures of the 10 largest US private foundations and found that only one had a sizable endowment of this kind.

You can check a specific foundation for yourself by pulling up a foundation’s Form 990-PF from the IRS’s website and looking in Part II: Balance Sheets. If both Line 25, “Net assets with donor restrictions,” and Line 28 are zero, then the foundation probably does not have a capital “E” endowment.

But even capital “E” endowments are possible to “break.” If the donor who created the endowment is still alive, the foundation could ask the donor to lift the restriction.

Moreover, the document creating the endowment—likely a gift agreement between the donor and foundation—may have a “variance clause” that allows the terms of the endowment to be changed in certain circumstances. Variance clauses give the foundation leeway to remove restrictions on spending endowment funds if circumstances demand it—say, the current planetary crises require expenditure to fulfill the foundation’s charitable purpose.

If these straightforward strategies are unavailable, a foundation may devise more creative legal strategies for spending endowment funds. This might include crafting an argument that spending the endowment is “prudent” under the terms of your state’s laws (more on that below). Or the foundation could ask a court to alter the endowment terms under either the cy pres (“as near as practicable”) or equitable deviation doctrines. Janelle Orsi at the Sustainable Economies Law Center has detailed these strategies in a separate article.

Does the Endowment Need to Be Invested “Prudently”?

But what happens if a foundation does not spend its endowments immediately? How must funds then be managed?

My preference would be for foundations to reject investment as an approach altogether. Rejecting Wall Street investing is one thing, but this would mean moving beyond investing in regenerative, solidarity economies and toward redistribution, pure and simple. As one recent report points out: “Radical redistributive and reparative investment in the solidarity economy means prioritizing those not ready to receive repayable finance.” While worker-owned businesses or community land trusts may have “business models” to reassure investors of repayment, many radical mutual aid and land back projects aren’t looking for a loan—they lack a profit-generating business model.

Foundations could decide to manage their assets primarily according to social return rather than financial return.

In that vein, the Sustainable Economies Law Center has drafted a board resolution rejecting investment that both nonprofits and foundations could implement in light of UPMIFA (the Uniform Prudent Management of Institutional Funds Act), which explains how charitable organizations must manage their assets like a prudent manager. A version of UPMIFA has been passed in all US states and territories except Pennsylvania and Puerto Rico.

Under UPMIFA, charitable organizations have two kinds of assets:

1. Program-related assets: held primarily to accomplish a charitable purpose and not for investment
2. Institutional funds: basically, all other funds, which are currently often held for investment

UPMIFA’s prudence standards require balancing financial returns with the risk of loss. Reflecting elite understandings of “prudence,” UPMIFA gives a clear runway for charitable organizations to offload most of their assets to Wall Street. However, nonprofits and foundations have room to push back: they could designate all or most of their funds as not for investment purposes, assuming they don’t have a capital “E” endowment requiring assets to be preserved in perpetuity.

Foundations could decide to manage their assets primarily according to social return rather than financial return. This could look like foundations simply holding onto their assets, perhaps in a credit union account, just long enough to fund grassroots movements.

For capital “E” endowments that foundations may have to preserve, trustees can still argue that prudence requires divesting from Wall Street and investing in social movements. For example, UPMIFA requires fund managers to consider both “the charitable purposes of the institution and the purposes of the institutional fund” and “general economic conditions.” Together, these provide the basis of an argument that our racial and climate crises require divesting from Wall Street funds that helped create those crises.

Similarly, UPMIFA may also allow foundations to transform their endowment into stable assets like a land trust technically owned by a foundation that empowers Black and Indigenous communities to steward the land.

Moving toward Philanthropy’s End

Philanthropy today—existing as a system of wealth accumulation embedded in racial capitalism—must transition and heal itself. The philanthropic sector must learn to release itself from the grip of financial and legal professionals who keep it wedded to dominant extractive systems while financial and legal professionals like me try to transform and heal ourselves. Philanthropy must stop hoarding wealth and power in perpetuity, and instead allow a shift to movement-led control over our own plundered resources. Either the sector learns on its own accord, or movements will have to organize to force its hand.

I’m heartened by the plethora of visions emerging for a just transition for philanthropy. So much organizing and movement building is required to hospice our extractive economy. Yet, the philanthropic sector is uniquely positioned to usher in new ways of thinking about and practicing money and power. While movements cannot count on philanthropy and its nonprofit industry to liberate us, the least we can do is to insist that philanthropy not undermine movements by remaining tied to harmful economies and harmful mindsets.