Charitable minnows muscle in on foundations

Wealthy investors are increasingly setting up their own philanthropic foundations with relatively small amounts of cash, as private banks and advisers respond to the growing demand for charitable giving.

Charitable funds are being set up with as little as £20,000, as private banks improve the services they offer to clients who want to
give money away in the most tax-efficient manner.

New Philanthropy Capital (NPC), a charity that advises donors on how to give more effectively, has started running training courses for wealth managers and lawyers on how to give advice on philanthropy, after a survey it conducted last year found that there was not enough expertise in the area.

Often, people set up trusts after they have liquidated some assets, such as selling a business. As mergers and acquisition activity has dried up during the recession, foundations have been less prominent. But this is already set to change.

“We’ve seen fewer people start charitable foundations with big chunks of money,” says Rebecca Eastmond, head of philanthropic services in the UK at JPMorgan’s private bank. But she adds: “I’m expecting more conversations next year as more mergers and acquisitions take place – as people think about selling their company.”

Padraic Brick, senior consultant at NPC, expects setting up a foundation to become increasingly common, as so much wealth
has been generated in the past two decades. He says that as people retire and look at their wealth planning, the idea of setting up a foundation is quite likely to arise.

Recognising this growing interest from clients in philanthropy, Barclays Wealth created a new head of philanthropy last year, poaching Emma Turner from Goldman Sachs.

“We know there’s a need for this – it’s a growing marketplace,” she says.

Investors are motivated to set up their own charitable foundation by a variety of factors.

“You do this when you start to incorporate philanthropy into your own philosophy and way of life,” explains Turner. “When you move from making random donations to charity to making it a more philosophical arm of your life, this is the way to do it.”

Eastmond says some investors want to set up a foundation if they want to get future generations involved in charitable work – creating the idea of a coherent family charity.

Charitable foundations also appeal to entrepreneurs who believe they have spotted a gap in the market and want to set up their own venture.

“If people have backgrounds as entrepreneurs, they want to see their philanthropy working as hard for them as their businesses have done,” explains Eastmond.

For example, entrepreneurs who have made their money in “disruptive” technologies – those that improve services or technologies – may be attracted to funding innovative projects, such as irrigation solutions.

These investors often want to focus on areas that are traditionally difficult to support through a charity – such as climate change and global healthcare – where the solutions require innovation.

The traditional route has been for wealthy philanthropists to give the foundation their family name – such as the Bill and Melinda Gates Foundation. But increasingly, investors are opting for other names to distance themselves from the charity. Martha Lane Fox’s charity is called Antigone, while the Hoare family charity is called the Golden Bottle Trust.

How much to put into a charitable foundation is a matter of debate. NPC recommends a minimum of £1m – but says there are some “really tiny” ones out there too. Eastmond recommends at least £500,000.

“Below that level, you have to think on a case by case basis whether it’s worth it due to administration costs and fees,” she says, estimating that these costs will total about £3,000 a year.

Most investors opt to set up a charitable trust, which pays out investment income free of tax and also qualifies for tax breaks on income paid into the trust.

Others choose to set up a limited company, which operates as a charity and is registered with Companies House. Penny Wright, an associate with Thomas Eggar Solicitors, says this is an attractive option for charities with substantial assets – such as land.

But investors who plan to give more away as they get older – or richer – are also setting up funds with even less money. Donor-advised funds, which are operated by a third party but are registered charities, can be set up with just £20,000, according to Eastmond.

For people who are very busy, Turner suggests setting up a trust within the Charities Aid Foundation, which removes responsibility for the administration and filing and also offers a level of anonymity, which some clients prefer.