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Philanthropy and succession planning

Date: 18 Jan 2023

Silvia Ricciardi

Citywealth focuses on the philanthropic sector, looking at possible trends for 2023. With a focus on succession, Citywealth digs into how charitable projects are managed to ensure they continue after their founders’ death.

Citywealth puts a magnifying glass on the philanthropic sector, looking at possible trends for 2023. What is the response from UHNW and HNW individuals in the long run? How to make sure the ultimate goal is reached? With a focus on succession, Citywealth digs into how charitable projects are managed to ensure they continue after their founders’ death.

Global frameworks, collective philanthropy and other emerging trends

Philanthropy is an ever-changing sector, but recently a more structured framework has emerged in order to analyse all giving vehicles at disposal of donors. “We will see philanthropy continuing to become a more essential part of the wealth management conversation,” comments John Canady, CEO at National Philanthropic Trust UK. “In the last couple of years there has been a move towards a more formalised and structured framework of HNW giving – similar to the one adopted by the US – and I expect to see that trend continue as advisors become more aware of the variety of giving vehicles for their clients.”

And in terms of donations, John expects to see “greater engagement between donors and charities to ensure the most impactful giving. For example, unrestricted giving might not help donors stringently track the impact of their grant, but in the current climate it can often be the most beneficial gift to a charity. For that to work well, a good level of trust and engagement between donor and charity is essential.”

Tom Hall, Managing Director and Global Head of Philanthropy Services at UBS, envisages three key trends for the future to come: collective philanthropy, blended finance and supporting impact ventures. “First, collective philanthropy. The biggest philanthropists and foundations in the world – the likes of Melinda Gates – are working /investing collaboratively about the need to pool resources (hence, the UBS Collectives, launched in 2021).

Secondly, blended finance, where funds are set-up with philanthropic capital taking ‘concessional’ first loss positions, correcting market failure, leveraging mainstream capital and allowing it to flow into more impactful opportunities than it could otherwise. This is still relatively new and really is quite a small market where governments paying for impact sits at just over USD2bn today, but it is growing and could reach USD1tr+ by end of the decade.

Third, supporting impact ventures. We see it as part of our role to identify, incubate and scale ventures that could become impact unicorns. Through our Global Visionaries programme, we have been supporting over 70 social entrepreneurs through creating awareness and connections, facilitating finance, and building capability.”

Rennie Hoare, Partner and Head of Philanthropy at C. Hoare & Co., dwells on the importance of thinking holistically about charitable giving. “For example, in my family’s charitable trust, the Golden Bottle Trust, we ensure that alongside the 300+ charitable grants we make each year, 100% of the trust’s investments maximise social or environmental good. We call this ‘total portfolio impact’.

I also believe that, to have the best chance of effectively mobilising limited resources, we need to adopt global frameworks. We are seeing a trend towards increased use of the UN’s Sustainable Development Goals, and we, alongside others in our network, have found these a very useful ‘lens’ to help identify need and focus our grant making. Finally, we are seeing significant growth across the sector in Donor-Advised Funds.”

Clare Morison, Partner in the Estates, Tax & Succession department at Thomson Snell & Passmore, talks about a move away from establishing family foundations as trusts due to concerns about the personal liability of trustees. “There is now a preference for using Charitable Incorporated Organisations (CIOs) as the legal structure for the foundation as they offer limited liability and are simpler than charitable companies from an administrative perspective.”

Clare adds that “there has been a move towards using organisations such as the Charities Aid Foundation (CAF) by individuals who wanted to establish grant making charities. Using these organisations eases the administrative burden of running a charity.

But Clare also foresees a lower income for charities. “The current pressures on personal finances and difficulties in the market are likely to lead to reduced income for charities. Therefore, foundations are likely to become more financially connected to the charities and other organisations they support and commit themselves to more long-term funding. They will begin financially supporting charities with day to day running costs in addition to the more usual capital projects that grant making foundations often support. This increased financial connection is likely to lead to more involvement from the foundation to ensure the funds are spent appropriately which will lead to a closer connection overall.”

Succession planning: the role of DAFs and governance

Anna Josse, Co-Founder and CEO at Prism the Gift Fund, comments: “Many HNWIs would prefer not to leave their accumulated wealth to their children. As an alternative, they are looking to distribute their wealth during their lifetime into the charitable sector. People can also choose to involve the next generation when giving and then name them as successors in their will to continue their giving through structures such as DAFs (Donor-Advised Funds). If they have opted for a DAF, there is no new legal entity to be created and the contract has already stipulated who the successors are, who automatically take responsibility for the running of the DAF.”

John Canady stresses the flexibility of DAFs and how they represent a suitable solution to teach financial education through impact investments. “One of the several benefits of donor-advised funds is their flexibility – both during your lifetime and for the next generation. When you set up a Donor-Advised Fund, you put in place a succession plan that is activated upon your death. You can name Successor Advisors to continue giving from the DAF after you pass away or you can name specific charities to receive the balance in the donor-advised fund at the time of your death.

During your lifetime, donor-advised funds make it easy to involve children and other family members in giving decision at any moment, allowing them to learn about social impact through philanthropy. I recall working with a family whose patriarch set up two DAFs to manage the family’s philanthropy in the UK. One was used for grant-making and the other exclusively to engage his young adult children in financial education through impact investments.”

“Personal foundations can be very limiting in terms of purpose and administration, and we have found Donor-Advised Funds an excellent way to ensure continuity,” confirms Rennie. “Quick and simple to set up, they are exceptionally well geared to dealing with shifting funding priorities as the fund is not tied to any one charitable purpose. With the flexibility to cater for possible changes in interests/focus, they make it easier to shift ownership to the next generation.”

Apart from taking care of the succession planning process, UHNWIs often deal with issues to ensure foundations continue after their death including, according to Tom Hall “subsequent generations having their own life priorities, interests and view on the world and differing views on the best time to solve social and environmental problems: is it in the best interest of society and the planet to preserve capital to address problems in the future or to derive a strategic plan to deploy capital to make progress now? Governance is key to overcoming these issues. Relevant structures (trusts), involvement of non-family leadership members, and strong constitutions can help to preserve values of a foundation across successions.”

“The best succession planning I have seen involves founders and trustees listening to the opinions of the next generation and shaping the work of the foundation to incorporate those opinions, if necessary,” reveals Clare Morison. “Generally, the sooner the children are involved in the big decisions the better. Some of the most successful family foundations which have survived strongly after the death of the founder are those where multiple generations of the family have been involved in the foundation at the appropriate level.”

Climate change and philanthropy: what is the response from UHNW and HNW individuals in the long run? Our experts believe that…

… collective action and collaboration is the key to addressing climate change, which is well understood by philanthropists who are adept at pooling resources, developing and sharing research, or forming partnerships. Additionally, philanthropists are known for their agility and appetite for risk, which enables them to meet the high level of urgency needed to tackle these complex issues. They can provide much needed capital for high-risk, high-reward investments in innovation to scale climate solutions. It is also firmly on the agenda for the younger generation of philanthropists who see it as their responsibility to step up where previous generations haven’t. John Canady, National Philanthropic Trust UK

… a DAF structure allows donors to donate to various charities, not for profits, and social enterprises all over the world, but some choose to focus on one cause area such as climate change. This could be through one-off donations or regular giving to well established international charities. However, philanthropists also have the opportunity to look for dynamic projects within grass-roots groups who are delivering new initiatives to aid the fight against climate change. Anna Josse, Prism the Gift Fund.

… donors are definitely aware of the complexity of such issues. At the Golden Bottle Trust, we are looking at multiple ways to solve problems in the environmental space. We believe that to effect significant change, a range of interventions can be much more impactful than a single grant. We call this ‘ecosystem granting’. At C. Hoare & Co., as well as holding one-to-one discussions with philanthropists about the toolkit that can be used to take carbon out of the atmosphere or lock it up, we run targeted customer events that dive deep into issues such as agro-ecology, re-wilding, or the preservation of peatland and seagrass. Rennie Hoare, C. Hoare & Co.

… more philanthropists are directing more capital towards addressing climate challenges and opportunities. According to ClimateWorks Foundation, the 25 percent increase in philanthropic giving to climate change mitigation outpaced overall philanthropic giving growth of 8 percent in 2021. But total giving to climate change mitigation from individuals and foundations still represents less than 2 percent of global philanthropic giving. Beyond direct giving toward climate, we are seeing a trend among philanthropists of adding a climate lens to all giving, without losing the focus on their main issue – like education or health. Philanthropists are appreciating the interconnectivity between climate change and other social outcomes. Tom Hall, UBS.

… a lot more family foundations are turning to climate change and conservation as part of the charitable purposes. With foundations that own land, we see changes to how that land is used with more importance being placed on ecology and conservation. We also see the continuing trend of ESG and, in particular, conservation and climate change being important considerations when investment decisions are being made by trustees. Equally, issues such as climate change and other environmental matters are taken into consideration when making grants. Many foundations are considering the environmental credentials of the charities and other organisations they support even when the work of those organisations has nothing directly to do with the environment. Clare Morison, Thomson Snell & Passmore.

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