When does a client benefit from setting up a family foundation?

Financial security is the first goal, but then what? For some, there can be a lingering and overarching need to give back. Setting up a family foundation is a great way for a family to consciously, intentionally and regularly give to charity and feel the great personal satisfaction of making a difference.

In this article, we outline the landscape for family foundations in Australia, and highlight when a client will benefit from setting up a family foundation.

What is a family foundation?

Family foundations, officially known as Private Ancillary Funds (PAFs) in Australia, are private charitable trusts that families can make tax deductible donations to. By law, 5% of the value of the fund must be distributed each year to charities with Deductible Recipient Status 1^[1](DGR 1) tax status.

PAFs are usually invested in a portfolio of investments that reflect the financial objectives of the family. Some families also choose to ensure their PAF investments are aligned ethically with social/environmental objectives.

Family foundations in Australia

There are over 1,600 PAFs in Australia, with an average value of $4.4 million each. The number of PAFs are steadily growing and with several hundred new PAFs registered each year (Chart 1, below).

Foundations are not just for the ultra-rich

PAFs can be established for any portfolio size, but are usually only cost-effective with an initial outlay of $500,000. For those with a smaller starting asset-base, there are other options that achieve similar outcomes. With a deposit of just $20,000, your client set up a sub-fund with a Public Ancillary Funds (PuAFs). Sub-funds have the same function as a PAF, but with some small differences. They allow your client to choose the charities they distribute donations to, but require a distribution of only 3% of the value of the fund per annum. However, your client will have limited control over the funds’ administration and investment decisions as this is the responsibility of the PuAFs’ trustees.

4 signs that your client will benefit from a family foundation

There are 4 clear signs that a client will benefit from establishing a family foundation. Those that aspire to leave a legacy, that take an active interest in helping others (or the environment or animals) and that are financially comfortable or have come into wealth usually receive the most joy and fulfillment from a family foundation.

Sign 1: Aspire to leave a legacy

Setting up a family foundation can be an extremely effective tool in embedding values within a family. Family foundations can exist into perpetuity and can be managed by the family descendants long after the founders are gone. They require an annual distribution which forces the family to continually reflect on their position in society and the critical role they can take in improving the lives of others. For these reasons, clients that see themselves as leaders and that want to leave a legacy are naturally attracted to setting up a family foundation.

Sign 2: Takes an interest in helping others, the environment or animals?

Does your client take an active interest in helping others? Are they of the nature that they take their role in giving back seriously? Deciding on where to place an annual donation takes thought and research. Too often we see clients disappointed by their charitable experiences because they haven’t given the giving process time and attention. Giving and making a real difference is not as easy as it first may seem. The more passionate your client is about making a difference, the more personal satisfaction they will get from their foundation.

Sign 3: Financially comfortable

Is your client financially comfortable? Once the funds are in the foundation, they cannot be withdrawn. Family foundations are therefore only recommended for clients that are financially secure and that have the ability to permanently lock away part of their portfolio without it affecting their lifestyle. Foundations are suitable for clients that have investment portfolios robust enough to withstand financial shocks after the foundation has been established.

Sign 4: Unexpected wealth

In many instances, a strong trigger for setting up a foundation is when a family comes into a large sum of money (e.g. from a business sale or inheritance). Their lifestyle doesn’t require increased wealth. Often, they have an overwhelming urge to give some of it away as they feel like they don’t need it. Having said that, these clients may also be reluctant to give it immediately to charity due to a lack of experience with the charity sector. Setting up a foundation for these clients allows them to make a commitment to charity, but give back slowly and carefully as they become more familiar with philanthropy.

What next?

If you have a client that fits the family foundation profile, get them started today. Setting up a foundation will help their whole family establish an annual donation ritual. Your client will then have something that cannot be purchased: a legacy and the overwhelming feeling of fulfillment that comes from giving back.

By Jessica Bowman, Co-Founder

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Notes:
[1] https://www.acnc.gov.au/tools/factsheets/deductible-gift-recipients-and-acnc
[2] https://www.philanthropy.org.au/images/site/publications/Advocacy/Blueprint_to_Grow_Structured_Giving_Report_Final.pdf

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Jessica Bowman

Introduction

There is a huge diversity in charities. To assist your clients in fulfilling their desires to “give back”, think of the charity sector as you would the stock market. Some clients may desire security and predictability over their donation, while others may wish to gamble on high risk-high reward type donations.  There is no one-size fits all approach to picking charities: financial advisors must understand their clients financial circumstances, risk profile and values in order to develop a successful philanthropic plan and find the right charities for their clients.

Types of charities

Often when we think of charities we think of those with recognisable brands (e.g. Guide Dogs, Red Cross, World Vision). However, these charities represent a tiny minority of charities in Australia. In fact, there are over 57,000 registered charities in Australia. That’s 25X the number of companies registered with the ASX. Each one of those charities are different. They have different objectives and are run by different people that have different ambitions. They each have a different risk profile.

Generally, you can characterise a charity into one of the following three categories:

• Blue chip – charities that have been operating for more than 15 years, have established systems and ways of doing things and a solid financial base. These charities have a high degree of predictability over their outcomes, but may have poor administration ratios.
• Start up – charities that have been operating for less than 15 years, are driven by the power and passion of the founder, are experimenting with the best source of funds and operational model. These charities can deliver a great bang for your buck, have aspirations for growth, but may have unpredictable donor services and outcomes.
• Grassroots (penny stocks) – charities that are consciously focused on delivering a service to a niche problem and/or geographic area, and have usually operated for a long time. These charities usually rely heavily on volunteers and are conservative with how they use their money. They don’t tend to have aspirations for growth and can get bogged down in personalities and politics. Having said that, it is usually easy to understand how your money will be used.

Understanding charity quality

Charities vary substantially in quality. It’s important not to assume that a big charity with a recognisable brand name is synonymous with quality. It’s also important to never be complacent with a charity as they can change dramatically over time.

Discerning the quality of a charity is similar to analysing stocks or investment funds. A high performing charity will have:

• financial integrity – the financial records will show that the organisation is using funds as described, that money is strategically allocated and that they aren’t over/under spending
• high quality leadership and governance – their leaders will demonstrate the relevant skills and experience to be able to guide the charity
• strong strategic direction – quality charities will measure KPIs, and/or implement sophisticated evaluation and improvement systems. They will be consciously monitoring their outcomes and sharing the results of their work with their broader network.

Like any organisation, a charity’s performance will fluctuate over time depending on their leadership and circumstances. There are times where both the government and private donors are more concerned about some social/environmental issues than others. This has a direct consequence on the kinds of talent that a charity can recruit and their ability to fundraise. For example, during the 2019/20 bushfires, a number of grassroots charities raised millions of dollars. These organisations had to re-strategise and upskill the board and executive team to reflect the new budget. Today, those charities look vastly different from before the fires.

Conclusion

Charities, like stocks, are diverse. By looking beyond the recognisable brand names, you will find a broad array of different organisations with varied risk profiles and performance rates. These organisations are dynamic and will change over time depending on their leadership and circumstances. To engage your client in giving, understand their needs and preferences, and find charities that suit them.

By Jessica Bowman, Co-Founder

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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

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Most people want to give to charity in a meaningful and heartfelt way.

Introduction

There is clear evidence to show that high net wealth clients are increasingly interested in giving. Charitable giving is dominated by wealthy Australians, with over 40% of donations^[1] in Australia given by the top 1% income earners. Not only that, wealthy Australians are giving more as time progresses. Since 2015, there has been a steady increase in giving by high income earners, with the average gift increasing almost 300%^[2] over that time. Some suggest^[3] that these substantial increases in giving by the affluent are a reflection of an undercurrent of changes in the way people demonstrate their status.

Despite these trends, there is a general hesitation among financial advisers to talk to their clients about giving to charity.  Advisers are not typically equipped to know how to answer questions about charities. They don’t want to impose their values onto their clients. Importantly, they don’t want to damage the client relationship by putting their clients in a position where they have to say “no”.

Financial advisers can shy away from talking about giving, or can build an expertise in the area and use it to their advantage. By gaining the skills to tactfully and confidently speak about giving, they will be better positioned to:

• provide a complete suite of investment advice
• engage the younger generation of wealthy Australians
• assist with preparing wills, and
• improve employee retention and engagement.

This article will outline the giving context in Australia and will present some tips on when and how to incorporate charitable giving into your client’s financial plan.

How much do people give to charity?

Over 80%^[4] of Australians report that they give to charity. There are a range of motivations for why people give. There can be an implicit obligation and responsibility of those “with” to give to those “without”. Religious protocols may provide them with expectation of giving to charity. Families may see shared giving as an opportunity to unite and come together. Finally, there are obvious tax benefits. The higher the income bracket, the greater the possible tax return from a charitable donation (see chart below).

Analysis of taxpayer data^[5] by the Australian Centre for Philanthropic and Nonprofit Studies (ACPNS) provides further detail on giving in Australia. In Australia, the greater the wealth and income of an individual or family, the more they give. Those earning less than $250,000 per year give about 0.25% per year. In contrast, those earning more than $250,000 per year give more than double that, giving at least 0.5% of their taxable income per year (see the ACPNS chart below).

Those living in the most affluent suburbs give more. The average amount donated in Peppermint Grove, Western Australia and Darlington, New South Wales, in the last reported financial year was substantial, at $348,000 and $104,000 respectively. In affluent suburbs in other states, the average gifts are still significant, although not as large. On Gold Coast, Queensland, the average gift was $19,000, in Toorak, Victoria, the average gift was $14,000 and in Rose Park, South Australia, the average gift was $13,000.

Occupation and age also play a role in how much people give. Those in executive positions towards the end of their career giving proportionately more. CEO’s give an average 1.3% of their taxable income and the value of gifts to charity peaks in the 55-59 age bracket.

Understanding charities in Australia

Many people have had poor experiences with charity as a consequence of a mismatch of expectations. For instance, a client might want their money to go “straight to the cause” but donate to a large multinational organisation where it is difficult to track how money is used. Alternatively, they might give their money to a volunteer-run organisation but are then disappointed with the lack of donor services (e.g. getting a tax receipt).

Generally, you can easily characterise a charity into one of the following three categories:

• Blue chip: charities that have been operating for more than 15 years, have established systems and ways of doing things and a solid financial base. These charities have a high degree of predictability over their outcomes but may have poor administration ratios.
• Start up: charities that have been operating for less than 15 years, are driven by the power and passion of the founder, are experimenting with the best source of funds and operational model. These charities can deliver a great bang for your buck, have aspirations for growth, but may have unpredictable donor services and outcomes.
• Grassroots: charities that are consciously focused on delivering a service to a niche problem and/or geographic area and have usually operated for a long time. These charities usually rely heavily on volunteers and are conservative with how they use their money. They don’t tend to have aspirations for growth and can get bogged down in personalities and politics. Having said that, it is usually easy to understand how your money will be used.

Understanding charity quality

Charities vary substantially in quality. On the outset it can be difficult to determine which organisations are strong performers. The good news for advisers is that understanding the quality of a charity is similar to analysing stocks or investment funds. A high performing charity will have:

• high quality leadership and governance
• financial integrity.

In addition to that, they will have a clear strategic direction and a method for measuring their performance over time. Quality charities will measure KPIs, and/or implement sophisticated evaluation and improvement systems. They will be consciously monitoring their outcomes and sharing the results of their work with their broader network.

When to introduce the charity conversation?

Once you hold a foundational level of knowledge on charities, it’s possible to start introducing the conversation of giving to clients. Provide clients with a clear statement that demonstrates philanthropic advice is an area of expertise, should they require it.

Ways of introducing your services include:

• in their annual financial statements, include a flyer that indicates that you provide philanthropic services
• on your website, indicate that you provide philanthropic services
• for all new clients, during the fact find, ask them to tick a box if they are interested in advice on giving to charity and/or philanthropic services
• in newsletter correspondence, include sections on philanthropy to demonstrate that this is an area that you specialise in – keep the content technical so not to impose your preferred value and/or charities on others.

How to introduce giving into financial plans

When a client indicates they are interested in giving, introduce giving into financial plans by following these steps:

• Understand the clients’ giving goals: Get an understanding of their values and risk profile. Understand their hesitations and fears about giving. Some charities are awful. They can be aggressive and corner you into a position where it’s hard to say no. Reassure clients that the charities carefully selected for them are different: they treat donors with respect and courtesy.
• Present 3-4 charity options: Once it is clear the kind of charity a client is interested in, download the Australian Charities and Not-for-profits Commission(ACNC)^[6] database of charities and apply relevant filters to identify matched charities. Conduct due diligence on each relevant charity option. Present the options to the client in a way that tugs at the heartstrings like videos and testimonials as giving is a heartfelt decision, but also validate your recommendations with data and facts. There are philanthropic advisers that can help with this research.
• Execute the transaction: offer the option of executing the transaction on their behalf. Corresponding with charities can be a time-consuming process. By providing this service, you can add significant value to your client.

Conclusion

Most people want to give to charity in a meaningful and heartfelt way. However, very few actually know how to give to charity. Identifying high performing charities is a skill any confident Financial Adviser can learn. Look for quality management, financial integrity and a clear strategy – features of any quality investment. Use technical language to position yourself as an impartial adviser. By gaining the skills to be a trusted adviser, you can uniquely position your services in a way that improves client relationships and assists with the ongoing succession of your business into new generations.

By Jessica Bowman, Co-Founder

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References:
[1] https://eprints.qut.edu.au/212682/9/An_examination_of_tax_deductible_donations_made_by_individual_Australian_taxpayers_in_201819.pdf
[2] Ibid.
[3] https://quillette.com/2019/11/16/thorstein-veblens-theory-of-the-leisure-class-a-status-update/
[4] https://mccrindle.com.au/insights/blog/charitable-giving-behaviour-in-australia/
[5] https://eprints.qut.edu.au/212682/9/An_examination_of_tax_deductible_donations_made_by_individual_Australian_taxpayers_in_201819.pdf
[6] https://www.acnc.gov.au

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