Ask NCFP: Should we add discretionary giving to our grantmaking strategy?

NCFP receives a number of questions about family philanthropy and is particularly equipped to answer inquiries about philanthropic purpose, governance, next-generation engagement, family dynamics, and succession and legacy. This series is designed to answer commonly asked questions and provide resources and considerations for family funders. If you have a family philanthropy question, consider posting to NCFP’s Peer Exchange Platform for peer advice or submitting a request for information to NCFP staff members.  

Question: Our family philanthropy has a strong strategic grantmaking program, which accounts for the majority of our giving. However, as we are adding new trustees, including next generation family members, we are finding that they have different interests from our central giving area. Should we start a discretionary giving program to keep people engaged? How much of our budget should we dedicate to that?

Family philanthropy, at its most effective, balances stewardship of assets for a better world, with family engagement. Discretionary giving pools, deployed well, can support both.

Discretionary grants offer board members funds to direct toward nonprofits of their choice. Often, the grants are not required to align with the giving areas of the foundation and do not undergo the same level of review as other grants. Many families have found that having discretionary giving pools can be a useful tool for supporting engagement of trustees, particularly if individuals do not live in the community the foundation supports. Discretionary giving also provides an additional “perk” of board service and can be an outlet to ensure that board members’ personal passions do not impinge on the foundation’s strategic priorities.

Discretionary grants are also frequently used to encourage the rising generation’s philanthropic learning and engagement. For example:

On an individual basis, they are ways for younger family members to begin exploring their values and philanthropic interests. Some families will, for instance, provide modest grant pools to their teenagers that the teens can access if they provide a written statement or presentation to the adults in the family about why they want to make a grant. This helps these young adults to begin to articulate what matters to them and practice the work of learning about issue areas and individual nonprofit organizations.

On a collective basis, families have also used discretionary pools to begin engaging the next generation as a whole. In these cases, the next generation may be given a pool of funds to distribute with the requirement that they work together to reach group consensus. This not only develops the skills mentioned above but also helps them develop collaborative skills of group decision-making, which are critical for future board service.

Important Considerations

Discretionary giving programs should be structured carefully, and NCFP’s long experience with hundreds of families has revealed some specific considerations:

It is critical that you create clear processes and policies for how family members can activate discretionary grants. Lack of clarity about how family members can recommend grants, and to what extent the grants need to be aligned with some aspect of the family’s overall grantmaking strategy can lead to both conflict and disengagement. It’s also important to have clear decision-making and voting procedures for these grants.

If your intent is to support a collective giving vehicle over time, you will likely want to limit the discretionary giving pool from that vehicle to no more than 10 to 20 percent of your total annual giving. According to research findings outlined in Philanthropy in Complex, Multi-Generational Families: Balancing Individual Preference with Collective Purpose, if you grow beyond that, you risk diluting the impact of your major initiatives.

Depending on the size of your board, and how you add new members, it can be problematic to assign a specific dollar amount to each individual. For example, if you are a family that adds every eligible family member to the board when they reach a specific age, then as the board grows, the discretionary grant pool may consume more and more of your overall grant budget.

In the reverse of the above scenario, if you set a certain percentage of your annual giving for discretionary grants and your board expands, this may reduce the dollar size of each individual pool. In either event, you should continually assess the size of your discretionary giving in relationship to other grantmaking you are doing.

You may wish to periodically survey your board about how they feel about the discretionary grant program and invite suggestions for change.

Depending on the size of the discretionary grant pools, they can become perverse incentives for board service. That is, you may find people wishing to be trustees purely to access the discretionary giving pools either to support their personal philanthropic passions, or for their own personal prestige. This could lead, in a worst case scenario, to trustees with little or no engagement with the core focus of the family’s philanthropy.

Discretionary Giving Examples

While many families permit discretionary grants to any IRS-certified public charity, others provide some guidelines.

One family, whose giving is focused on giving in the health and education in a specific city in the Midwest, has third and fourth generations that are largely living in different areas of the country. Each board member has a modest discretionary grant budget from which they may make grant recommendations in their local city, so long as those grants also align with health and/or education.

Another family is strongly focused on youth arts programs. Family members have discretionary pools that they can used for any arts-related program, but it doesn’t have to focused on youth arts.

A third family provides board members with broad latitude in making discretionary grants so long as they align with the foundation’s stated values.

As with most things in philanthropy, discretionary grants have advantages and drawbacks and should be considered in light of your family’s philanthropic goals and structure.

Related Resources

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