Advivo Business Advisors and Accountants provide insight on the benefits of strategic long-term giving
A Private Ancillary Fund (PAF) is a form of charitable trust that can be used for strategic long-term giving. This is a very special type of trust and it offers donors tax deductibility and flexibility in their charitable giving.
Private Ancillary funds provide a link between people who want to give and organisations that can receive tax-deductible donations (these organisations are known as deductible gift recipients, or DGRs). They may be public or private, and they provide money, property or benefits to DGRs.
Benefits of private ancillary funds
A PAF can be used to further your philanthropic objectives in a controlled and enduring way. It enables:
- Income tax deductable giving
- The ability to retain control over which Deductible Gift Recipients receive distributions
- Income tax exemption for income earned by the fund, including capital gains.
When established, a sum is donated to a PAF. This sum is a tax-deductible donation to the person/entity making the donation. After this point:
- Funds are invested
- A minimum percentage of the PAF funds must be donated each year to other deductible gift recipients
- Additional donations are able to be made to the PAF at later dates if desired
- There are governance requirements such as an independent director as well as directors who are part of the family group who establish the PAF.
- Funds contributed to the PAF can never return to those who put them in or anyone connected to them and can only end up with registered deductible gift recipients.
Private Ancillary Funds are not for everyone. Due to the rigorous compliance requirements, the fund needs significant initial or ongoing contributions for it to be sustainable. The investment return on the funds needs to be enough to cover gifting 4% of the total balance each year, plus the running costs of the PAF. We don’t recommend looking at one without committing at least $1m to it, for this reason.
Why would you want to set up a Private Ancillary Fund?
Setting up a Private Ancillary Fund is an opportunity to donate to a charity close to your heart and get maximum tax deduction and flexibility. It is a gift that keeps on giving.
Whilst you can no longer benefit personally from the money you put into your PAF, you still control these funds. This means that you can choose each year which charity/s receive your annual donation from the pool of funds in the PAF. Because of this you can engage with your favourite causes on an ongoing basis.
A PAF can let you quarantine part of your assets for benevolent purposes. This is great if your other assets are at some risk because of your professional or business activities, as the PAF assets are protected from other entities.
The PAF can be a great way to encourage a giving mindset for future generations of your family. By getting them involved in selecting and donating to charities, they can see firsthand the challenges that others face who may not be as fortunate in life as your family are. Because the PAF can continue past any one lifetime, this can leave an ongoing legacy.
At Advivo we have helped our clients establish and manage their PAF so if this is something that is of interest to you please contact us to discuss further.