Private foundations are often established with the intention of existing in perpetuity, distributing annual grants to support charitable causes. Yet in recent years, many foundations have chosen to take a different path, “sunsetting,” also known as “spending down.” Instead of preserving assets indefinitely, sunsetting foundations commit to distributing all of their assets within a defined period. For founders and boards, the decision to sunset is both strategic and emotional, requiring careful legal and operational planning.
Why Foundations Sunset
Foundations may choose to sunset for a variety of reasons. Some founders want to see the impact of their giving during their lifetimes rather than leaving a legacy in perpetuity. Others may believe that concentrating funds in a shorter time frame maximizes impact on urgent issues like climate change, racial justice, or public health. Additionally, some families or boards find that perpetual governance poses challenges in maintaining mission alignment across generations.
Whatever the motivation, the decision has significant implications, not only for the foundation itself, but also for its grantees and community partners.
Legal Implications of Spending Down
From a legal perspective, private foundations remain bound by the same rules under Internal Revenue Code Section 4940–4948 throughout their lifespan. This includes minimum distribution requirements (the 5% payout rule), prohibitions on self-dealing, restrictions on excess business holdings, and excise taxes for noncompliance. However, sunsetting raises additional legal questions around compliance, succession planning, and termination.
- IRS Notification: Foundations that plan to terminate must comply with IRC Section 507, which governs voluntary termination. In many cases, this requires filing notice with the IRS and paying a termination tax unless the assets are transferred to another qualified 501(c)(3) public charity or the foundation itself converts to a public charity pursuant to Section 507.
- Grant Agreements: As foundations prepare to sunset, they must carefully draft grant agreements to ensure that funds are used for charitable purposes beyond the life of the foundation and avoid self-dealing and other prohibited transactions. This may involve creating multi-year grants, establishing restrictions that align with donor intent, and ensuring long-term adherence to expenditure responsibility rules for grants to non-501(c)(3) organizations and individuals.
- State Oversight: In states like California, the Attorney General’s Registry of Charitable Trusts plays a key role in monitoring charitable asset transfers. A foundation must notify and often obtain a waiver of objections before distributing substantially all of its assets or dissolving.
- Employment and Contracts: Foundations must also manage obligations to employees, contractors, and vendors. Employment laws, severance obligations, and lease agreements must all be addressed before dissolution is complete.
Failing to account for these requirements could delay closure or create unnecessary liability.
Strategic Steps for Sunsetting Foundations
To successfully manage the process, foundations should adopt a deliberate approach to spending down. This includes creating a written sunset plan that is transparent, legally sound, and consistent with the organization’s mission.
Key steps include:
- Establishing a timeline for spending down and formally approving it at the board level.
- Consulting with legal and tax advisors to ensure compliance with IRS and state regulations.
- Designing grantmaking strategies that balance urgency with sustainability for grantees.
- Communicating clearly with nonprofit partners about the foundation’s intentions, timelines, and final opportunities for funding.
- Creating a plan for archiving records for IRS recommended retention periods, filing final tax returns, and notifying regulators.
Some foundations also choose to leave a legacy through a transfer of assets to a community foundation or donor-advised fund, ensuring continuity of support for grantees beyond their lifespan.
The Human Dimension
While the legal and financial considerations are essential, sunsetting also has a human element. For founders, it can feel like letting go of a piece of their identity. For grantees, it may raise concerns about funding gaps or destabilization from accelerated funding. Thoughtful communication, transparency, and support during the transition can soften these impacts and uphold the foundation’s reputation as a trusted partner.
Conclusion
Sunsetting a private foundation is not merely about closing the books, it’s about honoring mission, impact, and responsibility. By approaching the process with careful legal compliance and strategic foresight, foundations can ensure their resources are deployed effectively and ethically. For founders and boards alike, a well-executed sunset can be a powerful way to transform vision into lasting change.