Divorce is challenging, even under the best of circumstances. When the complication of family philanthropy is added to the mix, the fallout can affect more than just the divorcing couple.1
Over the past few years a series of high-profile breakups have rocked the philanthropic world. From Jeff Bezos and MacKenzie Scott to Bill Gates and Melinda French Gates, these splits have brought to the forefront conversations about how family philanthropy is affected when high net-worth (“HNW”) couples decide to go their separate ways.
While not everyone has a philanthropic fortune in the billions, many HNW couples have significant charitable assets. Learning how to divide or manage them together is becoming a complex issue that many divorcing couples are attempting to navigate.
Marital wealth enables philanthropy
At the end of 2018, it was estimated that approximately 802,000 Canadian households each controlled more than $1 million in financial wealth, not including equity in real estate or private business. This HNW group, making up only 7% of Canadian households, held $3.3 trillion in wealth and was responsible for an estimated 60% of annual charitable contributions. Despite the economic effects of the COVID-19 pandemic, this HNW segment is projected to expand to 1.3 million households and a wealth of $5.9 trillion over the next ten years.2
For many couples, marriage is an opportunity to accumulate substantial wealth, enabling them to use these funds to support the charities and causes of their choosing and access valuable tax and financial planning strategies. This giving can take various forms during one’s lifetime. Philanthropists can establish donor-advised funds, create private foundations, and make donation pledges. It’s important to note that assets contributed to a foundation or donor-advised fund are not considered the personal assets of the couple. However, issues may still arise if both spouses continue to have control over the direction and management of the charitable assets (such as in the case of a private foundation). A private foundation is a separate legal entity and the assets within this structure are not owned by an individual or couple.
To navigate this emotionally fraught terrain, divorcing couples must decide whether they can continue working together without jeopardizing the charities they support. If not, they need to consider the best options to separate these charitable entities.
How should philanthropic assets be divided?
“Divorce is never easy for any family,” says Lydia Potocnik, Head of Estate Planning & Philanthropic Advisory Services with BMO Private Wealth. “It can become particularly complex and challenging when a family has a formal process in place for their philanthropy.” Potocnik cites Bill Gates and Melinda French Gates as one such example, stating that, “while they have found a way to continue to work together in growing the good in the world with their foundation remaining intact, not all couples wish to continue working together when it comes to philanthropy. This means that current structures, family values and future giving must be reviewed looking at different options so that each spouse can find a way to move forward with their giving strategy.”
Generally, the arrangement of these charitable endeavours involves either continuing to share or splitting the asset. The division of a divorcing couple’s philanthropic assets should be done with the utmost care. Remember, different charitable entity types will have distinct rules, regulations and consequences when altered or divided.
Continuing to work together
Like Bill Gates and Melinda French Gates (who remain co-chairs of their foundation), a couple may decide to continue on in their respective roles, whether serving on a board of directors or as a trustee within a trust structure. While this may require the least immediate action, a couple choosing this path should ensure that they can resolve conflicts and work together in their foundation’s best interest.
Having a contingency plan in place if the relationship ceases to be amicable can be a valuable planning tool. Communication among family members at the time that the foundation is established is recommended. Any policies addressing what will happen to the foundation upon separation or divorce will ease the emotional and financial decisions that must be made, setting expectations up front with those members who play an active role in managing the foundation.
In Canada, when a private foundation is created the issue of who serves on the board as a director has to be written in the bylaws of the foundation. This is the best time to address (in the form of a written policy) what happens to directors who serve on the board together but later may separate or divorce.
Exploring a clean break
While assets already donated to charitable organizations are not part of the marital estate, a divorcing couple can still create a plan for how they intend to work together in making decisions on granting funds to the charitable sector, including:
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Donor-advised funds
A donor-advised fund can often be split into two separate funds, with each spouse moving forward with their own giving objectives. Another option is for divorcing spouses to get permission to terminate the fund through a grant recommendation and distribute the fund’s balance to another registered charity or charities.
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Private foundations
Terminating a private foundation is fairly straightforward. While two new foundations could be created, with the endowment being spent down over a period of time, a private foundation must follow specific rules and complete certain filings to avoid adverse or unintended tax consequences. Consultation with a charity law expert is recommended with this option.
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Planned gifts or pledges
For gifts planned during the marriage, the couple should address who will fulfill the financial commitment and which assets they’ll use to do so. In some cases, a gift or pledge agreement might name one or both partners as responsible for the gift, but it’s often possible to change the arrangement with the charity.
Establishing a new philanthropic identity
While the division of philanthropic assets can be painful, it offers an excellent opportunity to reflect on your philanthropic identity and goals moving forward. Are you still passionate about the causes you shared as a married couple? Are there new causes you could support that would better align with your personal preferences and values? Take this time to consider how you’d like to shape your philanthropic future.
Plan for all possibilities
While many HNW couples protect their personal wealth with prenuptial agreements, planning for the division of philanthropic assets is often overlooked. But contingency planning can be a valuable tool, creating a map to guide couples when tensions and emotions run high.
Have discussions early on
While it can be challenging to talk about divorce when it feels so unlikely, it is essential to plan for contingencies that can and do occur. “While nobody can anticipate the end of a marriage,” Potocnik says, “it is a good idea to speak as a couple about what happens to the family’s overall giving strategy and goals should you separate or divorce.” A forward-thinking foundation that prepares for the worst outcomes can safeguard itself by discussing terms and conditions that address that possibility, laying the groundwork for documents that can create support for these plans. Being prepared is always the best approach.
Put it in writing
“While not everyone takes a formal approach to their philanthropy by creating a private foundation or donor-advised fund,” says Potocnik, “for those who do, it would be wise to put a policy in place regarding who continues to play an active role with these vehicles when there is a divorce. Potocnik reminds us that “the divorce doesn’t need to be with the founding couple of the foundation or donor-advised fund. It could be that an adult child or grandchild is separating and their ex-partner is also involved with decisions around family philanthropy.” It is in instances like these that “having a written policy in place as to who remains involved as a board member or trustee is important,” says Potocnik, “as it will ensure that the family can continue to fulfill their mission to support various charities and causes that are important to them.”
These policies can make board decisions less personal – and less personal can go far when separating assets and responsibilities during a divorce. Policies can include what happens when a divorce occurs: Is there a spouse who will step down as a board member or trustee? Does one spouse hold greater decision-making authority than the other? Taking the time to craft a considered and well-written policy on succession and board eligibility will help you avoid making rushed decisions based on a pressing family situation. Some boards have unspoken agreements, but these discussions must be written down – even for concepts that seem simple or assumed.
Talk to a professional
While planning for all types of scenarios can be helpful when divorce looms, couples involved in family philanthropy would be wise to consult with legal and financial advisors who have specific experience in this area. Throughout the divorce process, a couple should speak with someone knowledgeable about the relationship between philanthropic gifts and divorce.
We can help
Dividing a couple’s philanthropic assets can be emotional and enlisting neutral parties can help keep tensions from running high. Consult with specialists who understand the areas of tax, estate planning and charity law to ensure that your particular situation is fully understood before taking steps to divide your charitable entities upon the dissolution of marriage.
As painful and difficult as separation and divorce can be, proper planning and professional advice can mitigate the impact that this transition can have on a family’s philanthropic assets and help redefine each spouse’s goals for continued charitable giving.
For more information, please speak with your BMO financial professional.
1While the article focuses on couples that are married and divorced or separated, those couples that are living common law and separate should give similar planning considerations to their philanthropy and may wish to consult with an expert in the area of family and charity law.
2 https://carleton.ca/panl/2021/fundraising-opportunities-with-high-net-worth-canadians-their-trillions/
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