The ABCs of the Business of Philanthropy
Atlas Corporate Services' Paul Hymers shares insights on the common structures for charitable giving and why building trust and foundations isn’t just for the super-rich anymore.
February 26, 2012 2:14 by kippreport
During times of economic distress we become more concerned about the security and tax efficiency of our assets, not only for the here and now but also for future generations. Though the recession forces us to spend less, it encourages us to give more. With the rate of charitable giving in 2011 surpassing economic growth in both the UK and US, it seems the business of philanthropy is thriving.
Perhaps one reason for its growth is that trust funds and foundations are not exclusive to the domain of the elite and wealthy anymore. In fact, they are fast becoming a sensible tax efficient strategy to managing any individuals’ savings—especially if you are thinking of the stowing away some money for your loved ones and their futures.
Whether you’re objectives lie in succession planning, asset protection or charitable giving, it’s important to have the correct structure from the outset. The most common structures are discussed below and it should give you an idea of whether these are the right products for you.
1 – Trusts
Dating back to the days of the Crusades, trusts are one of the oldest ways to ensure assets are delivered to their intended recipients. In its simplest form, a trust is formed when someone places their assets in the legal custody of someone else for the benefit of a third party. Using the jargon, a Settlor gives legal control of their assets to a Trustee for the benefit of a clearly defined Beneficiary. Trusts are commonly used for charitable giving and for many years have been utilised by a variety of organisations to provide benefit for either their employees or for other needy beneficiaries. Trusts are governed and utilised in common law jurisdictions, and historically the most popular jurisdictions are those where there is the most case law history, such as Jersey or Guernsey.
Trusts are a very powerful tool for estate planning and when used correctly, can minimize tax exposure and ensure that your assets are redistributed in accordance with your wishes. Privacy and asset protection are key advantages of a trust, for example the terms of a will are in the public domain, and trusts are not, also if a Settlor is in a partnership with unlimited liability these assets are out of the reach of his/her creditors.
Would-be philanthropists would typically opt for charitable trusts, and these are commonly used in the UK. They differ from a normal trust on the basis that the link between the trustees and the beneficiaries is broken, meaning that the beneficiaries have no legal standing against the trustees. Charitable trusts also qualify for HMRC advantages on the basis that it has a charitable purpose and public benefit.
2 – Foundations
Like trusts, foundations offer privacy, succession planning and a high level of asset protection, but they also afford a higher level of control to the Founder. Where the interaction of a Settlor with the operation of a trust may have a detrimental impact on the discretionary nature of that trust, the use of Protector in a foundation structure provides a more hands on role for those concerned about the potentially unlimited powers of Trustees to control assets.
Foundations are primarily civil law tools, used where trusts may not be recognised or deemed appropriate. They originated in the early 20th century in Liechtenstein and are now commonly offered in jurisdictions including Panama, Bahamas, Dutch Antilles and Isle of Man. They have a special legal status based on civil law, which mix the legal components of a trust and a company. They have their own self-governing legal status, but they don’t have any shareholders.
Once registered, the foundation exists only once the Founder transfers the assets into it. These assets are owned and controlled by the foundation which is governed by Foundation Council and directed by a Letter of Wishes, supplied by the Founder, which specifies how assets are handled and/or distributed. It is usual to insert a Protector into the structure, this role is to oversee the implementation of the Letter of Wishes and can grant the Protector rights of consultation or even rights to remove or replace the Foundation Council.
While it’s also possible to have a similar Protector role in a trust structure, the unique status of the foundation means that a Founder may be able to assume the role of Protector, without impacting the discretionary nature of the Foundation Council, therefore delivering more control.
In Panama, confidentiality is strictly maintained, foundations have no reporting requirements and neither the Protector nor the Beneficiaries need to be publically registered. These factors have made Panama the first choice for foundation structures and many wealthy philanthropists opt for Panama to ensure their privacy and to avoid unnecessary publicity.
It’s important to differentiate the term ‘foundation’ from that used in the US, where it has no special legal status and can be used within the company name for any type of entity. In the US community foundations and private foundations are types of charitable organisations (subject to IRS requirements), which differ in tax benefits, but work more like traditional charities.
3 – Charities
Fundamental to any charity is that it must offer benefit to the public. If it doesn’t, then it isn’t a charity and therefore doesn’t qualify for the tax exemptions and reliefs that a registered charity may benefit from. A charity is run by its trustees (also known as; directors, board, governors, or committee) and governed by its constitution which not only describe its purpose but also clarifies the rules for how it needs to be run.
The tax benefits and laws governing charities differ according to the jurisdiction. In the UK a charity is its own distinct legal form set out by the Charities Act and if the charity has income of more that £5,000 it must legally register with the Charity Commission. To qualify for tax benefits in the UK, such as gift aid relief on giving, the charity must apply for recognition as a charity to HMRC. Other tax benefits include exemptions from income tax or corporation tax, capital gains tax and council tax.
In the UAE, setting up a charity requires an application to the Public Utility Association Department of the UAE Ministry of Social Affairs. If the applicant is not a UAE national it is advisable for the applicant to first contact their Embassy to assist in the application. There must be twenty founding adult members who all have good conduct, as well as minutes from a temporary board of directors meeting and Articles of Association.
Whilst the use of a charity structure is common, they’re subject to stringent regulation and are becoming increasingly transparent in terms of donation and distribution.
No longer the domain of the super-rich….
For asset protection, succession planning and more recently chartable giving, there has been an inherent shift in recent years from trust structures to foundations. While this has been predominantly driven by a need for more input into the activity and operation of the structure, it has also been driven by a need for increased privacy.
No longer are trusts and foundations the domain of the super-rich or those seeking elevated social status, they’re becoming tools for those seeking a sensible, tax efficient approach to their asset management and allocation. For the philanthropists among us, giving seems to be something they want to do privately.
Paul Hymers is a Finance Director at Atlas Corporate Services.