Estate planning and philanthropy: 10 common questions

by |

There has been growing interest in philanthropy in Australia in recent years, and financial advisers may find it is a worthwhile area to discuss with clients as part of their overall retirement planning, explains Equity Trustees head of philanthropy Tabitha Lovett.

Many clients will have had some experience with philanthropy already – usually through donations to a range of charities or through fundraising events. They may even have thought about undertaking volunteer work when they retire.

However, they may not have considered establishing their own philanthropic foundation as part of their financial planning activities, despite the many advantages such structures provide.

Setting up a charitable foundation through their financial strategy, and consolidating their philanthropic activities, can be a tax-effective approach, and can also create the post-retirement interest that many retirees seek.

Some of the common questions asked about setting up a charitable foundation include:

1. Do you have to be very wealthy to set up a charitable foundation?

Many people will have heard of the charitable foundations set up by people like Bill Gates, Sir Reginald Ansett or the Myer family. This can give the impression that a foundation is only for the very wealthy, but in fact there is a philanthropic structure suitable for just about everyone.

Indeed, some philanthropic vehicles can be established with just $20,000 (see below) and they can be structured in ways to accommodate a wide range of financial circumstances and philanthropic interests.

2. What kind of charitable foundation should I consider?

There are generally three types of philanthropic structures, with a number of variables within each. 

They are:

  1. Private Ancillary Funds (PAF) (often used for family foundations).
  2. Public Ancillary Funds – Charitable Accounts or Sub-Funds (PUF) (often referred to as community foundations).
  3. Testamentary Charitable Trusts (often referred to as will trusts).

Which option is the best will depend on how much the client would like to invest in establishing their foundation, the types of causes they would like to support, and how involved they want to be in the foundation’s grant making and investments.

The table below provides a starting point for comparing the options available: 

Type

Minimum capital

When created

How it works

Sub-Fund within a Public Ancillary Fund (PUF)

$20,000

During lifetime

A charitable account or sub-fund is set up under the umbrella of a public foundation with its funds invested in a managed fund to distribute 4% or more of its market value each year.

Private Ancillary Fund (PAF)

Approx. $300,000

During lifetime

A private foundation is established by deed with its funds invested in a bespoke portfolio or managed fund to distribute 5% or more of its market value each year.

Testamentary Trust

$50,000 minimum

After death

A trust is set up in a client’s will to take effect after their death, administered by Trustees with its funds invested in a bespoke portfolio or managed fund to distribute its income each year.

3. I thought I could only set up a trust in my will to operate after I’ve gone?

Both Private Ancillary Funds and sub-funds within a Public Ancillary Fund are set up during a client’s lifetime. They can start distributing grants within the first year, and will continue operating after the client dies. Family members can remain involved in the fund’s operation, grant-making, and investment strategy.

This can be a beneficial approach for those who are looking for an interest in retirement that will keep them connected to the community and causes of interest to them, as well as involving family members.

4. What are the tax implications of setting up a charitable foundation?

Charitable foundations set up during lifetime attract the same tax deductions and considerations as making any charitable donation. Clients can make tax-deductible donations to their own charitable foundation at any time (once the foundation is established there is no obligation to make further donations).

The income from the foundation’s investments is also generated in a tax-free environment, so the funds available for distribution each year are not depleted through taxes.

5. Can I choose which charities receive the money from my foundation?

Absolutely, provided the charities have been approved by the ATO as eligible to receive donations.   One of the main attractions to setting up a foundation is the ability to name it and focus on causes that the founder particularly wants to support. 

Founders can also involve their families in decisions about the projects or causes they will support, thus passing on philanthropic ideals to their children or grandchildren.

6. Isn’t it better just to give a lump sum directly to a charity, rather than making grants each year?

Not necessarily. Take the example of the Harry Lyon Moss Trust, set up by Mr Moss in 1960 through his will. He left one million pounds ($2m today) to be held in a perpetual trust managed by Equity Trustees, with the income paid each year to the Royal Children’s Hospital in Melbourne. 

If Mr Moss had instead left this gift directly to the hospital, it would most likely have been used to build a wing or install equipment in the original hospital building, which is now marked for demolition. Instead, invested by Equity Trustees, the one-million pound trust is now worth over $56m and has distributed over $40m in income to the hospital since the Trust’s establishment.

7. Do I need to specify a single cause or charity to receive donations from my foundation?

It’s up to the client. They can either nominate a charity or a cause or can decide each year where they would like the income from their foundation to be directed. 

For example, after the Black Sunday bushfires in Victoria, a number of foundations chose to suspend their usual grant programs and instead donate funds to the rebuilding and recovery of those affected by the disaster.

Others may decide upfront that they will support, for example, a particular charity, area of research or education scholarship in their name. The only criterion is that the cause or the recipients of grants are endorsed by the ATO as eligible to receive the funds.

8. Isn’t it more tax-effective to make a donation directly through a charity?

Not at all. The Tax Office determines which donations are tax deductible and Private and Public Ancillary Funds can be endorsed as deductible gift recipients. This means that donations made directly by clients to their own foundation receives the same deduction as one made directly to charity.

In addition, with Private and Public Ancillary Funds:

  • The initial start-up capital is tax deductible;
  • The income from the fund’s investments is generated in a tax-free environment; and
  • Further donations to the fund can be tax deductible.

In addition, as long as the donation is valued by the Tax Office at more than $5,000, donors can either claim the tax deductions in the income year in which the donation is made, or spread the deduction over the next four income years, to maximise the benefit of the deduction.

9. If I set up a foundation now, how do I know it will continue to support the kinds of causes I want it to after I die?

The deed will specify how the income from the foundation is distributed each year, and these deeds are very difficult to change after the death of the founder.  In fact, the trustee must apply to the court to do so.

For example, it may be that a foundation was set up to provide scholarships at the high school the founder attended.  If the school later closes down, the trustee has a responsibility to identify an alternative approach that best meets the founder’s original intention. 

Then, unless the founder gave the trustee discretion in the will to make the changes, the trustee must apply to a court (or the Attorney-General in the case of a trust valued under $500,000) to have the changes to the deed approved.

10. Wouldn’t charities prefer to get the funds directly, rather than get income each year?

Many charitable organisations look upon these kinds of trusts as an essential part of their ongoing income. In fact, annual cash flow is often critical. A significant lump sum donation in one year may end up broadening a research program but result in work not being completed because of budget constraints in later years, whereas annual income distributions can support a project over a long period of time.

At the same time, the fact that charitable foundations increase their asset base over time, can operate forever, and can make larger distributions year after year, is also widely appreciated by recipients.

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Name (required)
Comment (required)
By submitting, I agree to the Terms & Conditions