Estate planning is an exercise in time travel. It is impossible to predict the future, especially when the time gap between planning and death is often decades. Fast forward 25 years, a charity may not exist when the estate is distributed.
Charity law identified this problem and a solution to it over 500 years ago. The solution is the charitable purpose in a charitable trust. In trust law there are “object trusts” that name people or organizations as beneficiaries. By contrast, a “purpose trust” names the objectives, not charities.
Purpose over charity
The charitable purpose is more important than any single charity. For example, the purpose could be animal welfare, with a particular focus on the rescue and rehabilitation of wild animal in rural Ontario. Several good small charities do this work now, but it is unclear if they will exist in the future – or what new charities will take their place. With a charitable purpose the animals are the focus, not the individual charities that exist to help them. A purpose seeks to address the underlying goal, regardless of the charity doing the work. In most cases, purposes that are in place over many years will likely be carried out by different charities.
A good example of a successful use of charitable purposes is the J.P. Bickell Foundation, a Toronto-based private foundation established in 1953. (Scotiatrust is the sole trustee.) The Foundation has a purpose to make 35% of its annual grants to Ontario charities at the discretion of the trustee. About 85% of the charities that the J.P. Bickell Foundation currently supports were not in existence 70 years ago. Indeed, many of the needs did not exist in the 1950s, either. Flexible charitable purposes help to ensure ongoing relevance and impact.
Don’t Name that Charity
In the estate planning process, most people don’t think in terms of charitable purposes. They think in terms of individual charities, just like they do with their lifetime giving. They feel compelled to “name that charity” to complete their will. I am frequently asked “what are good charities that do x, y or z?.” This is often the wrong question. And it mistakes lifetime giving with estate donations, which are usually much higher value. The “name that charity” strategy may make sense if the planned estate donation is modest or a charity is large and well established, but it is less well suited for the donor who has multiple interests or a passion for small charities. Charities close, struggle and change mission. What seems like the right charity today may not be 25 years.
For larger estate donations, the most effective way to support one or more charitable causes is by working with a public foundation to establish a legacy fund to support your charitable purposes. The recipient of the estate donation will be to the foundation that hold your fund, not to an individual small charity. This ensures your gift does not fail, which avoids future legal delays and costs.
Admittedly, creating a fund with a charitable purpose requires a lot of trust in the public foundation that holds your fund. The foundation will be interpreting your wishes in the future and funding charities on your behalf. Not every public foundation has the policies or capacity to manage funds with charitable purposes. The wise donor will ask the foundation how decisions are made, and grant recipients are identified.
A legacy fund with a charitable purpose addresses the time travel conundrum. It bridges the gap between donor intentions today and community impact tomorrow.
Jill NelsonMay 18, 2023 - 2:07 pm
Great topic and beautifully articulated, as always!
I am troubled about the use of the general term “Public Foundation” to describe the arrangement known often as a Donor Advised Foundation. There are many public foundations that do not operate in the way you describe, for example the CAGP Foundation, many Hospital Foundations etc.
So another option for a donor is to make the gift to a charity that they trust will be in existence, and describe the purpose to which they want their gift to be used in future… let’s say for example they make their gift to The Princess Margaret Cancer Foundation and ask that their gift be used for “cancer research” or even more specifically “prostate cancer research”. If the gift is not “endowed”, it will make an immediate and powerful impact on the cause that matters to the donor… and of course this applies to other causes and charities or public foundations as well.