Market view and Insights
MacKenzie Scott is giving away billions using a method that is growing increasingly popular, and not only with the super-wealthy. We look at the slimmer, sleeker alternative to setting up a foundation.
The billionaire divorcee has made a major mark on the philanthropy scene since splitting from Amazon founder Jeff Bezos - not just for her determination to give away her billion-dollar divorce settlement, but also for how she is doing it.
Foundations and trusts like the Bill & Melinda Gates Foundation in the US, the Sainsbury Family's trusts in the UK, and the Oak Foundation in Switzerland, have long held sway as the preferred method for the ultra-wealthy to channel their funds earmarked for donation.
MacKenzie Scott, however, has ignored the traditional method of giving through traditional foundations. Instead, she is routing a large part of her charitable giving through so-called donor-advised funds, known as DAFs. These convenient structures are rapidly gaining popularity among philanthropists in all wealth brackets thanks to Scott's quick-fire distribution of more than USD 14 billion since 2019. DAFs have been commonplace - and controversial - in the US for decades.
The concept is now growing more widespread in Europe and other parts of the world, although it varies in name and legal specifics, depending on the jurisdiction. In countries outside the UK and US, including Switzerland, the equivalent of a DAF is typically referred to as an umbrella foundation. This is a registered charitable foundation according to local laws that can host charitable funds underneath its umbrella.
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 leads to tax benefits. The donor defines a purpose - typically a philanthropic cause or project - and contributes a series of donations towards institutions, organizations, and programs devoted to this.
The two differ in flexibility: traditional foundations in many countries must have a fixed, iron-clad purpose, while a fund set up with an umbrella foundation can be adjusted more easily down the road. Traditional foundations are typically designed to last for generations.
However, 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 useful for families keen for their philanthropic legacy to span generations. This is because it offers greater empowerment to their offspring, and more flexibility in adjusting its charitable purpose, duration, and breadth.
And for the wealthy without heirs, using an umbrella foundation can address delicate succession issues. "It can be difficult to find someone with the same or very similar philanthropic interests who is willing to volunteer their time," according to Professor Georg von Schnurbein, Founding Director of the University of Basel’s Center for Philanthropy Studies, or CEPS.
"An umbrella foundation ensures that those philanthropic funds are actively managed and continuously donated in the way the donor wanted, with oversight and transparency," von Schnurbein adds. He sits on the board of the Ruetli Foundation, an umbrella foundation.
The Oak Foundation - created by duty-free shopping tycoon Alan Parker in 1983 - provides a blueprint for how families and their preferences evolve. In 2015, along with three other foundations, Oak co-founded a philanthropy effort focused on environmental and social issues. By 2022, three more organizations had joined, including the philanthropy fund of eBay founder Pierre Omidyar. The initiative, called Partners for a New Economy, is set up as a fund under the auspices of the Swiss Philanthropy Foundation - a Swiss umbrella foundation established in 2006.
Their donors open a fund with an existing charitable umbrella foundation. The umbrella foundation takes care of the back-office work: arranging board meetings, reporting to regulators, issuing financial statements, and tracking charitable activities. The umbrella foundation charges a fee for its services, but these are usually tamer than the expense of setting up a private foundation.
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 lump sums that foundations typically require. In Switzerland, where 365 new foundations were registered in 2021 alone, the number of umbrella foundations available to host funds is on the rise, according to data compiled by CEPS. The 21 new umbrella foundations set up last year oversee CHF 63 million in capital, the institute found. This new form is slowly taking hold in Switzerland, with larger umbrella foundations enjoying benefits of scale, according to von Schnurbein.
It isn’t just the wealthy pouring into umbrella foundations or similar structures: when the World Health Organization scrambled to coordinate relief aid after declaring Covid-19 a pandemic in March 2020, it first collected over CHF 30 million in donations through an umbrella 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 managed 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 in the US have been criticized for simply hosting funds without them being directed at philanthropic causes. 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, has disbursed CHF 318 million since its creation in 2006.
Title image: © Keystone/Evan Agostini/Invision/AP
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