The super-wealthy are giving away billions using a method that is growing increasingly popular for philanthropists of all brackets. LGT’s Julia Kleiser talks about the slimmer, sleeker alternative to setting up a foundation.
Julia Kleiser, has MacKenzie Scott broken the mold for philanthropic giving?
She’s certainly standing out! No one in recent memory has donated and channeled as much money as MacKenzie Scott has since 2019. One major aspect of Scott’s philanthropy that fascinates me is the fact that she is disrupting a large part of the traditional way of giving through foundations.
How is it disruptive?
Until now, foundations and trusts – the Bill & Melinda Gates Foundation in the US or the Jacobs Foundation in Switzerland are two well-known, large, established ones – have been the preferred method for the ultra-wealthy to channel their funds earmarked for donation.
MacKenzie Scott seems to have no interest in setting up a foundation to drive her philanthropic work.
Why does it matter?
It means she can channel large amounts of money in an impactful way, without the time, expense, bureaucracy or process tied to setting up and maintaining a foundation. She is among a host of ultra-wealthy individuals who have used donor-advised structures, which exist in some form in many countries.
Beyond that, she is demonstrating that you can give billions away quickly, no strings attached.
What is a donor-advised fund?
It is a convenient structure increasingly popular among philanthropists in all wealth brackets. Donor-advised funds (DAFs) vary in name and legal specifics. In countries outside the UK and US, including Switzerland, the equivalent of a DAF is typically referred to as an umbrella foundation (the German word is «Dachstiftung»).
This is a registered charitable foundation according to local laws that can host charitable funds underneath its umbrella. These charitable funds can be set up through a contract with the umbrella foundation.
What’s the difference between a foundation and a DAF/umbrella foundation?
The basics of traditional foundations and umbrella foundations are identical: money earmarked for philanthropy is placed in a charitable structure and no longer counts as the donor’s wealth, which in turn can lead to tax deductibility. The donor defines a purpose for the philanthropic fund, but this can be changed or adapted later.
And a fund can be created much faster than a foundation can be set up. Donations to charitable causes can then be made through the fund that is created.
Why does the form matter, if the funds are going to the philanthropic causes or projects and organizations of a donor’s choosing?
There’s a lot to be said for flexibility: traditional foundations in many countries must have a fixed, iron-clad purpose that is difficult to amend. Shutting down a foundation is very difficult. This – in many jurisdictions – has led to the existence of many small foundations that are difficult and costly to maintain.
By contrast, a fund set up with an umbrella foundation can be adjusted more easily down the road. Its administration is centralized under the umbrella. This means increased efficiency and more resources dedicated to philanthropy.
Isn’t the solidity and immutableness of a foundation exactly what most donors are after for their legacy?
Traditional foundations are typically designed to last for generations, but just as with a family business, younger generations may have very different priorities and interests to those of their forbears. The more adaptable structure of a fund underneath an umbrella foundation is, for example, useful for families keen for their philanthropic legacy to span generations.
Why is that more useful for families of philanthropists?
It offers greater empowerment to their offspring, and more flexibility in adjusting its charitable purpose, duration, and breadth. We’ve also seen many cases where foundations are left without professional, motivated leadership after the death of the founders – despite having a foundation board in place.
But in the case of umbrella foundations, the institution will continue to be managed professionally.
What about donors who don’t have the financial arsenal of MacKenzie Scott to give away?
This more flexible form is also better for smaller donations, for example, from high net-worth individuals who may not want to commit the large sums that foundations typically require to work meaningfully. As a donor, you can benefit from the scale of an umbrella foundation with less expenses, resources, and funds required to set up your own.
How do donor-advised funds work in practice?
Their donors open a fund with an existing charitable umbrella foundation. The umbrella foundation takes care of the back-office work: foundation board meetings, reporting to regulators, issuing financial statements, and tracking charitable activities.
They can also conduct due diligence of organizations and projects to support. The umbrella foundation charges a fee for its services, but these are usually less than the expense of setting up and maintaining a private foundation.
Isn’t there a danger of someone else taking control if it’s not «your» foundation?
If donors have reservations about using these umbrella set-ups, these are frequently rooted in the fear of losing control. But the reality is that all foundations, including umbrella foundations, are steered by boards, and although the donor’s name may adorn the nameplate of their foundation, in fact, it’s the board that takes the decisions.
The donor always loses an element of control once the funds have been tax-effectively placed into a charitable structure, no matter what channel he or she chooses to route their philanthropy through.
DAFs have drawn criticism in the U.S. for sitting on money indefinitely.
In many countries, including Switzerland, umbrella foundations are officially required to disburse donations, and are monitored by a regulator. The Swiss Philanthropy Foundation, for example, which is Switzerland’s largest umbrella foundation, has disbursed 318 million Swiss francs since its creation in 2006.
Julia Kleiser has been a philanthropy advisor for LGT Private Banking since 2021. With over 15 years of professional experience, she previously worked in UBS’ philanthropy department and for the Mercator Foundation in Germany. She holds a Master’s in international affairs from the Geneva Graduate Institute of International and Development Studies. Kleiser contributed to the LGT Guide to Strategic Philanthropy, a systematic guidebook to the topic for anyone who wants to use their resources to make a positive impact in the world.
