David Ward uncovers some of the secrets for aligning clients’ willingness to give with the appropriate structures.
Professional planners are used to assessing their clients’ appetite for risk and structuring their investments accordingly. But when it comes to helping clients with their philanthropic needs, planners may not be as adept at uncovering motivations for giving and aligning these with the appropriate giving structure.
What motivates individuals to give is as varied as people themselves, but fortunately there are some common themes. Ensuring maximum alignment of giving motivation with giving structure is the best way to ensure personally satisfying and effective giving.
An individual’s motivation to give can be driven by their personal belief system, a desire to share their values with family members or a wish to establish a legacy for themselves or their family. A desire to engage more meaningfully with one’s community or a sense of obligation to give back – given the political and business environment that has facilitated wealth creation – can also be motivators to give; as can observing those afflicted by natural disasters, or a personal or family experience that connects to a specific cause or organisation.
Aligning motivations with the appropriate giving structure is critical and there are three basic structuring options available for giving:
1. Direct gifts to charities. Direct giving is enhanced by tax deductibility for some charities, which have deductible gift recipient (DGR) status. A specific bequest to charity can also be included in one’s will. This can be a straightforward bequest or through the establishment of a testamentary trust whereby a trustee or trustees will administer the residual of the estate as a charitable trust and support causes set out in the will.
2. Establishing a foundation using one of the different structures available:
• A private or testamentary charitable trust. Private charitable trusts can be established by deed during one’s lifetime; or a testamentary trust can be included in one’s will. Bothand involve appointings a trustee or trustees to administer the trust to support charitable causes or organisations set out in the deed/will. Contributions are not income tax deductible.
• An account or “sub-fund” within an existing community foundation or donor advised fund run by a trustee company or wealth adviser. This provides individuals with the ability to recommend organisations to receive support from the income of the fund, with all the investment and administration taken care of by the provider. Contributions to these funds are usually tax deductible.
• A private ancillary fund (PAF). Contributions to PAFs are usually tax deductible. This is the “self-managed” option with responsibility for the control of a PAF and the investment and granting decisions resting with a trustee controlled by family members on the board, but with at least one independent director who meets the responsible person criteria set by the Australian Taxation Office (ATO).
Aligning motivation with structure
The central part of philanthropic advice is to align an individual’s motivation and capacity with the available structures to facilitate satisfying and efficient giving. There are some consistent themes that make the decision path relatively straightforward for many individuals or families:
• Tax does not initiate giving; however, for many people the opportunity to give in a tax-effective manner will be a determinant of how much and when they give. DGR charities and DGR funds – either a PAF or “sub-fund” – are therefore the preferred choice in such circumstances.
• Individuals who want to see immediate benefit to a specific organisation or cause will be inclined to make gifts directly to those charities.
• Individuals who are focused on leaving a legacy and are not concerned about income tax deductibility will often leave bequests.
• Individuals who want to give now (possibly motivated by the sale of a business, large bonus or windfall gain and the tax consequences thereof) but are not sure who to give to, or want their giving spread over a number of years, will tend towards a PAF or “sub-fund”.
• Individuals who want to actively engage with the organisations they are supporting and want that to be ongoing over several years will usually tend towards a PAF or “sub-fund” .
• Individuals with limited financial resources but who want to establish a foundation and are comfortable to leave the investment and administration to professionals will tend towards “sub-funds”.
• For individuals with more financial resources ($500,000 plus) to commit and who want to have the option to be fully involved in all aspects of the foundation, including investment and grant-making aspects, a PAF is the preferred vehicle.
While these generalities cover many individual and family circumstances, there can be significant uncertainty, in particular, because not all members of a family see things the same way. Also, there may need to be some tradeoffs if objectives and structures don’t fully align. In these circumstances, working with a specialist philanthropic adviser is important.
David Ward is director of Social Ventures Australia’s private ancillary fund (PAF) service.
