When a foundation makes sense

By Anna Vayanos

A charitable foundation is a structure through which the donor conducts their giving or corporate social investment (CSI) activities to help ensure focused and sustained giving.  It usually takes the form of a trust or a non-profit company (NPC), and involves the donation of capital to the foundation (either at the start or over time) and the investment of this capital or endowment. Proper investment of the capital should produce income to cover part or all of the distributions to beneficiaries or programme costs. In this way, the foundation becomes financially sustainable and able to give independently and into the future.

Why set up a foundation?

Corporate donors

  • Sustainable CSI

A financially sustainable foundation can continue to give in tough financial times, as amounts available for CSI are no longer dependent on the company’s financial position in any particular year, provided that the foundation has a reasonable endowment.

  • Easier quantification of CSI

It is becoming increasingly important to track CSI spend for reporting against the B-BBEE scorecard, for example. CSI efforts and spend can be tracked more easily by channelling all relevant activities through a foundation. Similarly, it then becomes easier to measure the impact of your company’s CSI.

  • Protection of CSI funds

The foundation’s assets will be separate from those of the company’s and thus protected from any of the company’s financial risk.

  • Fundraising

Directing money generated from fundraising campaigns directly into a separate foundation provides external donors with peace of mind, knowing that their contributions are paid to an entity separate from the company, for a clearly defined purpose.

  • Branding and legacy

Managing CSI through a foundation creates a branding opportunity for the business, using the name of the foundation as a related brand to highlight CSI efforts. A foundation separate from the company can also continue to exist even if the company ceases activities in the country or shuts down. The foundation and its brand can then remain as a legacy. An example of this is the well-established Zenex Foundation in South Africa.

  • Significant tax saving

A company could benefit from a number of tax advantages whether it gives directly to beneficiaries or through a foundation. However, the added advantage of making use of a foundation that enjoys the necessary approvals is that there should be no income tax or capital gains tax payable on the investment of the funds within the foundation. Funds that would have been paid towards tax can instead be used towards the objectives of the foundation.

  • Input from independent trustees

Independent trustees can be appointed to the board of a foundation – and should be carefully selected for their relevant expertise and experience in a business’s CSI focus areas. They can help guide a company’s CSI to ensure the effectiveness of programmes and their involvement can add credibility in the eyes of beneficiary communities.

Families and individuals

  • Determining your vision and committing to giving

The exercise of setting up a foundation involves the donor considering their values, passions and the areas in which they would like to make a difference. Once there is clarity on these, the foundation should be carefully structured to ensure commitment to the achievement of the donor’s vision for the longer term.

  • Sustainable giving

With proper funded and investment, a foundation can ensure that the donor’s giving is financially sustainable and not reliant on the availability of excess personal income. Income earned within the foundation can be distributed to beneficiaries long after any initial donations have been made to the foundation. Not only does this allow the donor to plan their giving but it also allows for longer-term commitments to beneficiaries, which is immensely beneficial to them and their programmes.

  • Involvement of the next generation

By including the donor’s children as trustees, or in the everyday activities of the foundation, an opportunity is created to keep their family connected and involved. This can also help to ensure that the donor’s vision is understood during their lifetime, which will assist with its continued achievement after their death.

  • Leaving a legacy

Many people would like to leave a legacy after their death by using funds made during their lifetime, to continue to make a difference long after they have passed away. Setting up a foundation either while still alive or in terms of the donor’s will can enable them to do this.

  • Significant tax savings, including estate duty savings

The donor could benefit from a number of tax advantages whether they give directly to beneficiaries or through a foundation. However, the added advantage of making use of a foundation that enjoys the necessary approvals is that there should be no income tax or capital gains tax payable on the investment of the funds within the foundation. Funds that would have been paid towards tax can instead be used towards the objectives of the foundation.

When not to establish a foundation

A foundation requires longer-term commitment and sufficient funds to make it practically and financially viable. If a company chooses to spend CSI funding, or an individual chooses to spend excess personal income, within a short time period from when it becomes available, then a foundation would not be appropriate. Giving directly to organisations or beneficiaries would make more sense.

Furthermore, if the amounts available for giving or CSI activities are quite low, the use of a foundation might not be financially viable.

Should a foundation continue for a limited period or into perpetuity?

This is a matter of choice. It is usually not viable to set up a foundation for too short a time period but some donors do prefer to set a time limit on the lifespan of their foundation. For an individual donor, this could be because they would rather see, and give input on, the impact of their philanthropy during their lifetime. Others specifically want their legacy of giving to continue after death. A foundation can also be structured in such a way so as to terminate once it has fulfilled the particular purpose for which it was established.

How much capital is enough?

A foundation need not be fully funded upfront; its capital base can be built up over time. However, unless the intention is to have at least R1 million of capital ultimately invested within the foundation for the long term, it is probably not financially viable to set up a foundation due to the ongoing costs involved.

Where to get advice and assistance

Various professionals provide specialised advice, for example, lawyers, philanthropy consultants and the philanthropy service divisions of private banks. It is important that the foundation is properly structured from the outset to fulfil the donor’s vision while meeting the tax and other regulatory requirements.

Start-up costs

Initial set-up costs of a foundation are between R10 000 and R20 000. This includes the registration of a trust or NPC, as well as the various applications for tax exemption (and possible registration as a Non-Profit Organisation, which this is voluntary and more appropriate for foundations that will be fundraising from third parties).

Running costs

Annual running costs include, as a minimum, fees for:

  • the preparation of annual financial statements
  • an annual audit or review
  • preparation and submission of an income tax return.

Depending on the size and activities of the foundation, there could also be staff and other overhead costs.

There are additional ongoing requirements that need to be complied with in terms of tax approvals and registrations obtained. These are not cost prohibitive and can be outsourced.