Bridging The Generational Gap Through Philanthropy

It is often said about family money that the first generation makes it, the second spends it, and that it is lost by the third generation. While the first generation understands the time and effort it takes to build wealth, it can be challenging to impart an appreciation of the true value of money upon the second and third generations.

Part of the challenge faced by family offices is bridging the various interests and priorities of multiple generations. These familial dynamics need to be carefully considered in the structuring and management of family offices alongside the activities they carry out.

Philanthropy can provide a common purpose among family members, attracting those perhaps not directly involved in the family business to take an interest, and can help to educate younger generations in both financial and social responsibility. Involving family members in a family office’s philanthropic activities can also help ensure that family members understand the true value - in every sense - of their family wealth, and instil in them a notion of custodianship of their wealth for future generations of the family.

Options for charitable giving

The modern family office can choose from several options for their philanthropic activities. The choice depends on the amount of control they wish to retain over charitable funds, their philanthropic objectives as well as the tax implications. The options include:

• Direct giving

This straightforward option allows a family office to support a particular cause important to the family. The UK Government recently announced that charitable tax reliefs, previously extended to EU and EEA charities, would be restricted to UK charities only. This measure is effective from 15 March 2023, although there are transitional arrangements in place so that certain non-UK charities that already benefit from such reliefs can continue to do so until April 2024. Donors should therefore not assume that tax reliefs will be automatically available and legal advice should be sought before gifts are made.

• Unincorporated association

This a common form of charity which is often set up informally. It tends to have a small membership and is run almost exclusively by volunteers. Its main advantage is that it is easy to set up, and it is run according to its constitution. The significant disadvantage of an unincorporated association is that it has no separate legal personality and so members of the association can be personally liable for the association’s debts. Consequently, this structure is not appropriate for charities that employ staff or own property.

• Donor Advised Fund (DAF)

Generally, this option allows family offices to outsource their philanthropic activities by giving funds to a registered public charity specialising in DAFs. These are similar to charitable investment accounts, with some DAFs accepting non-cash donations such as artwork, real estate and shares. Assets in a DAF can be invested and the money ring-fenced for short or longer term charitable activities. While families can recommend charitable grant recipients, control of the grants is ultimately ceded to the DAF service provider. DAFs also allow families to remain anonymous, if they wish.

• Charitable trust

Charitable trusts have a long history of use and allow family members to retain more control over charitable funds by becoming trustees themselves and with the flexibility of choosing the charitable causes they wish to support through grant-making. The trust’s assets can be invested by the family office to generate income for the trust’s charitable purposes. However, charitable trusts do not have separate legal personalities, and so trustees can be held personally liable for any debts or liabilities of the trust.

• Charitable company

Unlike a charitable trust, a private charitable company is incorporated, meaning that the charity itself can hold the charity’s assets and enter into contracts. The liability of trustees of charitable companies is therefore limited. However, the running of a charitable company can be administratively burdensome, since it must also comply with company (as well as charity) law, including regularly filing documents at Companies House.

• Charitable Incorporated Organisation (CIO)

This is a relatively new vehicle for families wishing to create a lasting legacy. CIOs are similar to charitable companies in their structure and the trustees having limited liability. However, CIOs are regulated by the Charity Commission alone and do not need to file documents with Companies House, which often makes them easier and less expensive to run. Individuals can sit as both members and trustees, allowing the family to retain a high degree of control to direct the CIO’s philanthropic activities and to maximise the impact on the causes they wish to support.

Careful consideration of the type of charitable giving structure and the associated tax implications should be made before proceeding, particularly when cross-jurisdictional issues are involved. We can advise on the type of charitable vehicle that might best suit the circumstances of a particular family office and the family they represent.