by Susan Chenoweth
Head of Elston Philanthropic Services

When many people think about estate planning, they’re initially focused on who they should leave their assets to. But often, through the estate planning process, they also find themselves thinking about the legacy they could be leaving.

What are the seeds of positive impact they can plant now, and help to grow into the future?

As a trusted adviser, you have a unique opportunity to assist your client to answer this question. But first, you’ll need to know a bit more about philanthropy and the different avenues to creating a legacy. This article gives you an introduction to the key concepts that can help to open up those important discussions.

Philanthropy is not just for the wealthy

There is an increased willingness and capacity of Australians for philanthropy, including making provision for charities in their wills.¹ Philanthropy and leaving a philanthropic legacy are no longer areas reserved for the wealthy.

There are a number of factors driving this growing interest in giving.

The Motivations Behind Philanthropic Giving

Before we delve into the how of philanthropic giving, it’s essential to understand the fundamental concept of philanthropy. At its core, philanthropy is the act of giving to help others, typically through financial contributions or donations of time, resources, or expertise.

Philanthropy is generally driven by a deep-seated desire to make a difference, to address social issues, and contribute to the betterment of society.

People are motivated to engage in philanthropy for a variety of reasons.

  • Social impact: Some are driven by a profound sense of empathy and a desire to alleviate suffering, while others seek to promote social or environmental causes close to their hearts. Often the charity will be one which has assisted the family in the past or one which is meeting a societal need and dear to the heart of the will maker.
  • Fulfilling personal values and beliefs: For many individuals, philanthropic estate planning is a means of aligning their financial resources with their personal values and beliefs. It offers a sense of fulfillment and purpose, allowing you to contribute to the causes that resonate with you on a deeply personal level.
  • Fostering family traditions: Philanthropy also provides a platform for fostering family values and traditions. It provides a way to involve heirs in charitable giving decisions, instilling in them a sense of social responsibility and empathy. Engaging the next generation in philanthropy helps ensure that family’s legacy of giving continues for years to come.
  • Leaving a lasting legacy: For others, philanthropy represents an opportunity to leave a lasting mark on the world, to be remembered not only for their financial success but also for their positive impact on the lives of others.
  • Tax benefits: One of the key advantages of philanthropy is the potential for tax benefits. In many countries, including Australia, there are tax incentives designed to encourage charitable giving. By strategically incorporating philanthropy into your estate planning, you may be able to reduce your estate’s tax liability while supporting causes you care about.

The Concept of a Lasting Legacy

Estate planning is often the crossroads or trigger event that presents an opportunity for an individual to create a lasting legacy that extends beyond the transfer of financial assets within a family.

A lasting legacy is about more than just money. It encompasses the values, principles, and beliefs that are important to you and that you want to pass on to future generations. In this context, estate planning becomes a tool not only for preserving and distributing wealth but also for perpetuating the ideals and causes that matter most to you.

That legacy might be a lasting contribution to care for others, advancing medical science, or funding the acquisition of artworks that can be enjoyed by an entire community.

It also might be a legacy of values, traditions of generosity and giving for future generations of your family.

Contemporary philanthropists have many options when it comes to dipping their toes into the water of charitable giving.

Different Ways of Giving

Engaging in philanthropy through bequests in a will, or during an individual’s lifetime can yield numerous benefits, both for the individual and for society at large. There are several strategies for incorporating philanthropy into your estate plan, each with its own advantages and considerations.

Donating Directly to Charity

Many Australians choose to donate directly to charity, either individually or through a giving collective such as a giving circle. This approach allows people to give “what they can, when they can,” offering a flexible and convenient way to start and stop their contributions.

Structured Giving

Charitable trusts can be established either through a will or in a person’s lifetime, and there are many advantages to doing so, including:

  • ‘Structured giving’ provides individuals with significantly more control over charitable contributions and how those gifts benefit chosen beneficiaries and projects.
  • They can be set up in perpetuity to provide ongoing and sustainable support to the charitable causes you care about, often with attractive tax incentives.
  • They can offer the donor anonymity

In addition to the pleasure people derive from charitable giving, using a structure can have a profound effect on a family as a whole. It provides the opportunity for family members to collaboratively determine the charities they wish to support and can also have the effect of emphasising for the family, the spirit of giving, which in turn enriches the values of a family.

The type of philanthropic structure you establish will impact your legal, financial and operational requirements, and the cost of your giving program.

Some Common Types of Charitable Trust Structures

Charitable Trust

This can be used to create a legacy after one’s passing. The trust can exist in perpetuity, serving as a living memorial.

Private Ancillary Fund (PAF)

  • PAFs are highly regulated by the government and typically require a substantial initial sum ($1 million is often recommended as a starting point) because of the administration costs associated with them.
  • They are ideal for donations made during an individual’s lifetime due to the tax deductibility of donations to a PAF.
  • There is a minimum percentage (5%) of the fund that must be distributed each year to prescribed, eligible charities.
  • They can be a great option for involving family and close associates in your giving.

A “Sub Fund” within a Public Ancillary Fund (PuAF)

  • May offer a more accessible way to engage in philanthropy as establishing a sub fund requires a much smaller investment than is required for a viable PAF, usually in the range of $20,000 to $50,000. Contributions to the sub fund can be made over time.
  • It functions as a “giving account” within a larger public foundation
  • This option provides a simple and low-cost way to get involved with giving

Ultimately, the right philanthropic vehicle for you will depend on your individual circumstances. Establishing structured giving during your lifetime or as part of your estate plan offers a profound sense of fulfilment and intergenerational connection.

Giving While Living

In addition to testamentary giving, I highly recommend discussing lifetime giving with clients, as it offers significant benefits for some donors.

  • The joy of giving: Giving while living enables people to experience the impact of their generosity during their lifetime, fostering a deeper connection to the causes they support.
  • Tax benefits: When a donor gives during their lifetime, donations to eligible beneficiary charities are typically 100% tax deductible. This includes donations to ancillary fund structures. In contrast, gifts made through wills are generally not tax deductible. However, a bequest may be exempt from capital gains tax (CGT) if it includes shares, property, or other assets subject to CGT.
  • Forming partnerships: Ensure you are confident about your charitable beneficiaries by thoroughly getting to know your charity partners.

Giving Through a Will

It is often in a person’s will that a lasting legacy can be truly established. Unlike immediate donations, bequests are planned gifts, designated through a will or estate planning, to be distributed upon the donor’s passing. This form of giving allows individuals to make significant contributions that may not have been possible during their lifetime, due to financial constraints or other commitments. Bequests are a testament to a donor’s long-term vision for the causes they care deeply about, reflecting a desire to leave a legacy that extends beyond their lifetime.

Balancing Donor Legacy with the needs of Beneficiary Charities

Ensuring that the provision is appropriately drafted requires more than simply naming the charity and specifying the amount to be given. Key details that need to be checked include:

The correct name and address of the charity. The charity may have changed its name, merged with another charity, or ceased to exist.

The charity’s preferred form of the bequest. This information may be obtained from the charity’s website, if it has one. Additionally, the charity may prefer that a bequest is to a particular fund maintained by the charity. For example, it may be seeking to direct donors to its investment fund where it proposes that only the income will be applied for its purposes.

Charities often experience challenges when receiving bequest gifts. Some report:

“Donors don’t notify us of their bequests or check to confirm if we can accept their gifts which creates more work for their executors if we are placed in a position where we must decline them.”

“Instead of including a non-binding statement of wishes regarding how donors would like their cash gifts applied, often lawyers include terms in the will such as ‘to be held on trust’ together with one or more conditions.”

This wording results in some charities having to establish separate charitable trusts, which requires additional administration and governance. This includes maintaining separate financial statements, annual auditing, investment strategies, governing documents and registering with the Australian Charities and Not-for profits Commission (ACNC). Most often the amount of funds isn’t of a scale that justifies this level of additional administration when a charity’s existing Foundation already has very robust governance systems in place.

Most charities prefer that Estate Lawyers encourage their clients to notify the charity of their plans and confirm that the charity can confidently realise their intentions in the future and after this. If appropriate, clients can then include a non-binding statement of wishes in their will or to the charity separately.

The best outcomes are achieved when charities have transparent and open conversations with donors about their thoughtful gift can be applied in a way that honours their intentions and provides a legacy they can feel proud of. This approach also allows flexibility to accommodate potential institutional changes in the future.

The best example I can think of involved a donor who had established a trust before passing away but by not fully understanding it, his will dictated that another separate trust be established when he passed away. We also received the proceeds of some investments from his wife’s estate that came to us when he passed away. However, these came with no conditions so went into our Foundation, resulting in three distinct funds all with different conditions! After he died, we had to apply to the Court for the two separate Trusts in his name (but named slightly differently) to be combined. It took a lot of untangling!

Furthermore, as a failsafe against a charity ceasing to exist, it is usual to express a general charitable intent so that the bequest can be applied for charitable purposes of the type the charity had provided.

Statements of Wishes and their Role in Estate Planning Philanthropy

To ensure that your philanthropic estate planning leaves a lasting impact, consider how both current and future trustees of charitable structures, or your charitable beneficiaries will understand the legacy you want to leave.

Statement of Wishes (sometimes called Memorandum of Wishes) are non-binding documents that provide guidance on the objectives and purposes of estate planning documents and also allow the formal documents, such as a will or Trust instruments, to remain flexible and broad.

Finding the Right Philanthropic Cause

Choosing the right philanthropic cause is a crucial step in philanthropic estate planning. Consider the following:

  • Identifying causes close to your heart: Start by identifying causes that resonate with your values and beliefs. Consider what issues matter most to you and where you believe your contributions can make a meaningful difference.
  • Researching and evaluating charities: Once you’ve identified potential causes, conduct thorough research to find reputable charitable organizations that align with your goals. Evaluate their impact, financial transparency, and efficiency to ensure your contributions are used effectively.
  • Adapting to changing circumstances: Be prepared to adapt your philanthropic estate plan to changing circumstances, both within your family and in the external world. Flexibility is key to maintaining a relevant and impactful philanthropic strategy.

The Role of Professional Advisors

Collaborating with professional advisors is integral to achieving your philanthropic legacy:

  • Estate planning lawyers: can help you establish the legal framework for your philanthropic initiatives. They can assist in drafting wills, trusts, and other legal documents that reflect your charitable intentions.
  • Financial advisors: Financial advisors with expertise in philanthropy can guide you in structuring your giving in a way that aligns with your financial goals and enhance the tax-effectiveness of your approach.
  • Philanthropic consultants: engaging philanthropic consultants or experts can provide valuable insights into effective giving strategies, charitable due diligence, and impact measurement.

Final Thoughts

Philanthropic estate planning provides a powerful way to combine financial success with a deep sense of purpose. By strategically incorporating philanthropy into your estate plan, you can create a legacy of positive change that endures far beyond your lifetime.

Whether driven by a desire to address societal challenges, instill family values, or fulfill personal beliefs, philanthropy offers an avenue to leave behind a meaningful and lasting impact on the world.

References:

  1. Australian Charities Report 10th Editon. https://www.acnc.gov.au/tools/reports/australian-charities-report-10th-edition
  2. Wealth transfers and their economic effects Research Paper. https://www.pc.gov.au/research/completed/wealth-transfers/wealth-transfers.pdf

If you’d like to know more about Elston Philanthropic Services, contact Susan here.