How do you ensure your client gets the most from a $1 million donation?
During the 2019-2020 Australian bushfires, it seemed that every second celebrity gave away millions of their personal wealth to support the cause. Chris Hemsworth and family donated $1 million, P!nk donated $1 million and Elton John pledged $1 million. A range of other celebrities gave significant gifts of over $100,000 to the cause, including Russell Crowe, Rebel Wilson, Kylie Minogue, Nicole Kidman and Keith Urban.
If distributed hastily and without thought, a $1 million gift will create marginal impact. In the worst case scenario, the charity will simply absorb the donation, invest it (poorly) and use the $50,000 of annual earnings to bump up their executive salaries. Smartly delivered, a $1 million gift can be leveraged to bring the charity more than 2 times that in donations, can fill gaps in their service delivery, stimulate their growth and create a significant impact in progressing their mission.
In this article, we outline tips to help ensure your client gets the most from a $1 million donation.
1. Understand your client’s motivation and personal circumstances
There are a range of ways for structuring a $1 million gift. Some clients want to keep the gifting process as simple as possible, whereas others want to use their gift to improve their tax position, grow relationships, and make an impact.
By understanding your client’s motivation and personal circumstances you can guide them to the most appropriate delivery mechanism and tax structure.
To understand your client’s motivation, consider the following:
- Do they want to make a single one-off gift (like in a bequest in their will), or do they want to build relationships with a charity over time?
- What are their capabilities of managing the gift? Do they have resources to commit to tax administration and/or grants administration?
- Do they want to use the gift to improve goodwill with family/employees/customers?
- Do they have any existing charities or causes that they are closely associated with?
2. Ensure the $1 million creates tax benefits
Significant tax benefits can be achieved by effectively structuring the donation. Options for giving include after-tax donations, giving through a business, workplace giving and philanthropic trusts (outlined below).
- After-tax donation – the most common and simple way of giving is simply making a donation from disposable income – that is spending after-tax income. Donations to charities registered as a deductible gift recipient (DGR) are eligible for a tax deduction. Deductions can be used to offset income or capital gains, and can be claimed when lodging a tax return.
- Giving through a business – another way of giving is through an individual’s business. All donations to DGR charities by businesses are tax deductible. Not only that, by giving through a business there is an option to spread the deduction over a period of time. For example, a one-off $1,000,000 donation can be spread as a $250,000 tax deduction over four years.
- Workplace giving – workplace giving has recently emerged as a tax-effective way of giving. Rather than waiting for the end of the financial year to claim a tax-deduction, workplace giving provides the option to deduct the donation before income-tax is paid to the tax office. This can be beneficial to employees – they don’t have to wait to receive a deduction, and their employers don’t have to pay as much withholding tax.
- Philanthropic trusts – Trusts allow a client to make a significant donation in one year, then spread the gift to charities over a much longer period of time. This can be particularly useful for those that have recently come into a large sum of money through a business or property sale. Philanthropic trusts are classified as:
- Private ancillary funds (PAFs) – a fund that manages investments and distributes funds to DGR charities. Each year, the trust is obligated to distribute at least 5% of the market value of the fund’s net assets each year.
- Public ancillary funds (PuAFs) – a fund that manages investments, raises money and distributes funds to DGR charities. Each year, the trust is obligated to distribute at least 4% of the market value of the fund’s net assets each year. Some PuAFs, like community foundations, offer the option for clients to set up a sub-fund. The PuAFs manage the administration and investment decisions of the sub-fund, but provide the donors with authority over how the donations are spent. Sub-funds can be established with a minimum contribution of $20,000.
3. Three options for finding charities
There are a variety of pathways to finding the right charity for your client. You can undertake your own independent research for your client, undertake a grants process or call on professional advisers. The best method will depend on the kind of impact your client wants to make and/or the type of organisation you are trying to reach.
- Independent research – This is where you undertake your own research to find aligned charities. This method is useful in finding strong organisations to distribute untied funding to where the charity will be able to use the funds as they please, no strings attached. It is most appropriate for those advisers with the time to be able to undertake the research and those who have enough experience with charities to gauge what makes a strong and weak performing charity.
- Grants – Grants are a great way of getting money to niche areas and finding interesting and underfunded projects. This method is appropriate for clients giving away large amounts of money with very specific interest areas. Funds can be directed to specific projects, meaning that donors will have a clear understanding of their impact, provided that they regularly monitor the charity. However, for smaller amounts of funding, the administrative burden and costs of a grants process can outweigh the benefits.
- Professional advisers – There are a handful of philanthropic advisers in Australia that specialise in finding high quality charity opportunities. They know which charities are high performing, where there are exciting unfunded opportunities and how to optimise the donor’s impact for the donation value. This approach is hands-off and flexible. Advisers tailor their approach to the needs and expectations of the donor.
4. Leverage the donation
By working with a charity, it is possible for a $1 million donation to be leveraged to get more funds into the charity. There are a variety of different ways to achieve this:
- Matched giving – A number of philanthropists give money to charities on a “matched” basis. For instance, they will give the charity $1 for every dollar raised from other donors. These campaigns are extremely effective in raising more money from a donor’s existing supporter base.
- Employing fundraising professionals – your client’s donation can be used to assist the charity in securing high-quality fundraising professionals. This is a simple way to allow the charity to focus on their core work, leverage their donation and create more impact.
- Government grants – Donors can be instrumental in allowing a charity to secure government funding. Some government grants to the International Aid sector require charities to match 20% of the total grant amount.
5. Get the family, workplace or customers involved
A major gift can be an opportunity to build goodwill and cohesion between a group of people. There are a number of creative ways that a $1 million donation can help build a legacy. For example:
- members of the family can be appointed with the responsibility to pick a charity
- matched giving can be offered as an option for employees
- donation vouchers can be provided to your clients’ customers and/or audience. This was demonstrated by hedge fund manager, Ray Dalio, and built an overwhelming sense of goodwill.
Conclusion
A $1 million donation can create an overwhelmingly significant impact. It can also be wasted if not used effectively. By structuring the donation in the right way and making sure it gets to the right charities, you can make sure your client gets the most from their donation.
By Jessica Bowman, Co-Founder