I recently had an enquiry from a client that I would like to share with you. My client wanted to know what options are available to gift funds to charity. He has been providing a regular large donation to a charity for years and wanted to look at other alternatives. He also wanted to discuss options for gifting in his will.
He was concerned whether giving all the funds to the one charity made sense, and if he gave a large amount, he could not then move the funds to another charity if he had a change of heart. He also has a significant tax event coming up and was considering making a large donation to charity as a way of both reducing tax and helping the community.
Planned giving through philanthropic trusts
About 15 years ago, the Howard government introduced rules to make it easier to establish a private foundation. A private foundation is one that can accept tax deductable donations and then provide donations to various charities at its discretion. These were originally called Prescribed Private Funds (PPP), and with some minor changes since inception, are now called Private Ancillary Funds (commonly referred to as a PAF or Private Foundation).
A PAF or Private Foundation is a philanthropic trust structure that helps you take a more structured approach to your giving; you can make the contribution now and then choose the charitable recipient later to one or a number of beneficiaries. The intention behind Private Foundations was to encourage private individuals and companies to make philanthropic gifts by using a combination of tax deductions and structures that work on a smaller scale.
In some ways Private Foundations have a similar administration burden to a Self-Managed Super Fund and typically need $500,000 to justify the set up/administration costs. Like all structures that have tax benefits, there are rules that need to be followed.
Over the past 15 years private and corporate philanthropy has grown significantly with over 1,200 Private Foundations now operating in Australia.
The benefits of structured giving
Structured giving is an ideal way to support the community and to plan your giving more effectively. The benefits include:
- Creating a family legacy – giving through a Private Foundations can build philanthropic values in the family or corporate.
- Tax benefits – the money you donate into your Private Foundations (both now and into the future) can be tax deductable. The funds are then tax exempt so your investment goes further.
- Personal Fulfilment – by establishing something in your lifetime, you can see the benefits of giving firsthand, particularly if you choose to be directly involved with the causes you support.
Here are two examples demonstrating efficient ways of making these structures work:
A group of women got together and started their own foundation. Individually they did not have sufficient funds to start their own foundation, but together they had sufficient capital. They each contributed an initial amount to the foundation then each pledged an annual contribution and some changed their estate plan to include a gift in their will. This gave both economy of scale but more important a pursuit and purpose for the women in line with their values.
In a bumper year, a mid-size company committed the initial capital to set up a Foundation and the staff agreed to give up a percentage of the profit pool to the Foundation each year. Staff volunteered to run the fund and make decisions on the recipient charities. It was a way of the company giving back and engaging staff in a worthwhile cause, even in the absence of a $100 million kitty such as the recently announced Westpac Foundation.
There is often a trigger point or catalyst that begins a discussion on Private Foundations1, such as:
- reaching a life turning point
- feeling an obligation to give back
- a windfall (such as a business sale, financial success or inheritance)
- learning about the interface between taxation and giving, and
- simply having enough.
For corporates the catalyst to move to structured giving can include:
- a formal structure achieving more community outcomes
- external factors (disasters and taxation incentives)
- marking an occasion/anniversary
- a financial event that creates an endowment opportunity, and
- valuing staff’s community-mindedness.
The inheritance dilemma
One of the key issues to consider in gifting large sums to charity is getting the balance right between the needs of your family and beneficiaries and your desire to give.
A private foundation may be both a family glue and purveyor of values that exchange across many generations, or a possible burden. Questions of honouring a predecessor, not depriving children of life experiences, knowing how much is too much to give, and the fear of “ruining” the childrens’ perception of the value of money, may come into play.
In closing, it is important to note that Private Foundations, like all structures, need a purpose and goal. They need to develop a strategy and process to decide who grants will be given to and a mechanisms to measure the success of the grants. They often include areas of interest to the family or company, such as researching an illness or disease within your family or supporting a church or educational institution that is dear to you.
1. Ref: QUT Business School, “Foundations for Giving” March 2012
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