David Ward explains how to help high-net-worth individuals to be more strategic in their approach to giving.
In the same way that investors have sought increased control of their finances in recent years – becoming more risk-averse and more concerned about corporate transparency – the ripple effects of the global financial crisis have also been felt in the philanthropic community.
A recent US study of high-net-worth philanthropy, sponsored by Bank of America Merrill Lynch, indicates that donors have become far more strategic in their approach to giving, and “when it comes to investing their philanthropic dollars, high-net-worth donors are less willing to take risks than they are with their personal investment portfolio”. The study also indicates that private philanthropists increasingly expect that non-profit organisations will provide full financial disclosure, acknowledge contributions and operate their businesses effectively.
The good news for financial advisers is that as part of this more strategic approach to philanthropy, high-net-worth individuals are increasingly consulting “legal and financial professionals to help them make charitable giving decisions”, with financial/wealth advisers (38.8 per cent) among the leading sources of charitable advice.
GROWING APPEAL
Following significant improvements in Australia’s regulatory environment over the past decade to encourage private philanthropy, a new structure has been developed which meets the needs of high-net-worth individuals seeking to take a more targeted approach to their philanthropic efforts.
‘Financial advisers (38.8 per cent) [are] among the leading sources of charitable advice’
In October 2009, the Australian Government introduced legislation to create the modern Private Ancillary Fund (PAF) structure. This improved structure superseded the previous Prescribed Private Funds (PPFs) that were introduced in 2001.
There are now more than 850 PAFs that collectively manage more than $2 billion in funds, providing contributions of more than $150 million to the non-profit sector each year.
Importantly, by establishing a PAF during their lifetime, as opposed to leaving a bequest to charity, PAF founders have the satisfaction of seeing the results of their own generosity.
These vehicles also give philanthropists complete control over which of the 15,000 to 20,000 eligible organisations will be the beneficiaries of their grants. In addition, funding long-term giving while still in a high tax bracket can be very tax-effective.
The PAF structure is tax-exempt and funds are often invested in perpetuity, which not only provides excellent opportunities for long-term investing but also a regular stream of fee income for those responsible for managing these investments.
These vehicles enable philanthropists to take the tax deductions now, but still have the opportunity to make decisions about where to spend the money over the coming years. This provides philanthropists with greater control over the timing and impact of their giving compared with a standard donation.
The main benefits of PAFs for philanthropists are that they:
• Provide a simple, efficient and cost-effective vehicle for ongoing planned giving. Not only is the structure itself income-tax-exempt but donations to the PAF (both initially and in the future) are also usually tax-deductible;
• Offer significant flexibility over the level of giving undertaken each year to eligible charities, with the main requirement being that an annual distribution of at least 5 per cent of the overall assets is made from the PAF (or a minimum annual distribution of $11,000, unless expenses of the fund are being met from outside the fund);
• Allow complete control over which organisations are the beneficiaries of the grants, provided that the recipients have relevant Deductible Gift Recipient status;
• Allow control over the investment of the portfolio to remain with the founder and his/her advisers; and
• Can also be a useful estate-planning tool (if set up in advance).
By setting up a PAF structure, PAF founders can ensure real long-term change occurs in the community by sharing philanthropic values with their own families and inspiring future generations to follow in their footsteps. Many Australian families that are sharing the running of a PAF are discovering the huge benefits of following their generosity together.
PAFs also provide significant intergenerational business development opportunities for financial advisers, enabling them to deepen client relationships as they help individuals, families and businesses to develop greater awareness of the importance and benefits of giving.
David Ward is director of PAF Service, Social Ventures Australia.
