The combination of “private foundation and perpetuity” is a bit like “Fred and Ginger”, always linked in the public mind. Since 2000, however, the charitable status of 1,750 Canadian private foundations has been revoked. Of that number, 1,088 private foundations deregistered on a voluntary basis at the request of trustees or directors.
To put these numbers in context, the number of new private foundations registered since 2000 is 2,983. In other words, the establishment rate is 1.7 times the revocation rate. In 2011, private foundations overtook public foundations as the second largest category of Canadian registered charities. The private foundation total is currently 5,436, while there are now 5,084 public foundations.
This data from Canada Revenue Agency helps to underscore the challenge associated with private foundations continuity. Private foundations are established with optimism and funded by some kinds of major event, such as a business sale of gift by will. Registration is the easy part. The hard work is creating a durable entity that will survive and thrive in providing public benefit.
Assuming the foundation has adequate funding, and frankly many do not, the key to the future health of a foundation is good governance. Does the foundation function as an independent entity and does it have a strong board that will renew itself, either through family or recruiting qualified volunteers? More prosaically, are there support systems in place to ensure sound administration, granting and compliance?
Establishing and funding a private foundation during life is a prudent step to addressing governance and continuity. Governance capacity can be developed and succession planned. There is often a major influx of funding at death. Preparing the capacity of the foundation in advanced is just plain prudent.
Succession plans should be articulated through by-laws, trust deeds and other written instructions. Next generation governance could involve family, trusted colleagues or professional support providers, such as a trust company. If there is a lack of clarity about succession of a private foundation, it may often makes more sense to establish a donor advised fund within a public foundation that has existing support systems and strong governance to implement the charitable purposes. Or a foundation could deregister as a separate entity but continue as a donor advised fund within a public foundation.
At the creation of private foundations, legal and tax advisors have a responsibility to ask clients about their long-term goals.