Current issues for charitable grant makers

The coronavirus pandemic has increased pressures on the charitable sector in an unprecedented fashion. Many operational charities are facing a perfect storm because their usual sources of fundraising (whether through public donations or fundraising events) have been depleted in circumstances where beneficiary needs have grown exponentially. In these times, many charities are more reliant on their charitable funders i.e. grant makers, foundations and, in some cases, donor advised funds.

That said, neither grant makers nor foundations are immune to financial concerns. Many grant-makers are restricted (as a result of their objects) in the areas which they can fund. Others are constrained in that they can only make grants from the income of the charity and not from the capital. Many are likely to be affected by a drop in investment income and declining capital. All are required in law to consider and balance the needs of current and future beneficiaries and so will need to consider carefully how best to assist in the current pandemic.

Below are some of the issues which grant makers might consider at the current time:

Collaboration

If grant makers collaborate with each other to administer particular funds (for example, by funding into a central ‘pot’ which is then distributed further to charitable beneficiaries), administrative costs and fees could be reduced.

Objects

Grant-makers with objects envisaging particular (rather than general) charitable purposes could consider widening them or amending them so as to include particular needs relating to the pandemic. For charities established as companies, this would involve obtaining the consent of the Charity Commission. However, many grant-makers are established as trusts and may have power in their trust deeds to amend the objects without needing to involve the Charity Commission. Where a charitable trust has an annual income of more than £10,000 and the trust deed contains no power to amend the objects, the trustees would need to obtain a Scheme of the Charity Commission to change the objects.

Reserves

Many grant makers will be holding funds in reserve, generally as unspent income. The Charity Commission, in its guidance on reserves, recognises that reserves are kept as a buffer against future uncertainties and that reserves can be used to meet an unexpected call on funds. It may be the case that grant-makers decide to use some reserve funds to fund charitable work during the pandemic.

Capital/Income

Grant-makers (established as trusts) which are restricted in spending capital, or which have particular funds where capital cannot be spent, could apply to release this restriction. This may be justified by the charity taking the view that the charity’s overwhelming needs might be current, not future and that the charity’s purposes would be better served by spending part or all of the permanent endowment on its purposes now. Such an approach could be justified by grant-makers or charities operating in the health sphere (for example, to commit additional funds to the development of a vaccine). A relaxation on the spending of capital could take the form of:

• adopting a total return approach. This approach allows any increase (whether by way of capital gain or income) in the value of an investment to be used as income and, therefore, optimizes the overall investment return.

  All investment returns are designated as ‘unapplied total return’. The charity then decides whether to allocate unapplied total return to the ‘trust for investment’ (i.e. to treat it as capital) or to the ‘trust for application’ (i.e. treat it as income to be spent in furthering charitable purposes). As a consequence of the Trusts (Capital and Income) Act 2013, Charity Commission consent is no longer required to adopt a total return approach, and the trustees can adopt a total return approach by resolution. In so doing, the trustees must attempt to value the original gift (which becomes the ‘trust for investment’) and the remainder of the fund is deemed unapplied total return.

  Each year, the trustees can (1) spend some or all of the unapplied total return; (2) allocate some or all of the unapplied total return to the trust for investment; or (3) carry forward the unapplied total return in which case it will continue to be invested. There is a maximum of 10% of the trust for investment which can be spent and funds spent must be recouped.

• using the statutory powers to spend capital contained in the Charities Act 2011. These powers apply (in relation to the main charity and special trusts) where the capital has been gifted to the charity and the trustees are satisfied that the relevant charitable purposes could be carried out more effectively if the capital (as well as the income) could be expended. It requires the Charity Commission’s oversight through a statutory process.
• applying for a Charity commission scheme to release the restrictions on spending capital. Generally, a scheme should only be sought where no other route is available.

Donor advised funds

Donor advised funds are, in many respects, akin to grant-makers. Many donor advised funds are holding significant sums at the moment on the basis that donors have paid into accounts but have not requested that the donor advised fund make onward grants to a particular charity or charities. Donor advised funds may wish to write to donors asking them to consider requesting that the funds held in donor accounts be used immediately for charitable purposes. By way of example, CAF announced a rapid response fund following the coronavirus outbreak. This has had to be closed to new applications by charities and community organisations because unprecedented demand has exceeded the available funds.

Untested funding mechanisms

Grant-makers should exercise caution in giving through unfamiliar or untested mechanisms. All grants will need to be made for purposes which are exclusively charitable. By way of example, care should be taken before grant makers give to crowd funding appeals, without ensuring that the ultimate use is wholly charitable, that private benefit is incidental and that arrangements are in place in relation to use of the money if fundraising targets are exceeded or cannot be achieved.

Neasa is Counsel in our Charities team.

This note provides a general summary and is for information purposes only. It does not constitute legal advice. Please let us know if you require advice in relation to any of the issues covered in this note.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.