As the world is increasingly interconnected and interdependent, remote occurrences have greater influence and impact on domestic and international social and environmental challenges. Events occurring thousands of kilometres away can have a ‘butterfly effect’, where a small change has far-reaching consequences. For instance, the COVID-19 pandemic pummelled the world’s interconnected supply chains, disrupting business operations globally due to shortages of supplies and doubling lead times. The pandemic also exacerbated inequalities in wealth, impacting access to quality education, restricting work availability, and worsening mental health. More recently, the Russian invasion of Ukraine and the ensuing war has reduced exports of grains and oilseeds, while millions of tons of Ukrainian grain are blocked in Black Sea ports, driving up the cost of food, and intensifying a broader food crisis.
Changing Attitudes About Wealth
Concern over stark disparities in wealth, coupled with whistleblowing exposés such as Panama and Pandora Papers, fuel demands for transparency, encouraging political ambitions to grant public access to beneficial ownership registers. Simultaneously, we witness the birth and growth of responsible wealth movements, such as the Patriotic Millionaires, a network of wealth owners seeking to reform the political economy to generate greater economic and political equality, and the Good Ancestor Movement formed to advise wealth owners who are committed to responsible wealth stewardship and radical redistribution of wealth.
Trending negative attitudes towards wealth, alongside political, legal, and regulatory landscapes, are impacting wealth-owning families and their philanthropy across national borders. Increasingly, wealth-owning families are in the social media spotlight, with increasing reputation risk as indiscretions are easily caught on film and broadcasted. Philanthropy alone is not enough to uphold a reputation, particularly where the family wealth is associated with historic actual or perceived wrongs that don’t align with current family values.
Changing Attitudes In HNW Families And The Judiciary Impacting Philanthropy
Society is moving from a narrow prioritisation of maximising financial return, towards a wider definition of benefit. This is reflected in the actions of certain wealth-owning families and the judiciary and has an impact on charities. For instance, in a recent Jersey Court decision in Re May Trust, a trustee made a Public Trustee v. Cooper application for a blessing of its decision to make a distribution to a family member beneficiary, the primary purpose of which was to benefit a charity.
The case dealt with a Jersey law discretionary trust with beneficiaries comprised of family members and a UK-registered charity. The family agreed that the primary beneficiary would request about one-half of the trust fund (£75M), which he would, in turn, distribute to the charity beneficiary. While the beneficiary would claim gift aid on a part of the donation, the remainder would be subject to a 25 per cent charge on the total amount, leaving the charity with 75 per cent of the distribution. As a beneficiary, the charity could have received the distribution directly from the trust without triggering a tax charge. Yet, the proposed approach was deliberate. The decision was based on the family members’ agreed values, including a moral obligation to pay taxes to aid the government in providing a broader social benefit. The trustees applied to the Court for its blessing to make the distribution as proposed and the Court agreed. In the judgment, the Court noted that prior case law focused too much on ‘financial benefit’ and acknowledged that society has moved on from that position.
Another example of a change in attitude impacting philanthropy, appears in a landmark High Court judgment, Butler-Sloss. In that case, trustees of charitable trusts connected with the Sainsbury family also sought the Court’s blessing through a Public Trustee v. Cooper application to permit them to adopt an investment policy that excluded any investments inconsistent with the Paris Climate Agreement. This request was made knowing that adopting such an investment strategy would exclude over half of the publicly traded companies and about 20 per cent of the total investible universe, possibly to the detriment of financial performance.
It is important to note that the trustees selected the pursuit of environmental protection and relief of poverty as the charitable objects and wished to reduce any direct conflict between these purposes and the trusts’ investments. The High Court granted its blessing, holding that trustees’ powers of investment must be exercised to further a charity’s purposes. While this might ordinarily mean maximising financial returns, the Court agreed that trustees maintain discretion to exclude investments they believed conflicted with their charitable purposes, provided they do not act for ‘purely moral’ reasons, and further provided they consider the issues responsibly and diligently.
Considered alone, Butler-Sloss indicates judicial tolerance of fiduciary independence for investment responsibilities and a deviation from prioritising profit maximisation in the context of a charitable trust. However, taken together with the decision in Re May, which expands the definition of ‘benefit’ to a class of beneficiaries as including their values, might a court grant similar latitude to a trustee of a discretionary family trust, where living members of the class of beneficiaries with agreed values wish for the trustees of their trust to adopt a similar restricted investment strategy?
Changing Attitudes in Governments and Multilateral Organisations
In a 2020 report on Taxation and Philanthropy, the Organisation for Economic Co-operation and Development (OECD) made several recommendations to nation-states to adapt policies regarding philanthropy. Given the rise in global poverty issues, climate change and health crises, one recommendation was that nation-states give equal tax incentives to domestic and cross-border giving, acknowledging that this would encourage collaboration that may improve positive impact.
Additionally, the OECD 2020 report recommends that countries align tax incentives with policy objectives and limit eligibility criteria so that philanthropic support is consistent with public policy. This suggestion may be in response to criticism that contemporary philanthropy is undemocratic and thus may work against public policy, as donors making sizable gifts possess disproportionate levels of influence in determining where funds are allocated.
Also, notably the same OECD report included a recommendation to increase transparency by improving data collection of philanthropic efforts, granting public accessibility to reports, and introducing public registers. While there are legitimate arguments for greater transparency in how philanthropic capital is allocated by enhancing efficiencies and minimising redundancies, unfettered transparency may not always be appropriate or wise.
Fuelled partly by public scandals like the Paradise Papers and Pandora Papers, transparency pressure on wealth owners is growing. The United Kingdom continues to push for public beneficial ownership registers despite the recent Grand Chamber of the Court of Justice of the European Union decision in November 2022, which held that making beneficial ownership registers public is in breach of the European Convention of Human Rights.
Further, the Common Reporting Standard (CRS) initiated by the OECD group of countries, gave rise to a similar risk of human rights abuse for politically ‘sensitive’ charitable activities in countries with oppressive regimes. Following the US Foreign Account Tax Compliance Act (FATCA), the CRS was intended to tackle tax evasion through a regime that provided the automatic exchange of information between ‘competent authority’ in states by requiring qualified ‘Financial Institutions’ to report ‘account holders’ information with the national revenue authority for ongoing exchange with the competent authority in the jurisdiction of tax residence of the ‘account holder’. However, unlike FATCA, which provided an exemption for charities, a decision was taken by the OECD on the introduction of CRS not to provide the same carveout.
Consequently, the regime caught certain charities such as endowed or grant-making charities, if assets are managed by a financial institution (e.g., under a discretionary investment management mandate) and the gross income is largely attributable to that investment activity. Charities caught under the regime are required to conduct due diligence on grant recipients and could have reporting requirements, including gathering non-resident grantee personal details, which would be shared.
Sector representatives expressed concern that the regime significantly burdened affected charities by requiring them to conduct due diligence on grantees and could cause human rights abuses by requiring them to report on grant payments to non-resident grantees. Consider the potentially harmful consequences of a charity funding civil society groups working with women’s rights, LGTBQ rights, freedom of speech or religion in countries with poor track records of respecting fundamental rights and freedoms and where beneficiaries can be subjected to state-sanctioned persecution. Even environmental activists fighting against the destruction of the rain forest are targeted and often killed.
Acknowledging the risks, jurisdictions including the United Kingdom and Bermuda implemented a process to restrict information shared where there were concerns of abuse of rights and safety. More recently, the OECD published amendments to the CRS regime, which effectively exempts ‘genuine’ non-profit entities from the due diligence and reporting requirements and may help to address some of these risks. This amendment alleviates the requirement to apply due diligence procedures in respect of all grantees and report on payments to non-resident beneficiaries. Yet, in response to government concerns that a blanket carve-out could prompt the circumvention of reporting obligations by improperly claiming non-profit status, the CRS has adopted an optional new process for qualified non-profits to be treated as non-reporting financial institutions, subject to adequate verification that the entity is a genuine non-profit.
Growing attention and concern over social and environmental issues can help affect change, especially if it encourages wealth-owning families to embrace and implement principles of responsible wealth stewardship. Global trends increasingly impact private wealth and philanthropy, requiring a wider planning lens and additional considerations. Philanthropy can do better by being more collaborative with other philanthropists and the public sector, increasing efficiencies, sharing knowledge, and aligning with public policy. While appropriate levels of transparency may be beneficial, unfettered access to philanthropic activities, donors and beneficiaries may also be harmful. Given that technology offers unprecedented access to real-time events and information, that social and environmental challenges do not start and end at our borders, and that not all nation-states operate democratically, with respect for rights and freedoms that many of us take for granted, prudency calls for thoughtfulness, responsibility, and discernment.
3 Re May Trust  WTLR 637
6 GJEU Joined Cases C-37/20 Luxembourg Business Registers and C-601/20 Sovim, 22 November 2022.
Gina M. Pereira
Gina M. Pereira TEP is a Managing Director with experience in law, wealth management, and philanthropy. Gina is an advocate for the responsible stewardship of wealth and frequently writes and speaks on the subject. In 2010, alongside her law practice, she founded and ran Dana Philanthropy until joining Meritus as Managing Director of Client & Fiduciary Stewardship in 2021.