“Leave the children enough so that they can do anything, but not enough that they can do nothing”

In a note to shareholders, US billionaire Warren Buffett expressed his belief that his children should not inherit his (almost incomprehensible) wealth following his death. Instead, he prefers that his children “pursue philanthropic efforts” both during his lifetime and after it. Having a considerable ‘bounty’ to leave under your Will would seem to many to be a blessing, though it carries the risk of your wealth becoming a ‘poisoned chalice’ to your successors. You may feel that leaving some or most of your wealth to charity is a better choice, both for the independence of your children and to service a ‘greater good’. In this blog post, we cover your options should you too wish to devote your wealth to philanthropy, either during your lifetime or following your death.

During your lifetime

As addressed in a previous blog post, there are benefits to dealing with your wealth during your lifetime, rather than after your death in accordance with your Will. When it comes to philanthropy, two of the most relevant benefits are:

(a) seeing the ‘fruits’ of your bequests;  and

(b) putting your wealth outside of the reach of challenge by would-be beneficiaries of your Will by way of distributions to charities made as outright gifts or via a trust structure during your lifetime.

Outright gifts to charity

A simple and obvious method of charity during your lifetime is to make donations to registered charitable organisations. Donations of more than ten dollars are tax-deductible, but beware of the limitations around tax deductibility because the charity must be a deductible gift recipient for the purposes of tax law and there must be no material benefit to you as a result of a deduction.

There are also specific requirements for donating property (including real property or shares) to a charity in order to claim a tax deduction. This option of making a gift is most suited for those giving small and/or occasional amounts to one or more charities.

Philanthropic Trusts

For potential donors looking to channel their wealth into ongoing philanthropy, a trust established during the donor’s lifetime may be appropriate. This may take the form of a Private Ancillary Fund (PAF).

A PAF is a ‘vehicle for private philanthropy’ (according to the relevant legislation) and can be established by an individual, a family or a business. The PAF itself is the deductible gift recipient, meaning family members can receive a tax deduction for money or property transferred into the fund. Such donations then form the capital of the PAF which can then be invested with income distributed to charitable organisations.

There are specific rules that govern PAFs, including:

  • At least one of the individuals involved in the decision-making of the PAF must be a ‘responsible person’, or a person with a degree of responsibility to the Australian community. Generally, this includes individuals who belong to a professional body with a code of ethics, such as a medical practitioner or lawyer;
  • The ‘responsible person’ cannot be a major donor or founder of the fund;
  • The PAF must make distributions equivalent to at least 5% of the value of the fund’s net asset each year, and such amount must be at least $11,000; and
  • The PAF is subject to strict reporting and auditing requirements

Due to the high threshold of charitable distributions required for a valid PAF, it is only suitable for clients with a high net worth who are looking to make considerable annual contributions to charity.

The complexity of the law surround PAFs requires expert legal advice, so please contact us if you are considering establishing such a structure for yourself or your family.

After your death

Charitable bequests

Many of our clients, regardless of the size of their estate, choose to leave bequests to institutions under their Wills. As an outright gift, there is more flexibility in regard to the beneficiaries of the bequest as tax deductions are not relevant; for example, you could leave a gift to a sports club that is not a deductible gift recipient. Your bequest can be for the organisation’s general purposes or for a specific purpose, such as leaving a gift to a hospital for research into a particular disease. You may also choose to leave a percentage of your residuary estate (i.e., your estate after specific gifts are taken out) to a charity or charities.

Testamentary Trust

Usually, testamentary trusts (trusts established by a Will) are established for the benefit of individual relatives and their descendants. It is possible, however, to establish a testamentary trust in favour of a charity or charities. The Trust must be created for a recognised charitable purpose, or what is referred to as a ‘head of charity’, such as relief of poverty or advancement of education (though these terms can be applied broadly).

Using such a structure provides tax benefits to the Estate, including exemptions from capital gains tax and income tax, though such advantages must be balanced against the ongoing costs to administer such a Trust.

If you have a desire to make contributions to charities you must also weigh up the needs of other potential beneficiaries of your Estate to whom you owe a ‘moral obligation’. This is because if you do not adequately provide for them under your Will and instead preference philanthropy, your children (or other dependants) may seek a claim for “further provision” from your Estate by way of a legal challenge.

Of course, if you are in the position of a “Warren Buffett”, then a small percentage of your Estate for charitable purposes should still be sufficient to make due provision for your beneficiaries; otherwise, you may need to re-adjust the proportions of the bequests in your Will. Should you wish to make only a modest provision for your children (for example) we recommend disposing of a pre-determined proportion of your assets via philanthropic pursuits during your lifetime, as described above. Unlike in New South Wales, these assets cannot be ‘clawed back’ in a Victorian Supreme Court claim after your death because they may be treated as part of your “notional estate”.

Distributing wealth to charities in a way that is tax-effective and protects your Estate from claims for further provision can be complex. Our experience in advising on succession and estate planning can take the weight off your shoulders. Contact us today to discuss your wishes.