“Why would I set up a giving structure rather than giving money directly to charity? Aren’t charities losing out?”

This short case study explains how a giving structure can help grow your philanthropic dollar, allowing you to give more money to charities over the long term.

Jennifer and Peter (not their real names) had always been generous with giving money to charity but had never considered establishing a giving structure. Then, after a significant windfall, they started to wonder if a PAF might make sense? They were in the fortunate position to have $10 million they wanted to invest over two years but weren’t ready to give that full amount directly to charities.

In 2014, Jennifer and Peter set up a private ancillary fund (PAF) with APS and seeded it with $10 million. APS takes care of the compliance, administration and management of their PAF, while their wealth adviser manages the investment of the capital.

In Australia, people can claim an immediate tax deduction on donations made to an ancillary fund. They can spread the deduction over five years, and have the flexibility to distribute the funds to charity over time. Contributions into a PAF are irrevocable, with the amount now committed solely for charitable use.

Today, Jennifer and Peter can see how much that decision to establish a PAF has paid off.

In the seven years since setting up their foundation, Jennifer and Peter have distributed over $5 million to charity, and the PAF is still worth more than $10 million today.

These numbers are based on a real example that benefited from the good investment returns experienced by many between 2014 to 2021 (which may or may not happen again). However, it clearly demonstrates the impact that a PAF can have on the amount donors can give over time.

Let’s break this down.

To summarise:

• Jennifer and Peter donated $10 million to set up the private ancillary fund (PAF)
• The capital was invested, with the returns accruing to their PAF
• Every year the couple gave away at least the minimum legal distribution of the PAF to the charities of their choice. PAFs must give away a minimum of 5% of the preceding year’s closing balance
• Jennifer and Peter have exceeded the minimum giving required, with their PAF giving around 10% of its value away each year in recent years
• The PAF is now worth more than the original amount the couple donated into it

Imagine if Jennifer and Peter had given all of the $10 million directly to charities back in 2015? There is no doubt that the money would have made a significant impact, but they would have lost the opportunity to decide how and where it would be spent over the long term. Furthermore, Jennifer and Peter (with no more windfalls in sight) would have dropped back to lower levels of annual giving. Setting up a PAF gave them time to thoroughly think through their decisions of who to fund, and supported their wish to provide ongoing long-term support to charities rather than large one-off gifts, which can also require careful planning and management by the recipients.

Now, let’s think about the future.

• Assume that the asset value of the PAF is maintained (while there are no guarantees, their wealth adviser has a solid track record of achieving good investment returns over the long term to date)
• Let’s also assume that Jennifer and Peter take a more conservative position with their giving and only give away the minimum 5% per year, meaning the PAF will give around $500k each year to charity. Within ten years (by 2031), they will have given away an additional $5 million to charity

That’s right. Within another ten years, they will have given away a full $10 million – the same amount that they donated to set up the PAF in the first place.

Their PAF will be worth more than when it began.

As Fiona Higgins highlights in her article ‘To exceed or not to exceed’, current levels of community need are so pressing that there is a compelling case for responding in real-time rather than holding off in favour of future needs. However, a PAF can enable you to do both. You can have an impact now and create a legacy to keep giving to charities in the future.

Setting up a PAF is a win all round. Jennifer and Peter can continue their charitable giving for years to come, and charities will benefit from the ongoing revenue stream far beyond the impact of a one-off donation.

Note: The figures quoted in this case study are based on an actual private ancillary fund, but names have been changed. It is intended to provide an example only and is not intended to be financial advice. Please make sure you seek financial advice based on your personal circumstances.