Breaking up is hard to do: the impact of a family split on shared passions

Significant potential for conflict arises when a couple are both involved with a charity – especially one such as a family foundation that they have set up together and where, for example, both individuals are trustees of that charity.  The same goes where other members of the family are engaged in the charity such as children or extended family members.

Any assets donated to charity before separation will be protected by the charity’s ‘shell’, and will no longer form part of the couple’s estate to be divided and shared on divorce. Rightly, once donated to charity, any such wealth can only be used to further the charity’s purposes. In that way, the assets are protected, but they are also unavailable for distribution or sharing between the separating couple.

A split can nonetheless  hamper a charity’s ability to operate, and can cause significant issues for the other ‘neutral’ (or even ‘non-neutral’) trustees on the board. A court is not only unable to divide charity assets, it is also unable to divide a charity itself. This is because the court’s distributive powers only apply as between the spouses and as regards assets they have or have an interest in. Because settlors and trustees don’t own charities, even if the spouses do have such roles, neither the charity’s money nor the charity itself is up for grabs or carving up.

That said, provided that it furthers the charity’s aims, in working together to reach a settlement  a couple can decide to split the charity, with one spouse using ‘their’ half to establish a new philanthropic venture of their own. Such a route needs careful planning and  the governance issues can be fraught. Trustees owe duties to the charity, and assets can only be given away if it is in the charity’s best interests to do so. The long-running Cooper-Hohn divorce demonstrated just how complex these governance issues can become, where private life begins to negatively impact the running of a charitable (or other) operation. Both legalities and realities need to be considered. The Bill & Melinda Gates Foundation itself announced a two year ’trial period’, to see if Bill Gates and Melinda French Gates can continue to work together as co-chairs and trustees of the charity following their divorce. If they cannot, the understanding is that Melinda will resign but will be supported in her philanthropy from Bill’s own personal resources.

While they are difficult conversations to have, it is always worthwhile openly discussing potential worst-case outcomes at the outset of establishing a charity or a family foundation. Such early steps to, say, take potential divorce or any separation of the settlors/trustees if they are in a personal relationship into account when drafting the constitutional powers and roles of individuals can provide peace of mind for the family, for the future charity itself and also for its stakeholders.

But what about other shared passions, beyond philanthropy?

Collections of various kinds, such as an art collection, have always formed part of the portfolios of wealthy families, with Credit Suisse estimating that almost 60% of UHWNIs allocate between 2–10% of their total wealth to collectibles.

However much a personal passion, art is also a asset and assets are divided on divorce. We are seeing this very situation play out publicly now with the sale of the Macklowe art collection – estimated to be worth $600 million.

Taking such a collection as an example, when it comes to dealing with it in a divorce, the value, use and source are relevant. To some extent whether the passion for the artwork is shared is an understandable influence on how it should be divided.  Creative solutions abound particularly where couples are working together constructively to advance a sensible separation.

Where division can’t be agreed and parties opt to fight it out rather than sort it out then a division is likely and a sale by default is possible, particularly where there is disagreement over values or ultimate ownership.

Many private collectors who wish their collections to remain intact and who want to leave behind a legacy which articulates their values and passion, choose to make a bequest to a museum or other charitable entity. Others will loan private collections to cultural institutions during their lifetime, often as part of a strategy which aligns a passion for a particular item or area with philanthropy.

Bequeathing a collection in advance can be one solution to ensure it stays together in the event of a divorce as, since the collection no longer forms part of the couple’s estate, it cannot be separated. Clearly, however, neither can its value be recouped and used to provide for any agreed settlement. Bequeathing  a collection as a tactical strategy to rid oneself of assets in a divorce is a highly dubious and unwise strategy. 

Even legitimate bequests, though, can bring with them the potential for disputes.

For example, a museum in Milan is facing action over 600 works which it received through a legacy bequest, the validity of which has been challenged by the estate’s heir.

These types of situations can be further compounded where a family estate is involved – for example where any form of bequest or giving may conflict with the terms of an existing will. If a testator intends to leave a collection to charity in a will, but doesn’t leave sufficient cover for a surviving spouse or dependent then there may be grounds to challenge the will. Settling collections into a trust with a corresponding trust deed specifying ownership and, in some cases, what steps are to be taken in the event of familial conflict, can help provide surety.