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Charitable giving tips and traps

Philanthropic considerations should not just be a once-a-year deliberation, Equity Trustees says.

A good financial strategy should include a structured and long-term approach to philanthropic giving which will also provide tax advantages, the independent trustee company's general manager philanthropy Tabitha Lovett says.

AN ONGOING APPROACH

Instead of simply writing a tax-time cheque for a chosen charity, Ms Lovett suggests looking at establishing a perpetual charitable trust for long-term benefits.

She says it need not be expensive or complicated, with a donation of $20,000 enough to seed and establish a philanthropic vehicle.

"Ultimately, a perpetual charitable trust can help to better fulfil a donor's philanthropic goals in a much more targeted and lasting manner and will ensure a greater impact on their chosen charity or cause rather than ad-hoc donations."

TYPES OF CHARITABLE TRUSTS

SUB-FUND WITH A PUBLIC ANCILLARY FUND (PuAF):

* Has significantly lower start-up costs than a private one

* Recommended for those who want to start small but still want to have some direction over which charities, programs or causes they support

* Donations attract the same tax deductions and considerations as making a donation directly to a charity.

PRIVATE ANCILLARY FUNDS (PAFs):

* Often used for family foundations and are suitable for those who can donate at least $300,000 in investible assets

* Income generated by a PAF's investments is tax-free so that funds available each year are not depleted through tax

* More than 1,000 PAFs in Australia distribute about $200 million annually to charitable organisations

TESTAMENTARY CHARITABLE TRUSTS:

* Traditional way of leaving a lasting legacy and a common vehicle for distributing funds to charitable organisations and causes

* 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 will

MONITOR YOUR EFFORTS

Ms Lovett says Equity Trustees requires charitable organisations to submit progress and acquittal reports each year on how the grant funds have been expended.

A philanthropist can track and evaluate the outcomes achieved with the funds and make decisions about what projects or charities to support in future years.

ENSURE CORRECT AMOUNT BEING DISTRIBUTED

Ms Lovett says the advantage of using the PuAF sub-fund option rather than a standalone PAF is that a PuAF has lower minimum distributions requirements, allowing a donor to build the capital of the fund.

PuAFs must distribute the equivalent of four per cent of the fund's market value (capital and income) each year whereas PAFs are required to distribute five per cent of market value, she says.

ENSURE TRUST HAS 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," Ms Lovett says.

"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."

She says good asset allocation is also vital, with a diversified growth fund a good place to start.

Ms Lovett says there has been an increasing demand for funding from charities in recent years.

"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."