Advice client philanthropy – a consumer protection perspective

25 Jan 2023

From AdviserVoice - this Regulatory Compliance and Consumer Protection article is proudly brought to you by Perpetual Investments

Spurred on by a global pandemic and the beginnings of the great intergenerational wealth transfer, philanthropy is growing in importance for investors.

Compile a list of the biggest emerging trends in financial advice, and the growing client interest in philanthropy is likely to figure prominently.

This should come as no surprise, sandwiched as we are between a global pandemic that forced a wholesale resetting of individual values and priorities, and an oncoming intergenerational wealth transfer expected to top $3.5 trillion in Australia alone^[1].

But whilst Coredata research^[2] revealed that heightened interest in philanthropy – along with ESG investing – was especially evident amongst high-net-worth investors, the desire to leave a legacy and make a difference is not limited to the very wealthy or the very old. Financial Advisers will thus increasingly be called upon to help a wide range of clients optimise their approach to charitable giving.

As positive and uplifting as philanthropy can be, for both the giver and the recipient, there are many traps for the unwary. Without expert financial (and other) advice, the best intentions can come undone, spectacularly foundering on a range of hazards, including volatile stock markets, legal action by disaffected family members, ineffective tax planning, and poorly chosen recipients.

In this article, we will explore client philanthropy through a consumer protection lens, identifying the major risks clients face in making their charitable efforts as effective as possible, along with the strategies financial advisers can employ to help clients mitigate these risks and, ultimately, protect their legacies.

Client philanthropy – a snapshot

Between 2014 and 2019, the charity sector in Australia grew by around 60%^[3]. And, whilst most recent growth has been more subdued, courtesy of the global pandemic, Australians are now making donations and bequests to charity to the tune of around $13 billion per annum^[3].

Although we like to think of ourselves as a generous community, on a global basis, Australian individual giving has plenty of upside, with the dollar value of donations and gifts sitting at around 0.38% of GDP^[5], notably lower than the UK (0.54%), New Zealand (0.67%), and the US (over 1%). On a positive note, the number of Australians who give is high, estimated by research^[6] to be around 81% of the population. Aside from cash donations, around 60% of the population support charities by donating goods (clothing, food, furniture), whilst 30% donate their time, as volunteers.

The causes currently most important to Australians include medical and cancer research, children’s charities, and animal welfare. Table 1, below, ranks the top eight causes.

It is important to note that the importance of causes can change over time, and can also vary by generation, as shown in Figure 1, below.

Protecting the effectiveness of philanthropic efforts

Effective philanthropy means supporting organisations that are likely to meet the social and/or environmental goals those organisations share with their donors. It requires donors to:

undertake a thoughtful decision-making process
identify their own philanthropic goals and values
conduct due diligence before selecting organisations to fund
ensure that organisations are supported in a way that allows them to thrive.

Values alignment as informed consent

Central to establishing an effective, sustainable philanthropy strategy is identifying what values and objectives are important to your client, and then finding a suitably aligned recipient organisation.

Taking the time upfront to articulate motivations and values allows the development of a proactive, effective philanthropic plan rather than giving reactively to funding requests. Ultimately, these motivations and values provide the anchor for decision-making at each step of the philanthropy process.

The overall result will be a giving strategy that the client understands, is happy with, and will be more committed to over the long term. It’s a type of informed consent.

There are literally hundreds of causes one could support, and thousands of charities willing to accept that support (over 43,000 in fact, just in Australia^[8]).

The comprehensive philanthropy toolkit produced by Perpetual^[9] includes a number of useful worksheets, matrices, palm cards and other resources advisers can use with their clients to help them:

reflect on motivations and values that will underpin the philanthropy
- this is a long list that can include high-level values such as accessibility, community, innovation, and peace
narrow these down to core values
uncover issues of interest
select organisations to support.

Examples of issues uncovered might include:

civil rights and justice
arts and Culture
animal welfare
education
social services
conservation and the environment.

Underneath each of these ‘’umbrella issues” is likely to sit a long list of specific issues, for example, under education, it is possible to support organisations focused on adult education, childhood education, and education for indigenous communities, just to name a few.

A focus statement frames a client’s values and motivations and connects them with their philanthropic intentions, as such it can help guide a philanthropic plan.

Do due diligence and select suitable recipients

Proactively identifying organisations to fund, rather than reactively responding to miscellaneous funding requests, helps ensure giving is targeted at organisations aligned with one’s goals and values.

A proper due diligence process involves assessing an organisation’s legal status, overall health, strategic direction, and visible programmatic impact and metrics. Poorly run organisations may have the right intentions but may not survive long enough to make effective use of your support, whilst opaque reporting can make it hard for you to judge whether your donations are being spent wisely. Completing this due diligence process thoroughly will enable funding decisions to be made with more confidence.

There are a number of ways to find suitable organisations, including seeking recommendations from your/client’s networks and researching online. Another option is to approach a third-party ‘charity matching’ service (such as Seedling Giving) where experienced philanthropic advisors learn can tailor a specific giving opportunity based on the client’s focus areas.

Donor networks are another valuable resource, and in Australia, there are networks to support philanthropists to find and solicit recommendations. These include Perpetual’s IMPACT Philanthropy Program, Australians investing in Women, and the Australian Environmental Grantmakers Network.

Relying on expert help and credible resources can also help avoid supporting an organisation that doesn’t have Deductible Gift Register (DGR) status, or worse still, is a fake charity.

Useful online resources to help screen organisations include the DGR (Deductible Gift Recipient) Register, which can be accessed via the ATO website, and the Australian Charities and Not-for-profits Commission (ACNC) website.

Selecting the right vehicle to protect the effectiveness of giving

Two more crucial protections to ensure a sustainable, effective giving strategy are:

setting and allocating a philanthropy budget, and
selecting the right structure and vehicles for giving.

The importance of setting a budget has taken on heightened importance in recent times, where market volatility and rampant inflation and rising interest rates have eroded the disposable income of many households. Charities frequently fall victim to economic downturns and setting a budget, which can be regularly reviewed, can help ensure your client can continue to achieve their giving goals in good times and bad.

Whilst the tax deductibility of donations is rarely an end in itself, there is no doubt that structuring giving in a tax-optimal way can amplify the ability of the donor to support their chosen causes and can also provide advantages to the recipient organisation(s).

As a financial adviser, you can obviously provide immense value by getting the greatest amount of money to a charity for the least out-of-pocket expense to the donor. Understanding the range of structures and options available is thus crucial.

Direct giving is the more common form of giving in Australia^[10]. Donors participate in direct giving through one-off donations to charities, through workplace giving, street appeals, fundraising dinners, or sponsoring our co-workers and friends for charitable fun runs or even for growing facial hair.

This kind of giving is often spontaneous or a reaction to something (i.e., a natural disaster) or a request from someone. Such contributions qualify for a tax deduction which can be spread over up to 5 years. Donors can also qualify for tax deductions when they donate long-term appreciated non-cash assets (e.g., shares or real estate, etc) directly to charitable organisations or foundations.

Structured giving

More structured, formal, vehicles more suitable for giving larger amounts over a long time period include private and public Philanthropic Trusts.

Since being enabled by legislation over 20 years ago, Private Ancillary Funds (PAFs) have grown in popularity, to the point there are now estimated to be around 2,000 PAFs holding $10 billion in assets and making grants of $500 million annually^[11].

Figure 2 charts the recent growth of PAFs.

A PAF is a fund set up to manage investments and distribute funds to DGR charities. Each year the trust must distribute at least 5% of its funds to DGRs.

A major advantage of PAFs is that donations to the PAF are tax deductible when they are made, as opposed to when funds are allocated to charities. This removes the timing of donations as an issue for tax purposes and means a large deduction can be claimed for funds paid to the PAF upfront, even though the donations subsequently made from the fund may then be spread over many years.

A downside of PAFs is that they can be administratively cumbersome, as they require a board of trustees, and ongoing funds management, and are subject to the ongoing compliance requirements of both the ATO and ACNC.

This administrative burden can be avoided by instead setting up a sub-fund within a Public Ancillary Fund (PuAF). These funds manage the investment and administration of the sub-fund while giving donors full authority over where donations are made. The tax advantages are the same as for private funds, although the annual distribution obligation is slightly lower, at 4% per annum. PuAFs are typically managed by non-profit entities, community foundations, and the charitable arms of for-profit financial service providers, such as

Perpetual. As an example, Perpetual is the trustee of the Perpetual Foundation, a PuAF which allows donors to open an Endowment (sub-fund) with 20,000 or more^[13].

Estate planning

Whilst charitable giving can start during a donor’s lifetime, many individuals choose to give bequests via their estate.

Bequests are gifts from your assets – whether they be a transfer of cash, shares, or real estate – made through your estate plan or will. If the recipient is an existing DGR, they can avoid any Capital Gains Tax that may have been payable if that asset had been given to another beneficiary.

The downsides of this approach include the fact that the donor is not around to see their money put to work, they receive no tax benefits during their lifetime, and they can be open to legal challenges from disaffected family members.

Protecting gifts from legal challenge

Sadly, bequests to charity are frequently and easily contested by disaffected family members. One study^[14] by Australian Centre for Philanthropy and Non-profit Studies (ACPNS) revealed that in 47 cases where wills were contested, 33 charities lost more than half the amount originally designated to them. The lack of legal resources or willingness to engage in lengthy and costly disputes means that many charities will often aim to secure some sort of settlement, usually a fraction of the initially promised amount, rather than legally contest any challenge.

There are a number of steps advisers can take to ensure their client’s wishes will be difficult to dispute:

Help establish a client-charity relationship. Ensure your client is taking steps to give on a regular basis or volunteer with the specific charity they wish to leave a bequest to show they have an interest in that charity’s mission
Encourage your client to ensure their family members are aware of and even involved in, the giving program (this type of family-wide engagement is also recommended as a way of making intergenerational wealth transfers much smoother)
Ensure intentions are made before declines in mental/physical health
Develop paperwork to show there has been a thorough and thoughtful process to decide on the charity and specific bequest value.

In other words, advise your clients to find their preferred charity today. Recommend that they start giving what they can today, even if it is a nominal amount, like $50 per month. After they pass, they will no longer have control.

Undertaking the steps above to solidify their intention and their relationship with the charity will help minimise the contestability of your client’s intentions.

Protection from market downturns

Research^[15] suggests charitable donations can be quite elastic in response to stock market volatility. With the market downturn and inflation/interest rate increases leading some to question the age-old 60/40 approach to portfolio construction, many charities and not-for-profits are understandably nervous about the impact on their revenues.

Regardless of the structure used by your clients for their giving, the following principles can help make their philanthropy more sustainable and more resilient in the face of economic uncertainty:

basic investment principles – diversify and take a long-term view
narrowing the focus of philanthropic activities to ‘core issues’ and paring back non-core donations if necessary
maximising tax effectiveness of giving structures
designing a budget that can be adhered to even in uncertain times.

The ultimate consumer protection – expert advice and education

As with financial matters more broadly, expert advice can be the ultimate consumer protection for clients seeking to establish an approach to philanthropy.

Philanthropic advisers provide specialised assistance with developing philanthropic strategies, setting up your giving vehicles, and carrying out specific gifts. Advisers trained to give philanthropic advice can also help their clients develop a tax strategy to integrate philanthropy into their overall wealth and estate planning.

Financial Advisers are clearly well-placed to operate in this space, and the number of financial advisory firms offering formal philanthropic advice and services is increasing.

Client education in this area can help make their giving more effective, and is available from formal education providers, affinity groups and peer networks.

Education providers and affinity groups offer educational support for high capacity donors, such as events, workshops, conferences, research, online courses, and programs.

Affinity group examples in Australia include groups focusing on the Arts, Homelessness, and Aboriginal and Torres Strait Islander communities. Education providers include the Australian International Development Network along with those mentioned earlier in this article. Peer networks are organisations that manage networks of high-capacity donors.

In summary

As community interest in philanthropy and charitable giving continues to increase, financial advisers are ideally placed to help clients develop sustainable, effective, giving strategies. The right advice can help your client optimise the tax position of their strategy and avoid many of the risks and hazards that can bring a strategy undone.

As well as enabling advisers to deepen their relationships with existing clients, helping clients with their giving efforts can also help advisers engage younger family members, which in turn can be instrumental in protecting intergenerational wealth.