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 Smarter Giving - Eureka Report Article 
 
 
 

September 11, 2006
Smarter giving
By Scott Francis

PORTFOLIO POINT: A charitable fund will go on giving in perpetuity; but investors should be aware that there are costs involved and once money is committed to the fund it cannot be taken back.


They've been around since 1999, but it's only in the last year or so prescribed private funds (PPFs) have become popular with Australian investors looking to manage charitable donations in a more efficient and strategic manner. Inspired by some of the market's best-known investors, including Chris Cuffe, the former Colonial Investments star who has become a one-man advertisement for PPFs, the funds allow investors to use their investment skills to make more money for charitable purposes.

According to industry estimates, about $600 million is already held in PPFs and that figure is growing by more than 40% a year. The average fund holds about $1.5 million with $250,000 seen as the minimum entry level.

A prescribed private fund is one of three basic structures investors can use for their charitable activities. The others are to add their money to a managed fund; or, the most flexible of the three options, to set up a do-it-yourself fund. Here's how they work:


Prescribed private funds

Prescribed private funds, sometimes referred to as charitable trusts or charitable giving trusts, are set up with the specific purpose of distributing the income earned by the trust each year to a charitable organisation. These are commonly set up by wealthy individuals as the core of the charitable giving.

A person donating to the trust can claim a tax deduction for their donation. Once the money has been donated to the trust it can never be retrieved, it has been donated for good. Over time, additional tax-deducible contributions of capital can be made to the trust to continue to build up its capital.

Each year the trust's investment earnings are donated to charitable organisations. In the normal course of events you would expect the investment earnings of the trust to increase each year, particularly if a portion of the trust's assets are invested in growth assets such as shares and property.

Distributions from the trust can only be made to registered charities; this is something that you should keep in mind. If, for example, a family member fell ill, you would not be able to help them by accessing any of the capital in the prescribed private fund.

The costs associated with a prescribed private fund limit its effectiveness to people with at least $250,000 to use exclusively for charitable giving. This is because the set-up and running costs will eat away too much of the investment returns if the trust holds less than $250,000. A smaller initial amount might be feasible if it was going to be topped up regularly.

If you are looking to create a lasting stream of earnings to benefit registered charities, from a sizeable base of capital, and you are sure that you will never want access to that capital again, then a prescribed private fund is a powerful way of creating a charitable legacy.

For those with smaller amounts of capital, a similar "managed" alternative is worth considering.


'Managed' alternatives

Another option, which still allows the building of a perpetual legacy, is to pool your money with others in a managed fund, a "community foundation", such as the Melbourne Community Foundation or a "charitable gift fund", such as the Perpetual Charitable Gift Trust.

Your contributions are still tax-deductible, and the fund distributes the income from your capital to charitable organisations each year. As with a prescribed private fund, a stream of increasing earnings is being used to support charitable gifts in perpetuity.

It is also like a prescribed private fund that donations cannot be retrieved, and can be used only for charitable works. You can set up an account in your own name with an injection of capital, usually less than $25,000, and you can add to your capital over time.

You do not retain as much control over where earnings from your capital are donated. Most community foundations or charitable gift funds try to provide the donor as much control over which registered charities receive their donations; but they cannot guarantee where your investment earnings will be donated. This is an issue you should investigate prior to committing your money.

There will be costs involved in having a community foundation or charitable gift fund managing your capital. Make sure you understand these costs, and are comfortable with them.

Once you are comfortable with how the donations will be made from your capital, and that the costs are reasonable, these options provide a good way of creating a lasting stream of investment earnings to be used for charitable works, with significantly less capital than needed for a prescribed private fund.


The DIY alternative

A third option to accumulate capital for charity is to simply build an investment portfolio in your own name, and earmark its earnings for charitable giving. Provided the gifts are made to registered charities, the earnings of this capital will effectively be tax-free, as the tax deduction for the charitable gift will cancel out the tax on the income. You also retain the flexibility to access the capital for whatever you wish, such as to help in a family emergency, an advantage over the two previous options discussed, and to make distributions to non-registered charities.

Although you do not get the upfront tax deduction you would receive from making a one-off gift to a prescribed private fund, a community foundation or a charitable gift fund, you will get a tax deduction for every donation made to charitable organisations. The capital in your portfolio accumulates over time, so when the balance is big enough to cover the fees of another structure such as a prescribed private trust, you can then consider transferring it.

This is the most flexible of the three giving options discussed here; however it will require greater discipline to keep the money set aside for giving purposes only.


Conclusion

Most people's charitable activities involve making a number of one-off gifts to organisations each year. Informed investors know the power of investing in growth assets that provide a stream of earnings that increase over time. This article has provided three alternate giving options that, if you wish, can see you change your charitable giving from providing one-off gifts, to building a pool of capital that will provide charitable support in perpetuity.

In all of the above examples, your intentions with regard to any charitable activities should be incorporated into your estate planning arrangements.
Scott Francis' articles in the Eureka Report 

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