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Three steps to smarter philanthropy

Tonika HirdmanDirector General
Fondation de Luxembourg

Tonika Hirdman is the director of the Fondation de Luxembourg.

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The TakeawaySuccessful partnerships between governments and private banks to promote philanthropy involve three key steps. First, transparent governance is crucial. Second, tax incentives help. Finally, bankers need to be convinced that it’s in their interest to help clients establish charitable foundations.

In recent years, Luxembourg has created an effective partnership between the government and local private banks that allows wealthy bank clients to set up charitable foundations under the umbrella of the Fondation de Luxembourg, a state-sponsored nonprofit organization. This system has measurably improved the climate for philanthropy in Luxembourg and could well serve as a model for other financial centers around the world.

As an independent foundation with public support, the Fondation de Luxembourg facilitates philanthropic engagement by providing advice and guidance to both donors and private bankers. At the same time, the Fondation offers an umbrella structure that enables donors to establish their own charitable foundations, benefitting from all the advantages of a stand-alone foundation while minimizing administrative and cost burdens. This allows donors to structure their long-term philanthropic commitments within a secure and transparent legal framework.

Many private bankers in Luxembourg have found that helping clients pursue philanthropic goals actually winds up strengthening client relationships.

Since the Fondation de Luxembourg was created in December 2008, we have facilitated a number of worthy philanthropic projects. They include Foundation Education and Integration for All, founded by a Belgian entrepreneur to finance the creation of schools in Namibia. Foundations under our umbrella also support numerous environmental and cultural programs, as well as scientific research. For example, a well-known Finnish family used our services to establish the Ehrnrooth Fellowship in neurosurgery at the Helsinki University Hospital.

It’s relevant to ask whether these projects would have been launched without the support of the Fondation de Luxembourg. One clear indicator of our impact is that after three and a half years of operation, 33 new foundations have been launched under our umbrella, representing over 70 million euros in philanthropic commitment to support a wide range of worthy causes. In contrast, only 100 charitable foundations were created in Luxembourg between 1928, when the law on foundations was promulgated, and 2008.

Here are three key lessons from Luxembourg about building effective public-private partnerships to stimulate philanthropy.

Lesson One: Governance is crucial

As a state-sponsored organization, the Fondation de Luxembourg brings institutional credibility and sound governance to the philanthropic projects under our umbrella. Each foundation maintains its own bank account and management committee and files its own annual reports. At the same time, the Fondation exercises rigorous oversight designed to ensure that the individual foundations are properly governed.

A Fondation representative sits on the management committee of each individual foundation. The Fondation analyzes all foundation programs in detail to ensure that they meet high standards for public benefit. Programs that do not comply with Luxembourg’s legal standards for charitable giving can be rejected through the veto held by the Fondation representative on the management committee. The Fondation itself is supervised by the Ministry of Justice and is governed by a supervisory board chaired by the Luxembourg finance minister.

Lesson Two: Tax incentives help

The 2008 launch of the Fondation de Luxembourg was paired with new tax measures designed to make Luxembourg one of the most advanced countries in Europe when it comes to fiscal treatment of charitable donations. Today, individuals who hold financial assets in Luxembourg can make donations amounting to 20 percent of their taxable income, twice the previous limit. Meanwhile, the inheritance tax for charitable donations stands at 4 percent, down from 6 percent in 2008.

Under Prime Minister Jean-Claude Juncker, the government has also removed bureaucratic impediments that tended to discourage philanthropic giving. For example, the government abolished the formal approval process through the Ministry of Justice for donations made via banks operating within the European Union.

The new tax incentives have certainly helped stimulate philanthropy in Luxembourg, although they are not the main reason why donors give. The Fondation also belongs to the Transnational Giving Europe network, a partnership of foundations in 15 European countries that makes cross-border donations tax deductible. As a result, we can offer tax advantages to donors who live in other European countries, based on the fiscal regime that applies in their country of residence.

Lesson Three: Sell it to the banks

Some 50 private banks operate in Luxembourg today. Historically, many of their clients have wished to engage in active philanthropy by setting up their own foundations but lacked information on how to go about it. Meanwhile, their financial advisers were not actively promoting philanthropy, due to a lack of expertise. The Fondation de Luxembourg was designed to simplify the process of creating and operating a private foundation. This framework also gave bankers the opportunity to strengthen and deepen their client relationships without having to invest heavily in new competencies.

From the very start, it was clear that success depended on close collaboration between the Fondation and the private banks, which were in direct contact with the potential donors. The Fondation launched an educational road-show program for private bankers, hosted regular philanthropy seminars, and created a dedicated training program designed to teach private bankers the basics of philanthropy and encourage them to discuss philanthropy options with their clients.

Many private bankers were initially hesitant because they thought philanthropy meant assets leaving the bank. Over time, client-relationship managers started to realize that discussing philanthropy brought them closer to their clients. After all, philanthropy relates to issues and causes that are close to clients’ hearts. It is also a very private matter that speaks to the client’s family history, personal values, and life story. Far from threatening their core business, many private bankers in Luxembourg have found that helping clients pursue philanthropic goals actually winds up strengthening client relationships.

Export potential

By sponsoring the Fondation de Luxembourg, the government acknowledged the importance of private philanthropy in achieving important social goals. The initiative identified private philanthropy as a vital complement to the Luxembourg international-aid budget, one of the Organisation for Economic Co-operation and Development’s largest, at 1 percent of GDP.

Could the Luxembourg model of philanthropy work in other countries? The answer is yes, certainly. It should be especially interesting to international financial centers where there is an opportunity to leverage a wealthy private-banking clientele. International banking centers typically offer significant expertise in cross-border legal, financial, and tax issues. They are therefore attractive to international philanthropists seeking to establish their foundations in jurisdictions where they feel secure.

We have already held discussions with both the City of London and Lichtenstein, where the Fondation de Luxembourg model is seen as a competitive differentiator. In the future, we hope to see similar public-private initiatives in countries around the world.

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