At Christmas time the thoughts of many turn to giving. We give presents to our family and friends and many of us give donations to charities in response to end-of-year appeals.
It’s easy to respond to appeal letters that find their way into mailboxes but this may not be the best way for clients to support charities.
There are a number of different ways to give to charitable organisations that can be more personally rewarding and more meaningfully for the charities.
A good financial strategy should include a structured and long-term approach to philanthropic giving, which will also provide tax advantages.
It is possible to establish a perpetual charitable trust that is simple and inexpensive.
There are a number of misconceptions about establishment, operation and flexibility of such trusts, that often deters people. There is also a perception that charitable trusts are only for the very wealthy, which just isn’t the case. A donation of $20,000 is all you need.
Embarking on a strategic philanthropic journey can be rewarding for all involved: the client, the financial adviser, and the charitable sector.
Ultimately, a perpetual charitable trust can help to better fulfil a donor’s intentions in a much more appropriate and lasting manner and will ensure a greater impact on their chosen charity or cause rather than ad hoc donations.
A typical charitable or perpetual trust requires a consistent dividend yield greater than the broader equity market with a focus on enhancing the franking credit to achieve one of their key objectives.
A diversified growth fund is a good starting point noting that the asset allocation will be a major driver of total returns over the long term. Importantly, the asset allocation will reflect the expected returns (capital gain and income) and the risk tolerance through economic cycles. The core Australian equity allocation for a typical perpetual trust needs to focus on defensive sectors that generate predictable dividends. As a reference point, we are currently targeting a grossed up dividend yield of 7.8 per cent for the EQT Australian equity dividend fund.
The three main types of charitable trusts or funds typically in use, and under which circumstances each option is suitable, are charitable accounts or sub-funds; Private ancillary funds (PAFs); and Testamentary charitable trusts.
Charitable accounts or sub-funds are individual funds set up under the umbrella of a public ancillary fund (PuAF).
PuAFs are recommended for those who want to start small, but nevertheless wish to have some direction over which charities or causes they support. A sub-fund with a PuAF can be established with $20,000. Sub-funds are a particularly good option for people who don’t want to be involved with investment decisions. Additional contributions can be made over time to build up the capital base.
Donations to sub-funds attract the same tax deductions and considerations as making a donation directly to a charity. For those on a high income, there can be significant tax advantages in this approach as donations are tax deductible and the deductions to the donor’s income can be upfront or spread across five years.
The income generated from the charitable account or sub-fund is distributed year after year to charitable organisations.”
Private ancillary funds (PAF) are often used for family foundations and are suitable for those who can donate at least $300,000 in investible assets.
For those who want to have some control over their foundation’s investment strategy, an ATO-endorsed PAF may be the best option. The income generated by a PAF’s investments is tax-free so that funds available each year are not depleted through tax.
There are currently more than 1000 PAFs in Australia which distribute around $200 million annually to charitable organisations.
This form of structured giving is increasingly being used by families in Australia interested in being involved with philanthropy, as it allows all generations to be involved.
Testamentary charitable trusts are the traditional way of leaving a lasting legacy and are a common vehicle for distributing funds to charitable organisations and causes,” Ms Lovett says.
Testamentary trusts differ from other philanthropic options in that the beneficiaries don’t have to be a Deductible Gift Recipient, making the options for giving wider.
Income produced within the trust fund is tax-free, but the initial establishment amount is not tax deductible, as the trust comes into effect on a person’s death through their Will. This means the benefactor doesn’t have to be concerned with the consequences of gifting money during their lifetime or being involved with the trust’s administration.
The testator can nominate specific charities or identify charitable causes that they wish income to go to in the future. A family member or professional adviser can be nominated as a co-trustee or it can be left in the hands of a professional trustee company.
The options for philanthropic giving are many and varied, great wealth is not required, and giving doesn’t have to be limited to one off donations in response to a charitable appeal.
The past 10 years has seen the introduction of a range of philanthropic structures to encourage and facilitate much greater levels of giving.
