We are living in an age of personal philanthropy defined by larger donations and more donor choice.  Increased flexibility is the key feature of this age – especially through charitable structures like private foundations and donor advised funds. Historically, charitable donations and structures been defined by restrictions and controls.  Here is what changed and some implications for estate planning.

History

Charity law, at least in English Canada, is intertwined with common law of property, trust and donations, which were then overlaid with tax law.  Charity in this tradition is a mix of private action and public purposes, however, in pursuit of public good it rejects private benefit to the donor.  In common law, a donation is property freely-given without any benefit to the donor.

A key underlying objective of charity in the common law tradition is the control and protection of private property. Trust law is settlor or founder law, which is provides significant power to donors to impose restrictions for others to carry out.  Conversely, donors lose active control after a donation is made (or charitable trust is established), and the charity (or trustees) have a fiduciary obligation to carry out their wishes. Witness traditional endowments that prohibit the use of donated capital.  It’s a restrictive, rule-bound world.

Evolution and realignment

The move toward greater donor flexibility has been developing over a century.  A key development was the emergence of the private foundation at the beginning of the 20th Century. Structured as corporations, not trusts, this new charity model provided discretion to the directors of the foundation to shape and carry out charitable programs.

In 1931, the New York Community Trust, an early community foundation, created the concept of donor advised fund.  The launch of Fidelity Investment’s Charitable Gift Fund, the first 501c(3) to exclusively hold and manage donor advised funds, turbo-charged the world of donor advised funds and unleashed greater demand for philanthropic flexibility.

These structures are responding to larger donations from wealth and donor demand to be more involved with granting.  In many way, greater consumer choice in society created these philanthropic innovations.  Foundations became more responsive and flexible. Foundations have shifted the governing mindset from control and restrictions to provide increased support and flexibiloty to donors who are fund advisors.

Implications for donors

There are a number of implications for donors of these flexible philanthropy models.

1. Donors have time to decide what they want to support, even after they have made an irrevocable donation.
2. A donor can make multiple donations to single single charity and support numerous causes over many years.
3. A donor can create a coherent philanthropic plan that is easier to define and track than multiple individual gifts.
4. There is flexibility to respond to new and emerging needs in society.
5. Depending on the foundation, a donor can use capital or income for granting and charitable programs.
6. A donor can nominate successor grant advisors.
7. A single structure can unify lifetime giving and estate planning.
8. A donor can develop more knowledge and experience with giving and beneficiaries, which creates both joy and community impact.

Red lines

Flexibility has limits.  A donation is still an irrevocable transfer or property, and there are still broad restrictions about what a foundation can support.  An unfortunate practice by certain foundations with donor advised funds is allowing donors to routinely not grants from their funds.  This practice creates a systematic and regulatory risk to all foundations with donor advised funds and the charitable sector.  Money should not languish. Charities must be exclusively charitable.  Board must ensure resources under their control are primarily used for charitable purposes.  Simply, there is no reason for arbitrarily not spending.  Too much flexibility can cross the line into self-benefit or insufficient public benefit.