Forms of engagement

When looking for the right form of engagement, philanthropists are confronted with a wide range of options and approaches. This article explains the most common forms that can be used for different philanthropic engagement needs. 

Foundation

A particularly popular form of philanthropic engagement is the establishment of a foundation. Some philanthropists are keen to create something that can be used to pursue a social, charitable or patronage cause over the long term. 

In recent years, the number of charitable foundations has grown significantly in many countries, such as Liechtenstein, Germany and Switzerland; only recently has growth slowed somewhat. How many new foundations are established also depends on the legal and tax framework and the economic situation. In 2022, there were 1,375 charitable foundations in Liechtenstein, around 30,000 in Germany, 769 in Austria and 13,790 in Switzerland. 

The characteristics of a foundation

A foundation is an independent asset that is made permanently available by a natural or legal person. The establishment of a foundation creates a separate legal entity to which the power of disposal over the donated assets is transferred. The founder no longer has access to the assets. 

The foundation’s assets and any surpluses generated are earmarked exclusively for the defined purpose of the foundation. The charitable purpose of the foundation can be freely chosen at the time of establishment within the limits of the applicable tax law. 

Alternative forms to a foundation with legal capacity are, for example, the dependent foundation or the trust, which is primarily known in the Anglo-Saxon legal system, but is also possible in Liechtenstein. 

In some countries, foundations can also be set up in the form of non-profit organisations or associations. Whether the assets are permanently tied up depends on the specific provisions of the articles of association. 

Establishing a foundation

To establish a foundation, the legal systems stipulate different requirements for the necessary foundation assets. In Liechtenstein, it must amount to at least 30,000 Swiss francs, euros or US dollars. If the foundation is only to pursue its purposes with the income from its assets, it generally only makes sense to set up a foundation with significantly higher foundation assets, as the necessary administrative expenses must also be covered. 

The umbrella foundation or endowment as an alternative to your own foundation 

There are attractive alternatives to setting up your own foundation for founders who want to avoid administrative expenses or only want to contribute smaller assets: on the one hand, you can strengthen the assets of an existing foundation that is already acting in your interests with an endowment. However, the opportunities for co-determination are limited here. 

Secondly, endowment funds or dependent foundations can be set up under the umbrella of existing foundations. In this case, the newly contributed assets are managed separately from the existing foundation assets and can be given their own purpose within certain limits. Administration is carried out by the umbrella foundation. The extent of the founder’s influence can be negotiated with the umbrella foundation. 

There are suitable organisations for every concern 

There are umbrella foundation’s and other community foundations for topics (e.g. the German Foundation for Monument Protection), for causes (e.g. animal welfare) or with a regional focus (e.g. civic trust). In addition, banks and other administrators offer to set up a dependent foundation or an endowment fund under the umbrella of a structure managed by them with little effort. 

Special features of Liechtenstein law

Liechtenstein law offers a special legal structure, the Protected Cell Company (PCC), which can also be used by foundations. In contrast to the umbrella foundation’s familiar in Switzerland and Germany, which also combine the assets of different founders, a PCC foundation has a legally regulated separation of liability. The separation exists between the core and the segments as well as between the individual segments of the foundation. 

Donation options and their effect

Unlike endowing a foundation with assets, donations are intended for immediate use. Donations are usually made to operating non-profit organisations. However, many foundations also accept donations and use them to increase their current budget for the fulfilment of their purpose. One advantage of donations is that they can be used to utilise and strengthen existing professional structures. 

Donations are often only intended to support specific purposes or projects. Recently, more and more voices have been raised in favour of making a larger proportion of donations available to non-profit organisations for use at their own discretion. 

On the one hand, this allows organisations to react flexibly and appropriately to current developments. On the other hand, many organisations find it extremely difficult to finance an appropriate infrastructure; from IT equipment to qualified administrative staff. However, this part of the running costs is essential for effective, targeted work, and there are still too few sponsors who recognise and appreciate this. A prominent example of the focus on unrestricted giving is philanthropist MacKenzie Scott (more on this in the essay “The Case MacKenzie Scott”). 

Foundation vs. Limited-term Trust (LtT)

Foundations are usually set up in perpetuity. The foundation’s assets are preserved and only the income from the assets is used to promote or realise charitable projects. 

However, the founder can stipulate that the foundation’s assets may or must also be used in whole or in part to fulfil the purpose. A special form is the LtT, in which the purpose for which the entirety of the foundations assets are to be used, is explicitly specified when the foundation is established. 

In this form, the LtT itself is dissolved as soon as the trusts assets have been used up. The period in which this takes place can also be specified when the trust is established. 

A founder’s loan as a further form of charitable support

When the foundation’s assets are transferred to a foundation, the founder finally loses his right to dispose of them. An alternative to this is a loan that the founder lends his foundation, or another organisation, part of his assets and leaves the proceeds to it. The foundation can use the income in the same way as its own assets. The loan is usually granted interest-free and without collateral. 

In the event that the founder should need the transferred assets himself, the loan agreement provides for a cancellation option. As soon as the founder is certain that he is no longer dependent on the assets, he can definitively waive repayment of the loan. He can also bequeath the repayment claim to the foundation or waive repayment in his will. 

Charitable commitment in the form of voluntary work 

Commitment does not always, or not exclusively, mean making money available to charitable organisations. An original form of commitment is the donation of time, for example volunteering or taking on an honorary position. 

Volunteering is a key pillar of civil society. In addition to informal engagement, for example in the area of neighbourhood help, engagement in formal settings plays a particularly important role. The most widespread form of formalised volunteering is participation in an association. 

Conclusion 

Which forms of engagement are most suitable for a philanthropist in a specific situation depends on objective factors as well as personal preferences. The talk “Finding the right path” uses examples to show which aspects can be relevant when deciding the form of your own involvement.