There are many ways to make your mark on the world and leave a positive legacy behind you, be it setting up a charity or becoming a donor. Philanthropy is on the rise! But what options are available? And what are their advantages and disadvantages?
Many high net worth individuals, especially business owners, spend a lifetime building up their legacy for future generations. Towards the end of that journey, they often develop a heightened sense of social and environmental awareness and wish to find ways to give back to society. They recognise that they have the financial resources, and often the skills and experience, to have an impact on societal problems. Philanthropy is a way to achieve this.
The amount given to charity has constantly risen in the past few years. How can this trend be explained?
Why engage in philanthropy?
- Making your mark – Many philanthropists wish to ‘make their mark’ and leave a legacy which future (family) generations can look back on proudly. Setting up a charity that will continue to operate after one’s own demise is only one way of securing a legacy. Some donors prefer to give money to established charities, which are usually happy, if desired, to recognise donors’ contributions by naming a building or project after them or for example including special thanks in their communication material.
- Shaping future generations – Where a number of family generations work together, a sense of shared vision and common purpose can be a great unifying force. Many individuals seek to develop the next generation by involving them in the management of the family’s charitable funds, to introduce them to investment management and increase their social awareness. If a family has its own charitable foundation or trust, the next generation can also be on the board and can gain valuable experience in governance, investment matters and the management of a significant organisation. In some cases, shaping future generations can also mean preventing negative outcomes. Some donors give most of their wealth to charity in order to avoid a significant inheritance disincentivising their children from leading productive and fulfilled lives.
- Tax relief – Most governments around the world recognise the contribution that philanthropists make and provide generous tax reliefs to incentivise giving.
What are my options?
- Charitable giving – Many people dip a toe into philanthropy by making gifts to a charity, perhaps to fund a particular project. This is a good option for people who want to make an impact in areas which charities are already engaged in, such as education, medical research, or arts and culture. It allows the donor to make a significant contribution, without the costs or administration of setting up their own charity.
- Volunteering – While philanthropy will usually involve giving money, it is also important to recognise that those with relevant skills can make a valuable contribution by investing their time into charitable organisations. This could be by sitting on the board of trustees of a charity, hosting fundraising events, or by undertaking specific work for the charity on a pro-bono basis.
- Corporate giving – Entrepreneurs often wish to link the business they have created to the charity they are passionate about developing. Some donors give their business to the family foundation so that the business can continue in perpetuity and fund charitable giving. Donors who prefer to retain the business could instead commit to giving a proportion of the profits to charity each year. They could also encourage their employees to give to charity by introducing a payroll giving programme. These have gained popularity as employees seek socially responsible employers.
- Socially responsible investing – Whilst grant-making charities can be highly effective, some philanthropists (particularly entrepreneurs) prefer more innovative ways to make an impact. For this reason, there is a growing interest in social impact bonds, where investors fund a social impact project and receive a financial return only if there are sufficiently good outcomes. For example, a government body might commission a charity to run a project to help those with disabilities into work on a payment by results basis. The investors who funded the charity to run the project would only receive a return on their investment if the charity was successful in helping sufficient participants into work.
- Family foundations – Some donors have a longer-term vision for their philanthropy, and prefer to set up a family foundation to make grants for charitable purposes. If the donor or founder is a board member or even the president of the board, he or she has significant influence on how the funds will be used. Setting up a family foundation, however, does come with costs and an administrative burden. In the UK, for example, charities are required to submit annual accounts and annual returns to the Charity Commission and comply with relevant legislation. Donors who do not wish to deal with the administrative side may prefer to set up an account with a so-called ‘donor-advised fund’ (DAF). DAFs are charities set up to facilitate philanthropic giving. The donor donates assets to their DAF account and the DAF makes grants on the donor’s behalf (provided it is comfortable the grants are for charitable purposes). This gives the donor a similar level of control to a family foundation without having to deal with the administration and cost of running a charity.
- Charities and social enterprises – For the most committed philanthropists, the final option is to establish a fully operational charity or a social enterprise (a trading company established with particular social goals in mind). The organisation could carry out charitable projects itself rather than simply funding them, allowing the philanthropist/ their family to be actively engaged in the work of the organisation and to leverage their business experience for social good.
Make YOUR mark
While this might seem a dizzying array of options, the main point to take away is that philanthropy is not a set path. Shape your giving depending on your motivations, desired level of engagement and stage of life.
About the author
Charles Gothard is a partner in the Private Client department of law firm Macfarlanes LLP. He advises many clients who are considering or engaged in philanthropy, both in the UK and internationally.