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One of the most important lessons for the banker moving into private client work to learn, is that the return is only half the equation.
Among the many other demands that wealthy families make on their advisers, how to give to charity is becoming increasingly important.
“The changes in family giving reflect the changing nature of wealth in the UK, and the larger trends in philanthropic giving,” says Salvatore LaSpada, chief executive of the Institute for Philanthropy, a non-profit organisation that promotes philanthropy. “Twenty years ago, 75 per cent of wealth was inherited and only a quarter was entrepreneurial. Now, those figures are reversed and that has brought about a whole new type of charity.”
Philanthropy is now a business. First-generation wealthy view giving in a new light – they are keen to bring their own expertise to philanthropy. According to Mark Evans, head of philanthropy and family business at Coutts, the private bank: “These people want to get involved, not just write out a cheque. They see the opportunity to enjoy giving, as much as if not more than making the money in the first place, and there’s a real interest in applying business solutions to charitable giving. People have a lot more to offer than just money.”
For many families, philanthropy has an educative role to play as well. “It can be an opportunity to prepare children for the responsibilities of inheriting wealth – helping them understand the value of money,” says Mr Evans. Getting children involved can help avoid the dangers of “affluenza”, the problems that can come with inheriting significant wealth.
“The skills that younger family members accrue are skills they can use in their personal and business lives,” says Mr LaSpada. “It is a way to transmit values and enables the family to focus together on something other than money.”
But inevitably these changes have made giving more complicated – as witnessed by the plethora of training programmes and forums run not just by independent organisations such as the Institute for Philanthropy but by big banks too. No private client division is complete without a set of charitable advisers, and there are numerous invitations for individuals to meet other donors, compare giving strategies and hear “pitches” from charities.
“This is a very complicated area,” says Mr Evans. “There are 180,000 registered charities in the UK alone and lots of things to take into account if you want to give wisely. How engaged do you want to be? Are you going to give time and effort as well as money? Is it a one-off payment or a charity you want to support over a period of time? Will you giving locally, nationally or internationally? How can you give tax effectively?”
Tax considerations, though rarely a starting point, may well play a key part in the amount and style of giving. “Most families come into this with a desire to make a contribution, but then the question of how to be tax-effective helps in framing that,” explains Mr LaSpada. “The UK has some really, really good fiscal incentives – one of the most generous tax regimes in the world for giving.”
In the UK, the simplest way is via a charity bank account, which can be set up for as little as £100 through the Charities Aid Foundation (CAF), an independent charity that offers services to other charities. Monies built up in this account can be used to support any charity, but CAF will administer the reclamation of tax through the Gift Aid scheme ,increasing the amounts available by 28p for every £1 donated by taxpayers. The individual receives a statement and cheque book, just as with a normal current account, making it easy to track donations.
The next step up from this is a charitable trust, which is free of income, capital gains and inheritance tax. Donations, which can be equities as well as cash, can be made in lump sums or regular payments and can be made by any family member, not just the originator. A charitable trust (which is not to be confused with trusts used to pass on assets to descendants in a tax-efficient manner) can be set up for as little as £1 and with a free trust deed from CAF – but most donors will want something a little more tailored to their own interests and with running costs of at least £500 a year, it only makes sense for larger donations.
A bespoke charitable trust needs a donation of about £250,000 to make it worthwhile, and it pays to take good advice and make the trust deed as wide as possible. That way, the trust is not restricted in its giving and is likely to have a much longer shelf life.
CAF can also provide trustees if required, but many families enjoy running a charitable trust themselves and there is no reason why even substantial trusts should not be entirely family operated.
“The starting point for many families’ giving is to articulate their values and identify the areas they care about and creating a mission statement,” says Mr LaSpada. “It may be best to do this in a retreat setting. We can then work with the family to deepen their understanding of their chosen areas, and develop a strategy that helps them make their giving as high impact as possible.”
Understanding motivations is important for a family, and creating a philanthropic strategy a good way to keep family values alive. For those still involved in a family business, setting up a payroll giving scheme – which allows employees to donate tax-efficiently – can help bring family and employees together, and build better employee relations.
Those with larger amounts may want to set up a charitable foundation, or even an operating charity that accepts donations from others. Individuals may also want to consider charitable legacies in their will – although there is no involvement during the individual’s lifetime, the money is exempt from inheritance tax.
The ways of giving are as varied as the families that choose to donate. Some create separate pools of money for each family member, while others have one pool and discuss as a family what to do with it. Whatever route is chosen, says Mr Evans, “giving as a family really can make a big difference”.