The Mega Millions jackpot paid out a record $1.6 billion last week, inspiring lots of people to revisit the age-old question: What should you do if you’re the winner of the jackpot?
Evan Sparks, a writer in Washington, DC, and a contributing editor at Philanthropy magazine, caused a stir on Twitter last week with a twist on the advice to donate your lottery winnings to charity: Start up a private foundation.
So, as the #MegaMillions jackpot reaches a record $1.6B and #Powerball reaches $620M, here's my advice about how to spend the money in a way that will truly set you, your children and their kids up for life.— Evan Sparks (@EvanSparks) October 21, 2018
Create a private foundation and give it all away. 1/
He thinks it’s not just the best move for the world — it’s also a great plan for you personally. Most people who win the lottery wind up miserable, he argued, dealing with complicated taxes and constantly fending off demands for their new, not-so-limitless wealth.
The stress can be damaging, even deadly, and Uncle Sam takes his huge cut. Plus, having a big pool of disposable income can be irresistible to people not accustomed to managing wealth. https://t.co/fiHsuJyZwz 3/— Evan Sparks (@EvanSparks) October 21, 2018
Donating the money solves that — and because of the fascinating dynamics of the philanthropy world he has observed for the past decade, a lottery winner who donated every penny would be as privileged and comfortable as one who kept the money.
Meanwhile, the private foundation is as close as we come to Downton Abbey and the landed aristocracy in this country. It's a largely untaxed pot of money that grows significantly over time, and those who control them tend to entrench their own privileges and those of their kin. 4— Evan Sparks (@EvanSparks) October 21, 2018
You can read the rest of the thread here.
Sparks’s tweets kicked off an online conversation about the role of private foundations in American life. This scheme for managing lottery winnings struck some people as enviable and others as infuriating. (Sparks has since expanded it into a post at Slate.)
Private foundations really do wield the power Sparks mentioned — and do both good and bad with it. They’re often vehicles of privilege without accountability. They also often invest in communities, causes, and research that no one else is investing in. Many people are increasingly considering whether we can get the good without the bad — and, if not, whether the good is worth it.
How to live a life of privilege and get celebrated for it
You’ve almost certainly heard of private foundations. The Gates Foundation is one. There’s a Clinton Foundation and a Trump Foundation. Vox’s Future Perfect is funded by The Rockefeller Foundation (which means it pays my salary).
And they’re not all billionaires. In 2014, there were more than 86,000 private foundations in the United States. Two-thirds have endowments of less than a million dollars, and the median is $500,000.
Is it really that easy to found a nonprofit and then live off it, as Sparks suggests? There are some restrictions, but they leave a lot of room for a comfortable upper-class life. There are laws against “self-dealing” that prohibit you from using your foundation to make loans or give gifts to family members. Those laws also encompass paying an above-market salary or offering a salary to someone who isn’t doing any work.
There’s a lot of flexibility in the definition of “market” salaries, though, and as Sparks observed, they can reach around a million dollars a year. You are not breaking the law if your salaries are reasonable, which market-rate salaries are typically presumed to be. That means salaries most people would find eye-popping are well within the bounds of the law.
Now to salaries. Per 990 filings, it is very reasonable to pay the CEO of a $1.6B foundation as much as $1 million. You can live well on a million bucks for life, plus the social prestige of running a large and generous charity. 8/— Evan Sparks (@EvanSparks) October 21, 2018
It’s worth noting that the $1 million you pay yourself is taxed as normal, so this isn’t a loophole you can use to donate your money to yourself or get out more money than you put in. But it’s a way to secure a great gig for life.
Here’s the thing about private foundations that Sparks got at in his Twitter thread: They wield a lot of power in the nonprofit scene and they aren’t accountable for the results of their grants as long as they’re not fraudulent. That means you don’t have to be good at charity — and can even be doing harm.
Sparks highlighted the way this can entrench the privileged, calling it “basically as close as we come to Downton Abbey and the landed aristocracy in this country.” Since foundations are required to spend only 5 percent of their endowment per year — and they typically surpass that in their investment returns — they can endure for perpetuity.
At every step of the way, they’re a source of power, connections, and insulation from risk for the families that run them. And the benefits, Sparks says, are multigenerational: “Colleges will court your kids, hoping for access to grants. Nonprofits and companies will hire them. They will have prime connections. (Remember the idea that Warren Buffett didn’t spoil his kids? Except he gave each of them a billion-dollar foundation!)”
It’s problems like these that inspired Stanford philosopher Robert Reich to call foundations “an institutional oddity in a democracy” and “virtually by definition, the voice of plutocracy.”
There are other concerns, too. Sparks told me that the history of private foundations is littered with bad calls: “Private foundations can err in big ways, as some of the largest did in the early 20th century when they supported eugenic sterilization campaigns.” Inspired by the dawn of research into genetics, wealthy, influential, and progressive Americans often threw their weight behind mass sterilizations of disabled people.
Fast forward to the present day, and we see some private foundations that are using their resources to push through priorities that have attracted public criticism. The Koch Family Foundations are among those that have drawn the most attention, especially for their work discrediting climate change and stalling public transit projects.
When the leaders of a foundation are also investors or CEOs of prominent public companies, it can become unclear what is philanthropic work and what is political lobbying on behalf of a business interest. Sometimes, they’re just a vehicle for outright fraud, as New York’s attorney general has alleged of the Trump Foundation.
However, Sparks notes that the exact things that can enable foundations to throw money at causes others might consider wasteful — accountability only to the trustees, and insulation from market and popular pressures — also enable them to do critical work that no one else can do.
“Philanthropists have worked through private foundations to fund civil rights campaigns, education for marginalized kids, vaccinations for deadly diseases, and the renewal of public parks,” Sparks points out. “All of these involved investments at scale with a tolerance for short-term setbacks in pursuit of long-term success.”
Foundations are a big part of American civil society — for better and for worse
The frauds and unpopular political lobbying may make headlines, but many private foundations do a lot of good. My colleague Dylan Matthews looked into the Clinton Foundation after calls to shut it down, and found it was surprisingly effective, notably negotiating lifesaving drops in the price of drugs. And while the Gates Foundation has rightly attracted lots of criticism for not valuing program effectiveness highly enough, they’ve saved millions of lives.
In fact, there might be some ways of doing good that will only happen through private foundations. If a charitable cause is obscure, small, or speculative enough, it’s unlikely to be eligible for government grants. Research into gene drives to eradicate malaria, for example — speculative when it first started and now tantalizingly close to fruition — was jointly funded by the Gates Foundation and Good Ventures, the private foundation of Facebook billionaire Dustin Moskovitz and his wife Cari Tuna. (The government does fund other malaria research and prevention efforts.)
Reich calls this the discovery case for foundations: “foundations can operate on a longer time horizon than can businesses in the marketplace and elected officials in public institutions, taking risks in social policy experimentation and innovation that we should not routinely expect to see in the commercial or state sector.”
Many of the foundation-funded organizations out there doing important work are organizations that pressure the government to live up to its obligations — like the Innocence Project, which tries to overturn wrongful convictions, and the ACLU. Even the much-criticized Kochs have thrown their weight behind criminal justice reforms and the fight against civil asset forfeiture, a way local police departments prey on poor people.
Organizations with a mission of holding the government accountable can’t rely on government funding, so they rely on a vibrant charitable sector. This is related to what Reich calls the pluralism case for private philanthropy: “foundations can help to diminish government orthodoxy by decentralizing the definition and distribution of public goods.”
And there’s another consideration when we evaluate the power of private foundations. If we’ve built a culture around philanthropy that makes giving an appealing option in the event of a sudden lottery windfall, that seems like a really good thing. We need to confront our society’s immense inequality — but there are better ways to start than by striking at the incentives for the wealthy to give their money away.
Private foundations are an integral part of how important research, pilot programs, experimentation, and lifesaving work happens. “A private foundation has the freedom to take big risks,” Sparks told me, “which will, from time to time, pay off for our whole society with huge rewards.”
And that means we need a thriving private charitable sector, even if we also need to reform its incentives, police its abuses, and ensure it doesn’t become simply a vehicle for privilege and power.
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