Cause for thought

Cause for thought

Key points

What is the issue?

Significant time and effort are spent on inheritance issues related to financial/asset distributions, particularly in high‑net‑worth families, yet the potential pitfalls of a philanthropic legacy are largely overlooked.

What does it mean for me?

A lack of information on the topic is resulting in family turmoil and the wishes of the deceased not being honoured.

What can I take away?

An understanding of the headline issues involved, the types of conversations to hold with clients, and questions to ask to ensure the same smoothness in philanthropic legacy as in other areas.

 

We have all heard stories of a disinherited child, where a desperate dependant is usurped in favour of a donkey sanctuary. Many estate planners have held long discussions with clients about the dangers of this approach; and many charities have found themselves caught in a dispute over an inherited legacy. Experts are sought, legal costs grow and, in particularly unlucky cases, gossip columns are filled.

A lesser‑known issue arises when descendants are taken care of and a philanthropic legacy is left, with the aim that the descendants will utilise this to improve the world in their ancestor’s memory. In these cases, the parent congratulates themselves on their fairness and foresight, while the estate planner simply ensures all the legal and tax implications are met before moving on to other issues. Very rarely does anyone pause to consider the implications the philanthropic legacy might have.

When a gift becomes a burden

When businesses or wealth are passed on, particularly in high‑net‑worth families, considerable discussions are held regarding pressures on the next generation, their suitability for the task and the family dynamics. Often, decades of financial education have taken place, external personnel are considered and a cohesive strategy is developed in alignment with all generations. With philanthropy, this rarely happens. Charitable giving is seen as ‘easy’ or ‘fun’ and therefore not worth real consideration. After all, how hard can it be to give money away?

The reality for those inheriting can be very different. Philanthropy can quickly come to feel like an overwhelming burden. Busy, middle‑aged children, often with demanding careers and families of their own, suddenly find themselves tasked with giving away a substantial sum of money. Greek philosopher Aristotle wrote: ‘To give away money is an easy matter and in any man’s power. But to decide to whom to give it, and how much and when, and for what purpose and how, is neither in every man’s power nor an easy matter.’

This is true today for the child who inherits. They need to find the right cause to give to and feel pressure to achieve the greatest possible impact, as befits their parent’s final legacy; their last chance to be honoured. Failure in this regard is to let their memory down.

Morality questioned

With questions about philanthropy on the rise and charities’ shortcomings becoming increasingly newsworthy, those charged with distributing a philanthropic legacy are faced with a difficult task. Donors often struggle to articulate their needs, while charities struggle to meet expectations. To complicate this further, families with multiple siblings must align their views or split the cash, and in doing so overcome often deep‑seated familial differences.

At its heart, philanthropy is a desire to improve the world and tackle the issues one feels are the most important. It speaks to one’s moral compass and as such can cause great tension and can cause pre‑existing differences to rise to the forefront. At best, beneficiaries shake their heads at the foolishness of their siblings for not seeing the world’s ‘real’ problems. At worst, they are outraged by each other’s views and fissures form at the deepest levels. This leads to conflict and inertia, and can turn philanthropy into a disheartening chore.

This is clearly not what parents aim for; so, can it be  avoided?

Considerations in leaving a philanthropic legacy

The easiest way to eschew leaving a burdensome philanthropic legacy is simple: do not leave one. This can be achieved by advising clients to pre‑select which charities will receive donations. However, many people are loath to allow their hard‑earned cash to fall into the pit of generic charity costs, as tends to befall legacies. They are often unaware they can engage with organisations during their lifetime, understand different projects and receive proposals detailing the kind of impact they could have.

Larger charities, in particular, have long‑term plans that could see a legacy being utilised for a defined and understood purpose. To this extent, clients should be encouraged to engage directly with their chosen charities to receive the additional benefit of garnering joy during their lifetime, as they can see the impact they will have, while reducing the pressure on others to do the hard work for them.

For those who still wish to either leave a direct amount for their children to donate, or establish a named trust or foundation to be watched over by future generations, there are several questions to consider. The first is whether they know the causes they want to focus on, and if so, whether these should be stipulated.

On the one hand, overly tight restrictions can create absurd predicaments for successors. In one such case, the trust of an Australian widow was to fund vests for orphans: a critical cause in 1921, however, not so in 2021. On the other hand, if definitions are left too broad, with the ubiquitous ‘charitable purposes as the trustees may from time‑to‑time determine’, then the money may be used for purposes not originally intended by the client, particularly given the changing nature of social issues, altering religious beliefs and differing experiences across generations.

To restrict too tightly provides clarity and reduces the chances of disagreements between siblings; however, a beneficiary who does not feel emotionally invested in charitable giving is less likely to engage.

In addition, the question of who is best placed to oversee a legacy is also critical. Just as in business, where not every child can be the chief executive officer, considerations should be made as to whether it is best for all children to be involved, if each should have their own area if so, or if a different member of staff should be trusted with the bulk of the responsibility. The time‑consuming nature of this work should also be considered, with potential allowances for a stipend to reduce the burden.

Finally, the individual leaving the legacy should consider what their ultimate goal is and whether philanthropy is the best approach. Those donating to charity do so for a variety of reasons: to make a difference, bring joy, create family connections, teach the value of money or create a legacy. Understanding their goal is critical to ascertaining if the approach being taken is the most likely to achieve it.

Communicate inheritance, not just disinheritance

No matter the choice, communication is key. Clients should be encouraged to discuss their wishes with the next generation, to focus on what truly matters to them and understand what their children want too. Will their descendants see this as a joy and something they wish to do? Will it bring the siblings together or drive them further apart? What are their thoughts for future generations? Is one child better placed to do the role or an external advisor? These are considerations advisors are used to discussing in a business context but rarely in philanthropy. That needs to change. Philanthropy should not be seen as a tick‑box exercise. Instead, it should be viewed as an issue filled with the potential for great joy but also complexity and challenge, which is worth considering in the same way as any other aspect of inheritance: asking questions and guiding clients to be aware of potential pitfalls as well as successes.

If done correctly, a philanthropic legacy does not need to be a curse. Those who are alive can honour the deceased and achieve something special in their memory, finding closure and joy. A legacy can provide a sense of purpose and morality, and a reason for family unity. Many of the biggest changes in our world, from education to medical research and arts through to the environment, owe their success to legacy giving. Encouragement towards this should be actively facilitated for the betterment of all society, but it is important that clients are provided with the tools and information they need to achieve their own goals.