Tom MacWright

Charitable trusts

This is all a somewhat recent realization for me, so there may be angles I don’t see yet.

So I was reading Bailout Nation, Barry Ritholtz’s book about the 2008 financial crisis, and one of its points was that charitable trusts were one of the reasons why CDOs and other dangerous and exotic financial products were adopted with such vigor: the trusts were legally required to pay out a percentage of assets per year, like 5%, and previously they were able to do so using Treasury Bills or other forms of safe debt because interest rates were higher. But interest rates were dropped to encourage growth, which made it harder to find reliable medium-return instruments, which put the attention on things like CDOs that produced a similar ‘fixed’ return, but were backed by much scarier things.

And then I was sitting in a park with a friend talking about how this was pretty crazy, and that these trusts are required to pay at least that percentage. He said (he knows a lot more about this than I do) that the 5% number is an IRS stipulation, but it is often also a cap: so the trust can’t pay more than that. Which - he’s not very online, and this is paraphrasing - is an incredible example of control from the grave.

All in all, why do charitable trusts exist? Given the outcomes of:

  • A billionaire donating all of their money to a charity at their death, or even before
  • Or, a billionaire putting their money in a charitable trust that pays 5% a year

The outcomes are simply worse when you use a trust, right? Using trusts gives charities less money, because they have to accept a trickle of yearly donations instead of just receiving the money. In exchange for withholding the full amount from charities, heirs receive the power to direct the trust to one cause or another, and the prestige of the foundation’s name and continuing wealth. This isn’t better for charities, right?

It seems thoroughly wrong that our legal system allows people to exert control long after they’re dead, and to specifically exert the control to withhold money from active uses. Charitable trusts are better understood as ways to mete out little bits of charity in a way designed to benefit wealthy families.

As far as I remember it - Against Charity, a whole anti-charity book that I read, didn’t lay out this argument, even though it is definitely a thing that people are thinking.