For decades, if not longer, wealthy families and individuals have set up foundations to distribute money to charitable causes or establish philanthropic projects in their own right. A look at some of the wealthiest foundations around the world shows that in many instances, they have names attached to them – the Bill & Melinda Gates Foundation in the US, the Azim Premji Foundation in India and the Garfield Weston Foundation in the UK being just a few.
Yet despite being a foundation in name, the actual structure used to oversee charitable endeavours, in many instances, is a trust – one of the most long-standing and recognised wealth and philanthropic planning vehicles, and one that has been around for centuries.
But it appears that this traditional approach may be undergoing a change, with philanthropists turning to other structures for their giving – most notably foundations.
Taking control through foundations
The foundation as a succession planning/philanthropic structure is a relatively new development in traditionally common law jurisdictions, such as Jersey and Guernsey, where foundation law only came into force in 2009 and 2011 respectively. While both foundations and trusts have similarities, the main way in which they differ is that a foundation typically offers more control to the founder than a trust, where control is handed over to the trustees.
This is perhaps an over-simplification, as there are nuances, but in terms of charitable giving, it’s a key point. In Vistra’s ‘Global Private Wealth and the Future of Philanthropy 2021’ report, which was published earlier this year, 86% of high-net-worth and ultra-high-net-worth respondents said that they prefer to be hands-on when managing philanthropic/charitable projects. Structuring using a foundation may well enable that, because of the level of control those setting it up can retain.
There are a number of other interesting factors that may well come into play when choosing a foundation for philanthropy – aside from being able to put your name on it. For instance, in our experience, foundations tend to be more popular with clients who come from a civil law background – so rules-based rather than principles-based. In civil law jurisdictions, there is often considerable hesitancy to simply hand over ownership of assets to a separate trustee.
Aligned with the fact that individuals want to be more hands-on is that they also want to see more tangible outcomes on their giving. Indeed, 100% of respondents to the Vistra survey said they want to see some measure of tangible outcome.
And also consider that, outside of philanthropy, there is a growing use of foundations for succession planning. In the Vistra survey, 72% said their preferred structure for succession planning is the foundation, against 37% for a trust.
On the surface, this all does seem to point to the desire for more control and active involvement across all wealth planning strategies. But this, in itself, has many layers.
Radical shifts in the global wealth landscape
Let’s look at the growth in HNWIs and UHNWIs around the world, for example. Many of these individuals are first-generation – entrepreneurs who have become wealthy through the creation of their own businesses. As such, they are used to being in charge, so it’s understandable that they’re going to want that same level of control over their philanthropy.
What’s more, certain countries where this new wealth is being created are typically civil law. So, it feels natural that the foundation will be their first port of call.
And it’s perhaps not surprising that Jersey and Guernsey introduced their foundation law in the aftermath of the global financial crisis. Since then, investors and wealthy individuals have become more knowledgeable and sophisticated, and want to play a more active role in their wealth structuring.
Finally, we can’t ignore the impact of Covid-19, which has made everyone look at their own mortality and their plans for the future. From an HNWI perspective, the reaction to the pandemic has involved not only re-examining their broader wealth planning, but has also seen a key shift in philanthropic activity.
The Vistra survey showed a rise in charitable giving – with 36% increasing their philanthropy during the pandemic, compared with only 19% who reduced theirs. Tellingly, healthcare and the environment were the main beneficiaries, seeing greater inflows from the survey respondents.
What is most significant perhaps is how that giving is being structured. At the time the survey took place – at the end of 2020 – only 24% were actively involved in running a foundation. Yet a staggering 57% said they plan to be involved in the following 6-12 months.
The application of business principles
The emergence of new wealth and this planned increase in the use of foundations is worth considering from a business perspective. Entrepreneurs who have built up their wealth in a generation – think Bill Gates and Jeff Bezos – are used to having granular information and KPIs about how their business is performing.
Secondly, they are much more used to employing professionals to get things done in a proper way as opposed to a series of friends and family who sit on the board of trustees. I think there is a desire for much more measurability and control, and the foundation definitely delivers that.
It’s possible to take this view one step further and recognise that businesses right now are far more attuned to issues of mental health and wellness in the workplace, as well as environmental and social issues. As such, it can be argued that business owners and leaders are increasingly aware of the difference they can make not only to their workplace, but the world in which they live.
A bright future for foundations
It certainly appears that all of this creates a perfect storm for philanthropy. Add to the above the fact that the Covid-19 pandemic has taken place against a backdrop of wealth transfer to generations who are arguably more socially and environmentally aware than the older generations. As such, they are more likely to want to become involved in charitable endeavours. Yet this needs to be done in the most effective way – and with a view to the long term.
The foundation not only gives the founder whatever level of control they desire, but family members can play an active role on the council, being involved in decision-making for current and future projects. As wealthy individuals continue to want to make a difference to the world in which we all live, the foundation may well go from strength to strength in philanthropic structuring.
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