Hey Financial Advisors, Discussing Philanthropy is Good for You and Your Clients

Learn why discussing philanthropy when creating or reviewing a financial plan helps financial advisors build trust with clients. Philanthropy expert Tabitha Lovett shares her knowledge.

Hey Financial Advisors, Discussing Philanthropy is Good for You and Your Clients

Learn why discussing philanthropy when creating or reviewing a financial plan helps financial advisors build trust with clients. Philanthropy expert Tabitha Lovett shares her knowledge.

Raising the question of philanthropy when creating or reviewing a financial plan helps financial advisors build trust with their clients and assists in the regulator-mandated ‘know your client' process.

With issues of professional standards and advisor ethics being a focus of the government's past inquiry into the financial industry, the role of financial advisors and the value they add remains in the spotlight.

Discussing Philanthropy Reinforces the Trusted Adviser Role

To act in the best interest of their clients, an advisor should know the right questions to ask to gather all relevant information, then use it to add value to their clients' world. This is in essence mandated, with the ‘best interests duty' signalling that advisors must complete a ‘fact find' on the client to ascertain their situation, objectives and needs. During this process, raising the option of philanthropy with clients has been shown to build trust and reinforce the importance of the advisor's role. 

Despite many people having a passion or interest in philanthropy and giving, it's not discussed enough. Conversations about philanthropy provide clients with a greater understanding of their charitable giving options and provides advisors with greater insight into what makes their clients tick.

Charitable Trusts: Not Just for the Uber-Rich

A donation of $50,000 is enough to seed and establish a named giving account (subfund). Discussing philanthropy, especially a simple, structured and tax effective way to give, with estate planning clients is a way to offer a real value-added service and has seen an increase in the number and amount of funds being directed towards charitable causes. Research undertaken in the UK confirmed that if the option of leaving a bequest to charity is raised by an estate planner, the number of charitable legacies increases by around 20 per cent. 

Despite their rising popularity, there’s still a perception that charitable trusts are just for the very wealthy. But you don't have to be one of Australia’s biggest philanthropists to set up a charitable foundation.

Exploring Structured Charitable Giving Options

Typically, there are three main types of charitable vehicles available. A common question we get asked is what are the differences between private ancillary funds (PAFs), sub-funds with public ancillary funds (PUFs) or testamentary charitable trusts. Let’s get into them below.

Public Ancillary Funds

A sub-fund, or named giving fund, with a public ancillary fund, such as the BeBlueRock Foundation has lower start-up costs than a private one. Establishing a sub-fund provides all the benefits of a private ancillary fund but simplifies the administration and reduces costs as the expense of audits, tax reporting and administration are spread across the foundation as a whole, rather than by the individual sub-funds. It’s a simple, effective way to leave an enduring legacy without the responsibilities of maintaining a foundation.

Donors who use this structure make their donations directly to their sub-fund and receive a tax deduction. Their donation is then invested in an investment vehicle designed to meet the needs of charitable foundations (healthy income yield and capital growth to stay ahead of inflation) and all income and capital growth of their sub-fund's investments is tax free, as PUFs are endorsed by the Australian Tax Office as tax exempt.

The result? The donor gets their full tax deduction and their donation continues to grow in a tax-free environment, increasing the income which they can give away each year to the charities and causes they’re passionate about. The trustee of the PUF manages the investment, governance and administration, freeing the donor up to focus on the rewarding part of being a philanthropist — thinking about the issues in their community or problems in the world they want to support or tackle.

What About Private Ancillary Funds?

Private Ancillary Funds (PAFs), on the other hand, are often used for family foundations. PAFs are suitable for those who can donate at least $500,000 to $1m in investable assets and the income generated by a PAF's investments is tax-free. There are over 1,800 PAFs in Australia and collectively structured philanthropic vehicles like PAFS and PUFs distribute around $2.5 billion annually to charitable organisations.

Giving After Death Through Testamentary Charitable Trusts 

Before PAFs were introduced in 2001, testamentary charitable trusts were the traditional way of leaving a legacy and are still a common vehicle for distributing funds to charity. The difference is that beneficiaries don't have to be a deductible gift recipient, widening the options for giving, such as to individuals for scholarships. Income produced within the trust is tax-free but the initial establishment amount is not tax deductible as the trust comes into effect on a person's death through their estate. This means the benefactor doesn't have to be concerned with the consequences of gifting money during their lifetime or being involved with the trust's administration.

Changing Trends in Philanthropy

The beauty of philanthropy is that each philanthropists' objectives are unique, and at BlueRock we find our clients are keen to share their philanthropic goals and dreams of change. Granting distributions from trusts has evolved to be more strategic and sophisticated in recent years. Clients and their advisers are more informed and thoughtful about what they expect to achieve when they set up charitable trusts, which in turn encourages more flexibility in the way distributions are made.

At the same time, while interest in philanthropy is expanding, grant recipients' needs are also changing. As a result of these two trends, many trustees and charitable trust managers are taking a multiyear view on their work, rather than making annual ‘one off' distributions. We’re also seeing more grant and donation requests from the charity and not-for-profit sector looking for alternative funding as government cutbacks and the increased cost of living has resulted in reduced funding.

We often request charitable organisations to submit progress and acquittal reports each year on how the grant funds have been expended. The reports allow a philanthropist to track and evaluate the outcomes achieved with their grants, which in turn informs decisions about what projects or charities to support in future years. 

PAF and PUF Distribution Requirements

There are specific but different distribution requirements for a PAF and a PUF. The advantage of using the PUF sub-fund option rather than a standalone PAF is that a PUF has lower minimum distributions requirements, allowing a donor to build the capital of the fund.

PUFs must distribute the equivalent of 4% of the fund's market value (capital and income) each year, whereas PAFs are required to distribute 5% of market value.

Ensure Your Trust Has The Appropriate Underlying Investment

Considering that between four to five per cent of the fund's market value needs to be distributed each year, the fund needs investment return in excess of this amount if it is to be of a perpetual nature. This means that a conventional perpetual trust must have a reliable dividend yield higher than the equity market as a whole, so franking credits are often very important.

The number of requests for grants from charities is on the rise and this demand from the charitable sector is increasing, not decreasing. While government and private sector funding for charities can ebb and flow, the proceeds from perpetual charitable trusts continue to be distributed, regardless of the financial climate or government funding priorities, which is a good thing for the charity sector and the community they support.

Discover BlueRock’s Philanthropy Consulting Services

When you work with our philanthropy experts and the Be BlueRock Foundation, we take care of the administration side of philanthropy, including maintaining financial records, distribution requirements, secretariat services and reporting to the Australian Taxation Office (ATO) and the Australian Charities and Not-for-Profit Commission (ACNC).

If you have clients interested in supporting charities – our grantmaking service can help you help them. Together we can decide on their giving philosophy and the causes and charities they’d like to support… all with the right tax and investment strategies in place.

Get in touch with our team to discuss what option best suits your client.

Stay up to date with the Be BlueRock Foundation, learn about philanthropy and discover different ways to get involved with your business or your family.