Building a solid foundation

There continues to be significant interest among high-net-worth individuals in setting up their own charitable foundation in England and Wales. As well as providing a focus for their charitable giving, a foundation is a simple way of maximising gift aid, while leaving a legacy.

A foundation in this context is a grant-making charity set up simply to receive money, perhaps invest it, and pay out money to other charities or for charitable purposes.

Food for thought

Here are some of the issues that must be considered when deciding whether to set up a foundation.

How will it be funded?

Will it be a one-off payment? Perhaps tied into the sale of a business? Or will there be regular payments? This will dictate the investment strategy of the charity, and the level of grants that will be made.

The level of funding is also an important consideration. If the money paid into the foundation will be relatively little, say less than GBP50,000, or distributed within a short time frame, a foundation is unlikely to be worth the expense. However, if the plan is to distribute the money over a number of years, a foundation is likely to be appropriate.

Who will the foundation support?

Will the foundation support a small number of charities, or will it spread its funds widely? If the proposed grants are to a small number of charities, a foundation may not be appropriate, and it may be simpler just to make the donations directly to the charities in question.

It may be beneficial to advise clients, irrespective of whether they have a certain cause in mind, to set up the charity with the widest possible objects, to provide for maximum flexibility in the future. A charity must only act within its objects, and it may find it difficult to widen its objects should it discover in the future that it wishes to do something not anticipated when it was set up.

The future

If the plan is for the charity to operate for many years, perhaps being a vehicle for further lifetime or legacy giving, it is important that the operative provisions in its constitution allow for future flexibility. It is usual for the charity’s promoter to maintain significant control over the foundation during their lifetime, and to include provisions to ensure certain individuals, such as relatives, maintain that control after their death. There are various ways of doing this.

Foundations are also a good way of introducing younger generations of the family into philanthropy. It gives them an opportunity to appreciate wealth and allows them to learn how to manage money, as well as giving them the opportunity to see what a huge difference a little bit of money can make to a lot of people. The promoter may wish to make appropriate provisions for these individuals to be included. However, it is important to appreciate the potential minefield that succession planning like this can be where the foundation is run by a few different family members rather than an individual.

Know your client

Knowing the promoter’s background is vital to understanding what drives that individual, and the sort of support they want the foundation to offer. It may also help you to decide what structure would be most appropriate. Trusts are rarely appropriate in the modern charity sector, with incorporated structures offering much more security. If the promoter has made their money in the business world, perhaps a company would be an appropriate structure, as they would easily relate to company law. If not, perhaps the new charitable-incorporated-organisation structure would be a better choice.

Post-creation

Once the foundation is up and running it will receive numerous requests for funding. There are online resources that provide lists of charitable foundations. Any new foundation will quickly find itself on those lists.

The administration involved in dealing with the applications can be significant, and many trustees will not have the time to manage this process. Application forms and publicly available grant-making policies are a good way to sort the wheat from the chaff, and avoid the generic mass mailings carried out by the many unimaginative fundraisers.