What are char­i­ta­ble foun­da­tions and trusts?

Your birth­day is com­ing up. Aunt Agnes asks if there’s any­thing you’d par­tic­u­lar­ly like. Almost auto­mat­i­cal­ly a num­ber of things run through your head. How much can she afford? What did she give you last birth­day? If you said you’d real­ly like a flash USB dri­ve, would she know what it is or where to buy it? Would she think it appro­pri­ate? Could you just ask for money?

Written by
Jo Habib
Added
May 23, 2012
Foundations and trusts have no function other than to give away money.

With barely a pause you say, ‘Well, I could really do with some nice warm socks, if that wouldn’t be too much trouble.’

You’ve just finished talking to Aunt Agnes when your parents phone. They too want to discuss your birthday. ‘We know you want to buy a new computer, would you like us to give you a contribution? How much is it going to cost?’

In your personal life you probably deal adroitly with different types of donors without thinking very hard about it. You many end up with slightly too many pairs of warm socks but, hey, it’s the thought that counts, isn’t it?

On a professional level it can be more difficult. For a start, thoughts don’t count for all that much. And then, it may not be as easy to know where different donors are ‘coming from’.

Charitable trusts and foundations differ from each other in significant ways. And at different times they give in different ways. According to Julia Unwin, an eminent observer of the world of trusts and foundations and author of the Grant-Making Tango (The Baring Foundation, London, UK), sometimes they behave like Aunt Agnes: they give gifts. At other times, like parents, they invest in those they fund. On other occasions they are more like shoppers. They know what they want to make happen and they’ll shop around for an organisation prepared to deliver it. To raise money from them successfully, you need to understand how foundations differ and the different styles they adopt, as well as the ways in which they are the same.

Foundation is the term widely used in the USA, trust is more common in the UK, though foundation is becoming fashionable.

​What sets foundations apart from other donors?

Some foundations will give gifts. Others invest in those they fund. While some just like shopping.

Essentially they have no other function except to give money to good causes. Individual people are generous in their support of charities, but the money they put in the collection box, or give through monthly direct debit could equally be spent on food for the family. Government in all its guises also gives to charities. But government has a duty to do things with the money it collects from its citizens – to mend roads, run hospitals, create jobs, or whatever.

Some foundations do things directly, but most don’t. They fulfil their objectives by giving money to others who then do things.

Think about how government agencies behave. If you had to come up with five words to describe them, chances are your list would include words like faceless, slow, form filling. What about five words to describe how individual people behave, compared to government? You might include words like impulsive, irrational, or unaccountable.

Although the trend towards ‘professionalism’ among larger foundations has shifted them towards the bureaucratic end of the scale, most foundations behave more like individual people than government agencies. Many don’t have application forms, many don’t require much, if anything, in the way of monitoring and evaluation, and there are very few mechanisms for making foundations account for the decisions they make. You can’t expect a foundation to give you reasons for refusing your request any more than you would a potential individual donor who ignores your direct mail appeal.

It isn’t surprising that foundations behave more like individuals than bureaucracies, given that they are essentially a tax-effective way of distributing private, not public, wealth. When faced with tricky decisions, trustees will often refer back to the personality of the founder, his – because it usually was a him, not a her – likes and dislikes, his outlook on the world. Because of this, it can be useful to think of different foundations as having distinct personalities.

Trustees, or board members are the people who run foundations, sitting on a committee often referred to as the ‘board’.

What exactly is a charitable foundation?

A rich person wants to give money to good causes. If she takes money from her purse or her bank account, she’s using money she has already paid tax on. Because she’s using her money for a charitable purpose, the government is prepared to forgo this tax. But she has to take action to recover it.

Nowadays, there a number of ways she could give her money ‘pre-tax’. In the UK, while she’s alive she could use Gift Aid, or open a CAF charity account, or set up a covenant. But what about when she dies?

To use her money for good causes ‘in perpetuity’ (or for a shorter period) she sets up a charitable foundation. She creates a trust deed that describes which particular charitable purposes her money should be used on. She asks some friends to join her as trustees. Their job is to make sure that the money is spent according to the trust deed. They have to send a report to the Charity Commission every year; in the USA they must file an IRS form 990-PF. When a trustee retires, the remaining trustees choose someone else.

The trust deed is likely to say that her original donation (the ‘endowment’) should be invested, not spent. The money that is given to good causes is the interest on this endowment. So the foundations always has an income and can go on and on forever. 

About the author: Jo Habib

Jo Habib has been involved in providing information and advice about charitable trusts and foundations for over 20 years. She is the co-ordinator at the Sovereign Health Care Charitable Trust. Before that she was a director of FunderFinder, a small national charity producing software for grant-seekers. She is also author ofTiny Essentials of Raising Money from Foundations and Trusts.

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