Philanthropy and financial planning – a gift that keeps on giving
Although many people’s approach philanthropy is to leave a bequest in their will to a favourite charity, Tabitha Lovett argues that giving while living is a much more rewarding experience on every level.
Bill Gates’ visit to Australia earlier this year and the media attention given to large gifts to universities from successful Australian businessmen has put philanthropy, and what it can achieve, back on the radar for many people.
Despite the common refrain about Australia lagging behind the philanthropic efforts of, for example, the United States, Australia does have a burgeoning philanthropic culture that is being cultivated in a number of different ways.
According to the Australian Taxation Office (ATO), individuals claimed more than $2.2 billion in deductible gifts in the 2010-11 financial year, and the last 10 years have also seen the introduction of philanthropic structures to encourage and facilitate much greater levels of giving.
Unfortunately, many people who have well-thought-through and implemented financial strategies and plans still think that developing a structured and long-term philanthropic approach is highly complex or difficult.
In fact it is a lot easier than most people think, and the benefits can be significant for philanthropists, their families and the causes they choose to support.
Financial advisers who have worked closely with individuals or families to develop their financial plans can often find that while their clients intend to leave a bequest in their Will to a favourite charity, or already take an ad-hoc approach to charitable giving, they have never fully considered the benefits – both financial and emotional – of setting up a charitable foundation while they are alive.
It is a conversation well worth having with clients. Not only are there tax advantages to such an approach, there are also emotional and familial benefits that can result.
Setting up a family foundation creates a lasting legacy that can strengthen families and bring them together to work towards a common altruistic goal.
It can be a great way for parents and children – and grandparents and grandchildren – to get together to discuss family financial matters, inheritance arrangements and to identify together how a family can support charitable organisations and those in the community less fortunate.
Alternatively, it may be an extended family foundation that keeps cousins, aunts and uncles connected and in touch with a common interest.
The rush of day-to-day life can be all-consuming and often leaves us solely focused on the people in our immediate circle. Stopping to think about people in the community who are vulnerable and need support can be a valuable and meaningful experience for all family members.
Establishing a family foundation therefore provides the opportunity and the impetus to spend time thinking about the family’s philanthropic goals and legacy, and the values with which the family name could be associated.
Often it is the case that delving into matters that have affected a family will influence the focus of that family’s giving.
By considering the values, motivations and interests of individual family members and the family as a whole, it will become apparent what areas might be appropriate for the charitable focus of a family foundation.
There are three main legal structures available for a charitable family foundation: a Private Ancillary Fund (PAF); a sub-fund within an existing Public Ancillary Fund (PUF); or a testamentary charitable trust.
PAFs (originally known as Private Prescribed Funds – PPF) were first introduced in Australia in 2001 as a way of encouraging systematic and engaged philanthropy. They are similar to philanthropic vehicles used in the USA to encourage philanthropists to establish charitable foundations while alive rather than through their wills.
There are now more than 1000 PAFs in Australia with a combined corpus of almost $3 billion and annual distributions to charities of over $200 million. This indicates how significantly private family philanthropy has grown in just over a decade.
A PAF enables the founders to receive a tax deduction for the funds invested into the foundation and allows the founders to have a say in the foundation’s investments and grants program.
In return for receiving a tax deduction for any donations made into the foundation, the foundation is restricted to funding organisations with charitable purposes that have been endorsed by the ATO as deductible gift recipients.
The ATO allows donors to spread their tax deductible donations across their taxable income in the year they make that donation and the subsequent four years, so a family would enjoy the same tax benefits as if they had donated the same amount over five years.
Alternatively, a family could have an individual sub-fund set up under the umbrella of a Public Ancillary Fund, often referred to as community foundations.
Equity Trustees has established such a fund – the EQT Foundation – which is an easy way for individuals and families to establish and name their own philanthropic vehicle from which to award donations and grants.
With a sub-fund within a PUF, founders do not have to be involved in the administration responsibilities and investment management decisions.
Instead, the capital of a PUF is invested in a managed fund, tailored to the particular needs of philanthropic foundations (ie, healthy income returns to meet the minimum distribution requirements and capital growth to stay ahead of inflation), and there is no need to worry about managing a bespoke portfolio and keeping track of the share market.
Alternatively, a testamentary trust can be established by a family member via their will to take effect after their death, with family members appointed to act as trustees or advisers and contribute to grant-making decisions.
The structure chosen from these options will require a different financial commitment to get started.
With a PAF, we recommend a starting capital of $300,000 upwards to ensure it is sustainable and can meet annual minimum distribution requirements and administration costs without eroding the capital base.
The benefit of establishing a family foundation as a PAF is that with this large donation the foundation can establish a healthy giving program immediately.
Setting up a sub-fund with a PUF – such as the EQT Foundation – requires less capital. For example, a Preferred Charity Account can be set up with a minimum starting capital of $20,000, and the founder then distributes the income through fixed payments to a maximum of five charities.
Alternatively, a second option with the EQT Foundation is a Preferred Purpose Account, which allows the founder to call for applications from the charity sector or specific charities utilising Equity Trustees’ grants program and database. Preferred Purpose Accounts can be set up with a minimum starting amount of $100,000.
Overall, a sub-fund with a Public Ancillary Fund has significantly lower start-up costs than a stand-alone Private Ancillary Fund.
Regardless of the vehicle chosen, families can benefit from various aspects of philanthropy, such as getting to know the charities they choose to support and better understanding and appreciating the work they carry out.
For instance, Equity Trustees can arrange visits to the supported charities so their philanthropic clients can see the programs they have funded in operation.
This is the part of philanthropy which gives the most satisfaction – seeing it in action and knowing money is being well spent and positive outcomes are being achieved.
It is also a good way to involve multiple generations of a family. Most young people are very aware of the problems in the world and are interested in tackling issues of concern, although they may not be the exact same interests as their parents.
For example, for one foundation with which Equity Trustees is involved, the family meets once a year for a foundation dinner where the children present to the adults on the charities they have researched and to which they think the foundation should donate.
The older members of the family have commented that it develops the younger generation’s empathy with and awareness of the community in which they live, while providing an opportunity for them to learn how to research and present a compelling argument to a group.
Structured philanthropy provides many life lessons – and opportunities for all generations of a family.
Tabitha Lovett is head of philanthropy at listed financial services company Equity Trustees Limited (EQT).
Recommended for you
In this episode of Relative Return Unplugged, hosts Maja Garaca Djurdjevic and Keith Ford are joined by special guest Shane Oliver, chief economist at AMP, to break down what’s happening with the Trump trade and the broader global economy, and what it means for Australia.
In this episode, hosts Maja Garaca Djurdjevic and Keith Ford take a look at what’s making news in the investment world, from President-elect Donald Trump’s cabinet nominations to Cbus fronting up to a Senate inquiry.
In this new episode of The Manager Mix, host Laura Dew speaks with Claire Smith, head of private assets sales at Schroders, to discuss semi-liquid global private equity.
In this episode of Relative Return, host Laura Dew speaks with Eric Braz, MFS portfolio manager on the global small and mid-cap fund, the MFS Global New Discovery Strategy, to discuss the power of small and mid-cap investing in today’s global markets.
