Is establishing a charitable trust the best way to make a difference?

The recent creation of The Patagonia Purpose Trust and the Holdfast Collective has shone a new light on how charitable trusts can be used for philanthropic causes while also being tax effective. Charlotte Fleming, Senior Solicitor in our private wealth and tax team, explores how charitable trusts work and the benefits they can bring.

9th November 2022
Hands holding coins in a jar

A trust is a legal vehicle which has been viewed by many with suspicion, particularly in recent years. They are seen by some as solely a tax planning tool for the wealthy, to ensure that wealth is maintained and protected for future generations. However, the recent announcement that Patagonia founder, Yvon Chouinard, has decided to gift his company to a charitable trust demonstrates that trusts can also be used for beneficial and philanthropic causes.

The Patagonia Purpose Trust and the Holdfast Collective

Previously Patagonia had used other strategies to contribute to their chosen key charitable purpose –the fight against climate change – such as donating 1% of its sales each year and using materials which were less environmentally harmful. However these efforts were unfortunately “no longer enough.” As there were no other suitable courses of action available to the company, Patagonia created their own, making “the Earth (their) only shareholder.”

Two legal entities have been created as part of this strategy:

  1. The Patagonia Purpose Trust, which will hold the company’s voting stock. Its purpose will be to protect the company’s core values.
  2. The Holdfast Collective, which will hold non-voting stock and will operate as a non-profit organisation, with all company profits that are not reinvested in the company being utilised solely for the protection of the environment and nature.

Mr Chouinard has stated that “instead of extracting value from nature and transforming it into wealth, we are using the wealth Patagonia creates to protect the source.”

Given the level of publicity surrounding this announcement, Patagonia may perhaps also see additional benefits in terms of a boost in sales and brand awareness.

How do ‘grant-making’ charitable trusts work?

Essentially, what has been created by Patagonia is a grant-making charitable trust. It is also possible for similar charitable trusts to be established in Scotland, by means of a capital gift to trust.

In order to be recognised as a charitable trust, the trust must meet the legislative test for ‘charitable status’ and must be registered with the Office of the Scottish Charity Regulator (“OSCR”). Funds are then invested, normally with professional investment advice, and donations are made to charitable causes from either the capital of the trust fund or from income derived from capital investment. The founding trust deed will set out the eligible beneficiaries and the trustees may be restricted to supporting certain types of causes.

Many charities are reliant on such grant-making trusts to fund their activities and as such, they are an indispensable mechanism for a large number of public causes. Many of the grant-making charity trusts are deliberately discrete to allow for quiet philanthropy.

Other benefits of charitable trusts

Charitable trusts have many other benefits:

  • Tax advantages

Charitable trusts are generally exempt from Inheritance Tax, Capital Gains Tax and Income Tax. Additionally, gifts to charitable trusts do not have any tax implications for individuals.

  • Branding

When a charity is registered with OSCR, it is permitted to refer to itself as a ‘charity’ and utilise OSCR’s charity registration logo. This is advantageous as it provides the trust with legitimacy and instils public confidence.

  • Regular gifting

Charitable trusts provide a means of regular gifting to various charities, over a number of years (often decades). As such, this means that support to a chosen cause is provided over a longer period.

Next steps

If you would like to learn more about lifetime charity trusts or establishing such a trust through your Will, please do not hesitate to get in touch with our experienced team who would be delighted to guide you through the process.