For those wishing to develop a longer term and substantial grant making program, it is worthwhile considering the development of a private ancillary fund.
What is a Private Ancillary Fund?
A Private Ancillary Fund (PAF) is a kind of charitable trust. It serves as a link between donors and charities that have tax-deductable gift recipient (DGR) status. Simply put, PAFs are investment vehicles designed to provide sustainable donations to registered charities and DGRs. PAFs are established by an individual or a family group to coordinate and maximise the grants made to charity. A trustee, usually a corporate trustee, manages the PAF and is responsible for its investments and charitable distributions.
Why use a private ancillary fund?
A PAF may be suitable for someone who:
- Wishes to keep on giving after their death
- Wants a structured way to involve their children or family in philanthropy
- Has recently disposed of an asset and wishes to obtain a tax deduction in the year of sale
Are any investments are prohibited?
- A PAF can only invest in shares or property; it cannot run a business.
- A PAF can only borrow money under limited circumstances, such as for settling specific transactions.
- All investment dealings must be held at arm’s length; meaning they must be on commercial terms, beneficial only to the trust or recipient DGR. They cannot benefit the trustee, donor, or their employees, either directly or indirectly.
- A PAF cannot invest in collectables.
- A trustee cannot give a security interest over trust assets unless as a guarantee for an eligible DGR.
- The trustee must follow any investment directions or restrictions specified in the trust deed.
The trustee has an obligation to exercise appropriate care and skill in managing the PAF
The State Trustee Acts require that a trustee must exercise “the care, diligence and skill that a prudent person would exercise in managing financial affairs of others”. However, if a professional trustee or finance professional is appointed as trustee, they have a higher duty of care: they must “exercise the care, diligence and skill that a prudent person engaged in that (particular) profession, business or employment would exercise in managing financial affairs of others”.
A PAF must have an investment strategy, which directs the investment activities of the trustee. The trustee may also take advice from outside sources or appoint an outside manager, both of which can be paid for with trust funds. An annual review must be conducted to document the actions taken to implement the investment strategy and to examine the effectiveness of the strategy.
Indeed, the use of a PAF is a strategic way to manage not only the destination of charitable giving, but the extent of the targeted capital designated for this purpose as well as how it is managed. If you are considering setting up a PAF, the Warlows Legal team can assist you in this process.