Charitable giving is increasingly becoming a keystone in ultra-high net worth family estate planning. Therefore, in considering how to unwind an estate plan on divorce, thought must be given to how to disentangle the family’s charitable activities.
How a philanthropic programme can be bisected such that each party can pursue their own independent path depends significantly on the form of that programme; at its most complex it involves a close investigation of UK charity and trust law to determine the best way to separate the two individuals.
Charity funds are public funds
In the first instance, a distinction must be drawn between funds on the one hand that have been nominally earmarked by the couple to be given to charity, and funds on the other that have already been given to charity, perhaps to a charity controlled by the family. If funds have been set aside under the expectation that they be applied for charitable purposes, but those funds still remain under the direct control and ownership of the couple, then these assets can simply be divided in accordance with the general rules governing the division of assets upon divorce. This remains the case unless and until those assets have been specifically ringfenced for charitable purposes, for example if they are held within a family trust.
However, once assets have been donated to a charity, those assets are no longer under the unilateral control of the couple. The assets of a UK charity are in effect public funds held for public benefit. It is for this reason that charities attract a wide range of tax reliefs. The quid pro quo is that, once donated to charity, a donor cannot demand the funds back. A charity is only permitted to apply funds in pursuance of its 'objects' (i.e. its purpose) and returning funds to a donor would not satisfy this obligation.
Continuing as co-trustees
It may be that the couple are both happy to continue as co-trustees of the family charity for the time being, as for example Bill Gates and Melinda French Gates have recently announced they intend to do for the Bill & Melinda Gates Foundation. In such circumstances the couple needs to be aware that trusteeship is a fiduciary role; charity trustees are obliged to act in the best interests of the charity’s beneficiaries, as defined by its objects. In continuing as charity trustees, the couple must be able to work together in furtherance of the charity’s purpose and, in doing so, they must put aside all enmity and personal differences. This is particularly important if one of the couple also performs another role for the charity, perhaps as an employee. In such circumstances the other spouse must continue to perform their role as a trustee with impartial oversight over all charity matters, including employee governance.
With both parties remaining as trustees, thought should then be given to whether there would be merit in adding new trustees. New trustees often bring a fresh perspective to affairs, but equally the trustees should be aware of the risk that the new trustees could be exposed to conflicts of interest. For example, if the new trustees are the adult children of the couple, they may be conflicted out of certain decisions that pertain to their parents. For this reason, the appropriate balance of family and independent trustees should always be considered. If the couple already both act as trustees then this should have already been considered, given that spouses are also a class of individuals in which potential conflicts of interest most commonly arise. It is also worth reviewing the person with whom the power to add and remove trustees resides. This is commonly the existing trustees, but if for example that power resides within the unilateral control of one spouse then this matter must be navigated carefully.
A clean break
Conversely, if the couple would prefer to part company on their future charitable affairs, then reallocating funds held within an existing charity can be very difficult if the couple’s charitable goals differ. If, for example, the objects of the existing charity are promoting animal welfare, that charity would be unable to transfer funds to another charity whose purpose is the advancement of the arts.
The objects of the existing charity could in theory be amended and broadened, but this would likely require prior consent from the Charity Commission, who might ask the reason why an animal welfare charity now wishes to support the arts. The Charity Commission’s primary concern will be over the charity’s existing objects and, were they to grant permission for widening the objects, whether this would be to the detriment of its stated purpose. In such circumstances, the Charity Commission often refuses to permit such radical changes.
On the record
Finally, it is worth noting that the activities of a registered UK charity are matters of public record. Therefore, steps like the retirement of a charity trustee eventually make their way into the public domain. Charity trustees are under a statutory duty to notify the Charity Commission of such a change, although there is no specified time limit imposed on charities. As such, divorcing trustees should expect that a trustee’s departure will eventually be known to the wider public. If the couple wish for their private affairs to remain private, then this public disclosure should be managed appropriately.
Please note, if the charity is also a company then, notwithstanding the lack of a Charity Commission deadline, it is still bound by the filing deadlines for companies. The directors (i.e. the trustees) must notify Companies House within 14 days of a person ceasing to be a director, which shortens the timeframe within which the couple must plan for public disclosure.
As with most forms of financial restructuring, it is impossible to give blanket approval or denial to a proposed rearrangement without seeing the detail of the restructuring. Meeting the couple’s wider collective goals can often be achieved, but when the interests of charity are introduced then a third party has been added to the conversation, whose independent voice and interests cannot be ignored.