“Is perpetuity 21 years?” asked a charity colleague. “No, it’s forever, until the end of time, or as long as we collectively exist,” I answered. Despite my pedantic response, the question is a good one because it underscores the inherent meaninglessness of the phrase “in perpetuity” in relation to charitable endowments.
My colleague’s charity was reviewing its endowment policy and having an internal debate about the term of funds. One opinion within the charity was perpetuity must be tied to the 21-year capital disposition rule for trusts. But this view forgets that registered charities are tax exempt and, in common law, charitable trusts are exempt from the rule against perpetuities.
Looser Rules for Endowments
There has been a lot of change to charitable endowments in Canada since the financial crisis of 2008/09. The crisis shook the concept of protecting capital “in perpetuity” at the expense of current charitable programs. In 2010, the disbursement quota for registered charities in the Income Tax Act was revised to eliminate the trust-based concept of the “ten-year gift”, which forbade the spending of endowment capital for the first ten years. The Act now provides charities with the flexibility to define the terms of long-term funds. The charitable sector has responded by loosening capital restrictions and introducing flexible structures, such as spend-down funds.
Less Perpetuity
Charities are using the term “perpetual” less often in relationship to endowments. This is wise. Without reducing the importance of long-terms endowments as a funding structure, abandoning the concept of endowment increases the effective uses of charitable funds. There are, however, still charities that include the concept of “perpetuity” in endowment agreements and marketing.
Forever is a long time. More to the point, “forever” is beyond proven human ability to maintain documents and systems. Here’s a test number: 1,607 years. That takes us back to the first sack of Rome. Much has happened since then, and, of course, perpetuity is even longer.
The point of this reductio ad absurdum argument is to make a plea for realism and caution in the use of “in perpetuity” when drafting wills, estate donations and endowment funds. Especially in estate planning, perpetuity is an emotionally powerful but intellectually incoherent concept. At heart, the notion of “in perpetuity” creates unrealistic expectations for the donor and imposes unhelpful restrictions on the charity. Ultimately it puts charitable capital at risk by saving it for an unreachable future.
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