As Mo Farah closes his foundation John Canady question whether foundations are always the way to go and advocates donor advised funds for more efficient giving.
You may have read recently about Mo Farah closing his Foundation and paying out the remaining funds to others charities. The move highlights the challenges of running an operational charity and the dilemma donors face when choosing a structure or vehicle to manage their philanthropy. Often, when successful people decide to give back, they (and their advisors) reach for the foundation model. They establish a new foundation with all the best intentions, but time and experience often lead to a question of whether running an operational charity is the best option for them. Setting up a foundation is not always the right answer and one would be wise to consider a broader spectrum of solutions.
If you are considering philanthropy, you may first want to discuss some important questions with your advisors before setting off down the route of setting up a foundation.
These questions typically centre around what is important to you and your family. Is there a particular cause, region or issue you would like to support? Are other charities doing similar work? Is your charitable activity going to include giving to other charities or do you want ultimate operational control? Is there one lump sum you’d like to commit or are you expecting to build the fund overtime? Are your income and contributions to philanthropy predictable?
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How you pay in and develop the fund will also factor: Do you expect a significant financial event to happen in the coming financial years (i.e. sale of business, IPO, inheritance)? Will you be donating cash to build the fund or do you have other types of assets, such as shares or property that you would like to consider donating to build the fund reserves? Is anonymity and privacy important to you in your giving?
Foundations can be the right vehicle if you want total control over how the assets are spent and if you have in-house operational and compliance expertise to run charitable programmes. However most of the time, a better approach is to find and support existing charities doing effective work rather than setting up a new operational charity. In that case, there is an alternative to setting up a foundation: a donor-advised fund (DAF).
Donor-advised funds are well established and widely used in the US but not yet as widely appreciated in the UK. There is a reason that they now outnumber private foundations in the US three to one. They provide a personalised giving vehicle structure, like a foundation, but without the administrative and compliance hassle.
Donor-advised funds (DAFs) are like charitable savings accounts and are simple to set up and manage.
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- You open and name your DAF account (e.g. The Smith Family Foundation)
- You donate assets into your DAF. You receive tax recognition for your donation when it is given to the DAF. You can make additional donations to the DAF at any time.
- You recommend investments to grow the capital in your DAF.
- You recommend grants from your DAF to any qualified charity in the UK or abroad.
The charity that administers the DAF does all of the administration and compliance and carries out the due diligence on the recipient charities. This leaves you free to focus on giving.
As the Mo Farah example highlights, setting up and running a successful international development charity is challenging. If you, or your clients, are considering how to make an impact, consider funding existing charities rather than setting up a new one. And consider all the charitable giving vehicle options – including donor-advised funds – before automatically reaching for the foundation solution.
John Canady is CEO of the charity National Philanthropic Trust UK (www.npt-uk.org). NPT-UK is affiliated with National Philanthropic Trust, the largest independent provider of donor-advised funds in the United States.
