When it comes to making a will, many people are now opting to take a more community based approach and endow a long-lasting financial legacy to their preferred charity.
It’s a very personal gesture and often a very important component of people’s lives, even if they cannot give as much as they would like. Armed with the right information, it is relatively easy to follow this path and make plans to donate a proportion of wealth either during one’s lifetime or after death. In general terms, there are four ways to make a donation. Each option has taxation and other financial and practical implications and you may require expert assistance to determine the best strategy for your circumstances.
1. Give directly
Historically, the first choice for many people has been to donate directly to an established charitable organisation, either in their lifetime or by making a bequest in their will, but a lack of transparency can be a drawback here. In some instances, the organisation’s use of the funds is apparent. The Cancer Council, for example, has clearly defined goals and donors can expect their donation will be used to support cancer research or assist cancer sufferers in some way. However, sometimes it is not clear how the donated funds will be used, which can trouble donors. For example, some aid organisations provide assistance across a very broad range of activities and countries. Additionally, administration costs can be unclear and there is rarely an opportunity to see a tangible result from a donation.
2. Establish a Prescribed Private Fund
Prescribed Private Funds (PPFs) are private charitable foundations that provide a way to donate money in perpetuity and can best be described as an ‘agent’ between the donor and existing charitable organisations. Unlike direct giving, a PPF allows the donated capital to be retained inside a charitable trust controlled by an individual or an entire family. The income generated is distributed annually to a range of charitable organisations chosen by the founding individual and their family. Where trustees of PPFs identify similar interests and goals, they may embark on joint ventures over a nominated period in order to provide funding for a project that would otherwise be too big for any one fund to support on its own. PPFs must distribute income annually to recognised charities and there are clear definitions about the sort of projects that can be funded. If desired, provision can be made for the charity to receive a certain percentage of the capital each year, plus income.
3. Donate to a Foundation offering Donor Advised Sub-Accounts
These are charitable trusts established and administered by a trustee company that allow intending donors to donate to a ‘sub-account’ within the trust. This relieves a donor from the cost and compliance issues involved with having their own foundation. However, like PPFs, donors still retain control over the manner in which their donation is used. For example, if an individual donates $250,000 to a Donor Advised Sub-Account and nominates that the income go to animal protection charities, the foundation directs the donor’s income to those nominated charities each year. Donations can be made to a Donor Advised Sub-Account throughout a person’s lifetime, or in their will. Patrick Rafter’s Cherish the Children Foundation is a well-known example of a Donor Advised Sub-Account in a foundation operated by a trustee company.
4. Establish a Testamentary Charitable Trust in a will
Establishing a testamentary charitable trust (TCT) as part of an estate plan is another way of providing chosen charities with a reliable annual income stream in perpetuity. As is the case with PPFs and Donor Advised Sub-Accounts, the donated capital is invested and the income distributed to objects or purposes detailed in a person’s will. And like PPFs, provision can be made for a charity to receive a certain percentage of the capital annually, plus income.
As indicated at the start of this article, each of these methods of charitable giving has its own tax implications and you may need the assistance of an expert in tax to work out which is the best for you. For example, donations made via the first three options are tax deductible, which may encourage or enable you to make further donations so your gift can keep growing. In the case of TCTs, however, their growth is limited by their very nature, i.e. they only become effective on the death of the person making the will and any donations made by others to top them up are not tax-deductible. On the other hand, if the will-maker gifts an asset normally subject to Capital Gains Tax (CGT – like a house) to a TCT in a will, it is usually exempted from CGT, preserving the full value of the gift.
Just as the structure and tax aspects of your charitable giving need careful consideration, so does the choice of trustee to manage any charitable trust in which you choose to become involved. The trustee plays an often time-consuming role in managing the trust. This includes meeting all legal and taxation requirements, ensuring that the funds are invested for the best possible returns and distributing the trust allocation. This can be a major burden for an individual. However, it is all part of the role of a professional trustee, so appointing a trustee company is a popular answer for many. A trustee company not only provides expertise in investment and knowledge of developments in philanthropy, it also provides continuity in the management of the trust that will usually continue in perpetuity.
Disclaimer: This is intended to provide general information in summary form on the topics discussed and is current at the time of publication. The contents do not constitute legal, tax or financial advice and should not be relied upon as such. You should seek professional advice before acting on any information contained in this article.
Mark Robinson is an estate-planning specialist with national financial services firm Australian Executor Trustees.
Ph (02) 9028 1056
Further information on charitable giving can be found by contacting:
Australian Executor Trustees Australian Tax Office
or by phoning your favourite charity direct.