A guide to giving – easy steps to philanthropy

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It is often said that Australia does not have a big philanthropic culture – particularly when compared to countries such as the United States – but the truth is there are more Australians becoming involved in charitable and volunteer work every year.

Furthermore global studies, such as the 2018 CAF World Giving Index ranks Australia highly when it comes to charitable giving, with women in particular playing an increasingly significant role.

Millennials are also driving philanthropic trends, with younger generations promoting their own charitable giving on social media through status updates and other feeds, and motivating others to give and contribute to a better community.  More generally, online platforms and crowd-funding initiatives are playing an increasingly important role in Australian philanthropy.

For the most part, Australian philanthropy does still tend to focus on ad-hoc charitable giving and volunteer work.  However, for individuals looking to make a lasting, significant and ongoing impact, a structured approach – such as establishing a charitable trust – is worth considering.  A common misconception regarding charitable trusts is that they are only for the very wealthy.  However, such trusts can be established in a number of ways, to suit a variety of financial and personal circumstances and philanthropic objectives.

There are three main options to individuals, all of which provide a structure that allows funds to be invested and managed, with income generated available for distribution to charitable entities and programs.  These structures include: Public Ancillary Funds; Private Ancillary Funds; and Testamentary Trusts.  Each has different requirements, approaches and benefits, however all provide a structure that facilitates the establishment of a long-term, sustainable philanthropic legacy.

To assist individuals decide which structure is most suitable in line with their financial position and charitable objectives, an important first question to consider is whether to establish a charitable fund during their lifetime, an inter vivos trust, or whether to include the fund in their Will, to be established upon their passing.

Should an individual wish to establish a foundation  during their lifetime, the next questions to consider are how much the individual can initially donate to establish the fund and how involved they are seeking to be in the fund’s investment and granting strategies.

Public Ancillary Fund

A Public Ancillary Fund (PuAF) is a fund usually managed by a trustee company, which allows individuals with smaller amounts available for an initial donation, to establish a charitable sub-fund during their lifetime.  The sub-fund established can accept future donations from the individual; members of the individual’s family; and the broader community.  All donations received into the sub-fund are tax deductible.

Furthermore, the sub-fund can be named, which effectively establishes a legacy that can transition across many generations, into the future.  Those who set up the sub-fund can be involved in decision-making regarding granting, assisting to direct income to causes about which they feel passionate.

A key benefit of this approach is that the minimum initial donation required to establish a sub-fund is $20,000, which is lower than other structures, and the tax deduction from the initial donation can be spread over five years.   Charitable trusts are designed to support growth capital over time, whilst generating sustainable income for granting distributions.  In addition, all the investment, compliance and administrative requirements are undertaken by the trustee.

Private Ancillary Funds

A Private Ancillary Fund (PAF) is established by an individual via a Deed but is only able to receive future, additional donations from the original donors.  As a standalone trust, the fund’s financial statements must be annually audited and an appropriate investment strategy must be implemented and regularly reviewed.

The minimum initial donation required to establish a PAF is around $200,000.  This initial donation provides sufficient capital base to seek to generate required income, in line with annual minimum distribution requirements (at least five percent each year of the fund’s net value, or $11,000, whichever is greater must be distributed), as well as meeting administration, reporting and compliance costs.

Testamentary Trusts

A testamentary trust is established via a clause in a Will upon the passing of the individual.  As the trust is established upon passing, the funds donated into the trust are not tax deductible.  The trust is then administered by the appointed trustee into perpetuity.  Usually, initial capital of at least $50,000 is required to ensure the trust is viable.

These structures all represent the more traditional means of establishing a lasting legacy however a key difference with regard to testamentary trusts is there are fewer limitations regarding the charitable entities to which the trust may grant funds.  This can provide the individual with broader options for granting.

Importantly for each charitable structure outlined, all income and capital growth have tax free status, as they are endorsed by the ATO as tax exempt.

Individuals are also able to grant directly to a broad range of charitable entities and programs and in many cases, receive an associated tax deduction.  This can be particularly useful for those on a high income seeking a more significant diversity of granting options.  Of note is the requirement for property or other chattels donated to be valued by the Australian Tax Office at greater than $5000.  Individuals can claim any applicable tax deductions in the income year in which the donation is made, or spread the deduction over the four income years immediately following the donation.

Regardless of the structure established, all provide the benefit of enabling people to become involved in the causes that are most important to them and their families, and often bring family members, across multiple generations together to consider and discuss their philanthropic values and legacy.

Ultimately, philanthropy is a highly personal and often emotional journey and can be undertaken in a number of ways across an individual’s lifetime and multiple generations.  Regardless of circumstances and preferences, there is a structure that is suited to most individuals, allowing the creation of a tailored philanthropic legacy.

* Emma Sakellaris is executive general manager of Australian Unity Trustees Limited.

First published in the Australian Financial Review: https://www.afr.com/personal-finance/a-guide-to-giving-easy-steps-to-philanthropy-20190116-h1a4b9