Divorce and Philanthropy: The Marriage Ends, The Giving Continues
By Marguerite Weese and Alexa Broida, Wilmington Trust
Divorce is fraught with all levels of change for the parties involved, their families, and in some cases, the charities that have meant so much to them during happier times.
Donors’ decisions to make charitable contributions are not only dictated by their particular financial standing and ability to give. We have discovered, through years of helping clients enact these financial decisions, they are also deeply personal.
Typically, the larger the contribution, the more significant it is to a donor’s life. During and following a divorce, there’s a lot for them to consider.
Donors very often find themselves mulling not just the immediate issues important to them, but also how they affect their personal legacies and their engagement with their families and with those external entities – schools, community groups, houses of worship, etc. — receiving donations.
In some cases, a donor may be motivated, financially and emotionally, by a divorce to expand their charitable efforts, such as MacKenzie Scott, who has been methodically making significant donations using the Amazon shares she received in her divorce.
So, it shouldn’t be a surprise that a divorce may have varying consequences on a family’s philanthropic plans and ultimate goals.
Setting the Stage
A charitable contribution is defined as a gift of cash or property to a nonprofit when nothing of value is received in return.
While that may seem simple on its face, complexities can arise on everything from the assets being given, timing of gifts, or the vehicles being used. This article considers four categories of common charitable structures, describing the structure itself, identifying issues that may arise during a divorce settlement, and suggesting potential strategies or next steps.
Like all financial decisions surrounding a divorce, your role in these important decisions will be critical. Seeing through the emotions of the moment can be enormously beneficial for all parties in the divorce — and for the recipients of the parties’ donations.
1) A Donor-Advised Fund (DAF)
A DAF is a separately identifiable fund or account, which is maintained and operated by a public charity or sponsoring organization, as defined by Internal Revenue Code section 501(c)(3).
The fund or account is set up when a donor makes a charitable contribution. Because the gift into the DAF is irrevocable, the donor may receive a tax deduction at the time of the gift, rather than the date of distribution to the ultimate charitable recipient.
While the sponsoring organization has legal control over the completed gift, the donor, or the donor’s representative, retains privileges with respect to the distribution of funds and sometimes the investment of the assets in the account. It’s important to note that because a DAF is not an individual’s legal asset, the main question following a divorce is: Who plays the role of the fund advisor for charitable distributions out of the fund and, possibly, who will control things like investment-making decisions and fund management?
DAFs’ flexibility can be an advantage in a divorce settlement, as they can be relatively simple to divide into two or more separate funds. Additionally, new DAFs are relatively inexpensive and quick to set up using a variety of assets.
2) Private Non-Operating Foundation (Private foundation)
A private foundation is an independent legal entity established by a donor for charitable purposes and funded from a single donor, family, or corporation.
At its formation, the donor establishes the foundation’s charitable purpose, creates a board of directors, and drafts by-laws as appropriate. The gift of assets into a private foundation (like a DAF) is irrevocable, so the donor may receive a charitable tax deduction in the year of the gift, rather than when the funds are ultimately distributed out of the foundation. Unlike a DAF where funds can remain indefinitely, private foundations are mandated to make an annual minimum distribution of 5% of their assets.
The board of a foundation — responsible for matters like investment policy, operational procedures, and grantmaking strategy — may include family members. In fact, the foundation may function as THE primary point of familial connection, particularly if there are multiple branches or generations involved. Therefore, during and following a divorce settlement, it’s important to consider not just the legal implications of continuing to run a foundation, but also the status of all those relationships. A contentious divorce might make these decisions harder to reach.
In addition to the dynamics among the donors and within the board, the private foundation may have developed close relationships with certain nonprofit grantees, and a soon-to-be ex-spouse breaking ties with the foundation could negatively impact those relationships.
Potential next steps may include:
- Making a donation from the private foundation to establish a DAF for the one spouse;
- Dividing a private foundation into two;
- Spending down or dissolving the foundation; or
- Just having one spouse step away.
With each strategy, it is important to consider the costs and complexities associated with a decision on how to proceed.
In the case of Bill Gates and Melinda French Gates, their 2021 divorce addressed the Bill and Melinda Gates Foundation, which is structured as an irrevocable charitable trust with a significant endowment. It was not a marital asset but they were co-chairs, two of the three co-trustees and the Foundation was a focal point of the couples’ charitable work. The divorce settlement agreement stipulated that they would continue their working relationship at the Foundation, and if they chose to change course, Melinda would step down and Bill would give her an additional $12.5 billion. In 2024, after the Gates’ took time to address the operational implications, including expanding the board of trustees, and renaming the Foundation, Melinda stepped down. As per the divorce settlement agreement, Bill gave her $12.5 billion personally (not from The Gates Foundation), with the intention that she will use it to further her personal philanthropic goals.
3) Split Interest Charitable Vehicles
“Split interest” is a broad term encompassing charitable vehicles and structures that provide a dual benefit to a charitable and noncharitable (a donor or another designated individual) beneficiary.
Some common structures are:
- Charitable lead trusts (CLT), which make payments to a charitable recipient for a fixed term and then distribute to a noncharitable beneficiary.
- Charitable remainder trusts (CRT), which operate in the reverse by making payments to a noncharitable beneficiary for a fixed term, at which point the remainder is distributed to a charity.
Each of these trusts has many possible variations, and the specific trust document in question must be reviewed to assess its unique characteristics.
It is critical to identify the key individuals involved (the trust creator, trustee, and beneficiaries) to determine who, if anyone, is receiving a tax benefit; who, if anyone, is receiving an income stream; and who has control over any revocable or undetermined charitable beneficiary.
Strategies during a divorce include keeping the status quo, if only one spouse is involved; splitting the trust in two; or terminating early. The unique makeup of the individual trust will determine the legal, tax, and financial implications of each option.
4) Planned Gifts or Pledges
A pledge is a legal agreement between a donor and a nonprofit organization in which the donor promises to make a gift in the future and multiyear pledges are a commitment to distribute funds incrementally.
It’s important to recognize that, at the time of divorce, a multiyear pledge may already be partially fulfilled. Because of the nature of a pledge, the assets to be used to fulfill the pledge are still under the control of the donor. Therefore, unless the client lists the pledge as a liability, it may get overlooked.
It’s important to ask whether a pledge exists and whether it was made by an individual or by the couple jointly.
Remember: Pledges from individuals or couples may not be fulfilled from that couples’ DAF or private foundation, and tax deductions are only permitted in the year the gift is completed. Still, keep in mind that any charitable contributions, including pledge fulfillments, that are part of a divorce settlement may become ineligible for tax benefits because they would be satisfying a legal obligation. So, determining a pledge’s responsibility should be handled carefully.
One Last Consideration
Make sure you specifically ask your clients to disclose all charitable assets, planned contributions, and other charitable or social impact structures such as program-related investments and social enterprises early in the divorce process.
Obtain and review any governing documents of charitable vehicles or pledge agreements to confirm who has control over what and what obligations remain.
Lastly, don’t forget to ask your client about their non-monetary goals for these charitable structures, since the impact of philanthropy is often deeply personal. When possible, encourage your client to notify any affected charities as soon as possible to avoid unforeseen complications.
Providing this level of counsel for your clients will assure that their philanthropic wishes continue to be met despite the end of a marriage.
This article is for general information only and is not intended as an offer or solicitation for the sale of any financial product, service, or other professional advice. Wilmington Trust does not provide tax, legal or accounting advice. Professional advice always requires consideration of individual circumstances. Wilmington Trust is a registered service mark used in connection with various fiduciary and nonfiduciary services offered by certain subsidiaries of M&T Bank Corporation.
© 2024 M&T Bank and its affiliates and subsidiaries. All Rights Reserved.
Marguerite C. Weese, Chief Operating Officer and Alexa Broida, Family Legacy Philanthropic Advisor, work together as part of the Wilmington Trust Emerald Family Office & Advisory team. They help individuals and families identify their philanthropic goals and develop an impactful, values-based strategic giving program. Together, they facilitate workshops that utilize philanthropy to help educate and engage multigeneration. The Emerald team guides clients in the creation, implementation, and execution of complex financial, estate and succession plans. www.wilmingtontrust.com/divorce
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