Opportunities in philanthropy
When it comes to servicing Australia’s ageing and increasingly wealthy population, many advisers overlook the opportunities that exist in philanthropy. Lawyer Vincent Holland explains why advisers are uniquely placed to capture this burgeoning market.
While philanthropy in Australia is yet to experience the boom that it has in the United States, there are a number of reasons to suggest that the trend is about to change.
The missed opportunity
Industrialised nations, including Australia, are on the cusp of experiencing the largest transfer of inter-generational wealth ever known.
It is well documented that in Australia alone, the current generation of baby boomers are expected to pass on wealth of an estimated $600 billion over the next 30 or so years.
A shift of this magnitude will present opportunities for advisers to service not only their current baby boomer clients, but also their heirs.
For many advisers, estate planning has become a cornerstone of their strategy for attracting and retaining clients. Estate planning helps an adviser build trust and loyalty with their clients and to engage with them on a new level.
For baby boomer clients, estate planning is often seen to be the ‘lead in’ to servicing the client’s wider family group, placing the adviser at the centre of the family’s inter-generational wealth strategy.
However, one opportunity that is often missed in estate planning discussions is the legacy the client would like to leave outside of his or her immediate family.
Often, the estate planning strategy is focussed on keeping assets within the family bloodline (which is important), but with less, or any, emphasis being placed on other worthy causes the client may wish to support and the tax advantages of doing so. There are other reasons why philanthropy is not addressed.
More than ultra-HNWs
First, while philanthropy is often associated with the “rich and the famous,” it is wrong to think that philanthropy is only for ultra high net worth individuals. Indeed, there are varying degrees to which a client can participate in philanthropy.
It could be that the client leaves an outright gift in their will to a cause they feel passionately about, or uses a more sophisticated structure, such as a private ancillary fund (PAF).
A PAF is a trust which in turn donates to other deductible gift recipients. Because a PAF is, itself, a deductible gift recipient, any donations to the PAF are, themselves, tax deductible and any income within the PAF is generally tax exempt.
A PAF is therefore a powerful tax planning tool and can give the founder considerable flexibility over the design and control of their own foundation.
Because a PAF must meet certain ongoing requirements including an annual audit and make a minimum annual distribution, it seems logical that a similar amount needed to justify setting-up a self-managed superannuation fund would be necessary; that is, an initial sum of at least $250,000 - $300,000.
Secondly, one of the reasons clients do not participate in philanthropy is because they lack appropriate advice on their philanthropic options. We find that clients are generally more receptive to philanthropy than one would perhaps think.
Of course, the client’s perception will obviously depend on such factors as his or her age, net worth, family situation and tax position, but the old adage “you will never know if you never ask” rings particularly true.
Finally, there is a mistaken belief that philanthropy is not the domain of the financial adviser.
However, the financial adviser, more than any other professional, is suited to formulating the client’s philanthropic strategy.
Other professionals, such as lawyers, can be briefed where necessary; however, only the financial adviser can advise on whether the client’s strategy is both affordable and consistent with his or her overall financial objectives.
So, where do the opportunities lie? There will be a myriad of opportunities for advisers who up-skill in this area, ranging from upfront financial advice, to the implementation of that advice and the ongoing management of any investments that the client’s philanthropic structure may hold.
PAFs have a requirement that an independent individual, with a degree of responsibility to the Australian community as a whole, be an active director of the trustee (which must be a company).
An adviser could potentially take on this role. There is also scope for advisers to charge fees for co-ordinating the set-up of the relevant philanthropic structure with other professionals, including a lawyer and accountant.
Finally, philanthropy gives rise to a number of intangible benefits including a closer client/adviser relationship, a sense of personal fulfilment attached to achieving a greater good, and the opportunity for the adviser to differentiate their service offering from the more commoditised, product-based advice.
Vincent Holland is a lawyer and principal at Forty Seven Legal.
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