Introduction

Grasping offshore asset protection is vital for keeping your wealth safe and planning your financial future. Charitable purpose trusts give a special way to safeguard assets and back good causes at the same time. Dive into the perks of these trusts, see how they stack up against other types, and get handy tips for global estate planning. Aiming to cut down on taxes or wanting to leave a lasting legacy? This guide will steer you toward smart choices.

Understanding Charitable Purpose Trusts or Charitable Trusts

Charitable purpose trusts are specialized legal structures designed to manage and distribute funds for charitable purposes. To be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC), a trust must adhere to specific legal criteria. These criteria ensure that the trust operates as a not-for-profit entity, serves purely charitable purposes that benefit the public, and does not engage in activities that disqualify it, such as serving individual interests, political ambitions, or government operations.

To maintain certain advantages, such as tax exemption status, charitable trusts are usually required to ensure that their distributions are made exclusively to other non-profit organizations or registered charities. This stipulation is often detailed in the trust’s deed, highlighting the need for careful structuring and management to comply with legal requirements while fulfilling the trust’s charitable objectives effectively.

What Constitutes as a Charitable Purpose?

The definition of what constitutes a charitable purpose is outlined in the Charities Act 2013 (Cth) and further detailed in the Charities Consequential and Transitional Act. According to this legislation, a charitable purpose encompasses a range of activities, including the protection of human rights, promotion of reconciliation and tolerance, and various modern charitable efforts such as prevention, education, research, and raising awareness.

Charitable trusts, such as grant-making foundations, play a unique role within this framework. Unlike other non-profit organisations that directly undertake actions to fulfil specific purposes, charitable trusts primarily focus on distributing funds. These funds are allocated in a manner that enables other organisations to effectively pursue their charitable objectives.

The concept of ‘charitable purpose’ has evolved through court rulings and legislative changes, adapting to societal shifts. The Charities Act 2013 lists twelve recognised charitable purposes:

• Advancing health
• Advancing education
• Advancing social or public welfare
• Advancing religion
• Advancing culture
• Promoting reconciliation, mutual respect, and tolerance among groups in Australia
• Promoting or protecting human rights
• Advancing the security or safety of Australia or the Australian public
• Preventing or relieving the suffering of animals
• Advancing the natural environment
• Other purposes beneficial to the general public
• Promoting or opposing changes to law, policy, or practice that affect the above purposes.

Key Features of Charitable Purpose Trusts

A charitable trust is a type of express trust specifically designed to support charitable activities. Like all express trusts, several key features must be present for a charitable trust to be legally recognised and effectively operational. Here’s a breakdown of these essential elements:

Key Feature	Description
Certainty of Intention	There must be a clear and explicit intention to create the trust, known as certainty of intention. This involves the settlor expressing a desire to set up a trust specifically for charitable purposes, documented formally in the trust deed or will.
Certainty of Subject Matter	The trust must have clearly defined assets or property, known as the certainty of subject matter. These assets are used to generate income or benefits for the charitable activities supported by the trust. The identification of these assets must be precise to avoid legal complications regarding their use.
Certainty of Objects	The beneficiaries, or in the case of a charitable trust, the purposes, must be clearly defined. This is known as the certainty of objects. The trust must support purposes that are recognised by the Charities Act 2013, as discussed previously in this article.
Creation and Duration	A charitable trust can be established by a living individual through a declaration of trust or by transfer of property, or through a will. Unlike other trusts, charitable trusts can have an indefinite duration, thanks to legal protections such as the Perpetuities Act 1984 (NSW) which allows these trusts to extend beyond usual legal limits.
Government Oversight	Charitable trusts are administered under the oversight of the Crown, typically delegated to the Attorney General. This oversight ensures that charitable trusts are properly managed, and the Attorney General has the authority to enforce the trust’s terms or take over its administration if necessary to ensure the fulfilment of its charitable purposes.

These key features ensure that charitable trusts operate transparently and effectively, adhering to their intended charitable purposes while benefiting the community in a legally recognised manner.

Advantages of Charitable Purpose Trusts for International Estate Planning

Charitable purpose trusts play an important role in international estate planning, offering a unique blend of philanthropic legacy, financial benefits, and strategic flexibility. The key advantages of using charitable purpose trusts for estate planning include:

• Legacy and Philanthropy: Charitable trusts enable individuals to leave a lasting legacy by contributing significantly to charitable causes or organisations. By setting up these trusts, donors ensure that their support for these causes endures beyond their lifetime, cementing a lasting impact on the community and causes they care about.
• Tax Advantages: From a fiscal perspective, charitable purpose trusts offer considerable tax benefits:
  • Bequests: Direct bequests to charities are deductible from the estate for tax purposes, potentially reducing the estate tax burden significantly.
  • Charitable Remainder Trusts: These trusts provide income tax deductions for the donor, especially beneficial when funded with appreciated assets. Upon the donor’s death, the remaining assets are transferred to designated charities, reducing the taxable estate.
• Financial Planning and Income Generation: Charitable remainder trusts serve dual purposes—providing a steady income stream to the donor during their lifetime and ensuring a charitable gift upon their death. This arrangement supports financial stability for the donor while guaranteeing future benefits to charitable causes.
• Flexibility and Control: Planned donations through charitable trusts offer donors control over their charitable contributions. Donors can specify amounts, designate specific charities, and impose conditions on the use of the funds, tailoring their philanthropy to personal philanthropic strategies and family planning needs.
• Perpetual Existence: Unlike other trusts, charitable trusts can exist indefinitely, providing ongoing support to charitable causes.

Disadvantages of Charitable Trusts for International Estate Planning

However, there are several challenges and limitations associated with charitable trusts:

• Complex Trust Law: Managing a charitable trust requires navigating complex legal landscapes, necessitating professional legal advice.
• Lack of Separate Legal Entity: Charitable trusts cannot own property or enter contracts in their name; instead, everything must be held in the trustees’ names.
• Unlimited Liability: Trustees may be personally liable for the trust’s debts and obligations.
• Regulatory Compliance: Charitable trusts must adhere to strict regulations, especially if registered as a charity with the ACNC, including maintaining financial records and meeting governance standards.

Charitable Purpose Trusts vs Other Trusts

Feature	Charitable Purpose Trusts	Non-Charitable Purpose Trusts	Traditional Trusts	Discretionary Trusts
Primary Focus	Focus on societal benefits (e.g., education, poverty relief)	Created for specific non-human purposes (e.g., property upkeep, pet care)	Provide benefits to specified individual beneficiaries (e.g., family)	Main purpose is to ensure that trustee has discretion over distribution to beneficiaries
Beneficiaries	Benefits the public indirectly through charitable activities	No direct human beneficiaries; serves the trust’s purpose	Includes specific individuals or groups as beneficiaries	Beneficiaries must be identified in the trust deed; trustee decides on distributions
Duration	Usually perpetual, provided the charitable purpose remains relevant	Can be indefinite, depending on jurisdictional rules	Typically limited by the lifespan of beneficiaries or a fixed term	No fixed term; depends on trustee discretion and trust terms
Enforcement	Government oversight ensures compliance with charitable laws	Lacks traditional beneficiaries; relies on appointed enforcers or court oversight	Beneficiaries have legal rights to enforce trust terms	Trustee has significant control; legal advice recommended for changes to avoid resettlement risks
Tax Treatment	Often tax-exempt; donations may be tax-deductible; beneficiaries taxed on distributions	Subject to regular tax laws; no special tax benefits	May be taxed depending on the trust structure (e.g., grantor trusts)	Generally not taxed if income is distributed; trustee may be taxed on distributions to minors or non-residents
Regulatory Oversight	Strict regulation to ensure funds are used for charitable purposes	Generally less regulated unless public interest is involved	Subject to standard trust and estate laws	Subject to standard trust regulations; must adhere to specific terms; legal advice recommended
Overseas Distributions	Mainly within Australia; up to 50% of income can be distributed overseas	Not specified; governed by trust deed terms	Not typically focused on overseas distributions	Allowed; trustee taxed on distributions to non-residents; non-resident beneficiaries may claim tax credits

Steps for Setting Up a Charitable Purpose Trust in NSW

Setting up a charitable purpose trust in NSW involves several critical steps, each designed to ensure the trust operates effectively and complies with legal requirements. Below is a structured guide to help you navigate the process:

Establishing the Trust

1. Initiating the Trust: A charitable trust can be established through a bequest in a will, though this is not mandatory. It typically starts with an initial capital or corpus intended to be held in perpetuity. The income generated from this capital is periodically distributed to support various charitable activities.
2. Attorney General’s Role: The Attorney General acts as the Protector of Charities under the doctrine of parens patriae, representing the Crown in overseeing the administration of charitable trusts. This includes ensuring that the charitable purposes are adhered to, and the trust’s property is protected.

Addressing Issues with Charitable Gifts

1. Inoperative Charitable Gifts: If a charitable gift specified in a will cannot be given (e.g., if the recipient organization no longer exists or has changed), the process differs based on the value of the gift:
   • For gifts under $500,000, an application can be made to the Attorney General under Part 4 of the Charitable Trusts Act 1993.
   • For gifts over $500,000, an application must be made to the Court.
2. Application Process: The application involves verifying the existence of a charitable trust and, if confirmed, may lead to the implementation of a cy-près scheme, which allows the reallocation of funds to a similar charitable purpose when the original intent cannot be fulfilled.
3. Public Notification and Implementation: If no objections arise after a one-month public notification period, the order to establish the scheme is finalised. This order is then published, taking effect 21 days post-publication unless challenged.

Making an Application for Cy-près Scheme

1. Required Information: Applicants must provide comprehensive information, including:
   • The document establishing the trust.
   • Details of the trust’s failure and the proposed cy-près scheme.
   • Information on current trustees and beneficiaries.
   • Financial details of the trust property.
2. Review and Decision: The Crown Solicitor reviews the application and advises the Solicitor General, who may authorise proceedings under the cy-près principle if the trust’s original purpose can no longer be met effectively.

Application of Charitable Gifts by the Governor

1. Governor’s Role under the Sign Manual: In cases where no formal charitable trust exists but a general charitable intent is expressed (e.g., gifts to “the poor” or “medical research”), an application can be made for the Governor to direct the gift’s application under the Sign Manual.
2. Process and Requirements: Applicants must provide:
   • The document indicating the charitable gift.
   • Relevant court orders and details of the gift’s proposed use.
   • Information on involved parties and the value of the gift.
3. Attorney General’s Decision: If the Attorney General deems it appropriate, the gift may be distributed under the Sign Manual. If not, the application may be redirected under the Charitable Trusts Act if it meets the necessary conditions.

Demonstrating Charitable Purpose for Registration

To register with the ACNC, an organisation must clearly demonstrate its charitable purpose through:

• Governing Documents: These should explicitly state the organisation’s purpose.
• Supportive Evidence: Additional documentation such as annual reports and financial statements.

Post-Registration Benefits

Once registered, the organisation’s classification (e.g., Public Benevolent Institution) can influence the extent of tax concessions it receives, necessitating further documentation to support these classifications.

Setting up a charitable purpose trust in NSW involves complex legal requirements and compliance with both state and federal regulations. It is advisable to seek professional legal guidance throughout the process to ensure all legal and compliance obligations are met.

Legal Framework and Compliances for Charitable Purpose Trusts

Charitable purpose trusts operate within a stringent legal and regulatory framework, requiring adherence to specific guidelines to ensure their effectiveness and compliance. Below are the key legal and regulatory aspects related to charitable purpose trusts:

Legal Nature and Structure of Charitable Trusts

Charitable trusts differ from other not-for-profit entities as they are not separate legal entities. This distinction means that the trust itself cannot own assets or enter into contracts; instead, all assets and contracts must be held in the name of the trustees. Additionally, trustees are personally liable for any debts and liabilities incurred by the trust. The Charities Act mandates that these trusts exist solely for public benefit and serve a defined charitable purpose.

Registration and Compliance with the ACNC

To access tax concessions and other benefits, charitable trusts must be registered with the ACNC. Registered charities must:

• Maintain Financial Records: Accurate and comprehensive financial records are essential for compliance and transparency.
• Submit Annual Information Statements (AIS): This includes a summary of financial activities and additional information about the charity’s operations. The AIS is made public on the ACNC website, barring specific privacy considerations.
• Adhere to Corporate Governance Requirements: This includes maintaining a sound governance structure to ensure proper management and accountability.

Annual Reporting Requirements

The size of a charity—small, medium, or large—determines its specific reporting obligations:

• Small Charities: Defined as those with revenue under $500,000 (from 2022 onwards), they must answer financial questions in the AIS but are not required to submit a financial report or have their accounts audited.
• Medium Charities: With revenue between $500,000 and $3 million, these entities must submit a financial report. If classified as a reporting entity, they must prepare general-purpose financial statements, adhering to specific accounting standards. Non-reporting entities can choose to prepare special-purpose financial statements but must comply with minimum accounting standards.
• Large Charities: Entities with revenue exceeding $3 million must submit audited financial reports. These charities must also disclose remuneration paid to key management personnel, starting from the 2021-22 financial year, to enhance transparency.

Financial Transparency and Related Party Transactions

From the 2022-23 reporting year, all charities are required to disclose related party transactions. This mandate aims to increase transparency regarding transactions that could pose conflicts of interest, ensuring that all dealings are conducted with integrity.

GST Registration and Compliance

Charitable trusts must register for Goods and Services Tax (GST) if their annual GST turnover is $150,000 or more. Charities benefit from GST concessions, where certain types of income may be deemed GST-free. This registration also allows eligible charities to claim input tax credits, which can provide significant financial relief.

Refund of Franking Credits

Charities endorsed for income tax exemption may be eligible for a refund of franking credits if they receive franked distributions or dividends. This refund can be a valuable financial resource, enhancing the charity’s ability to fund its activities.

Key Takeaway

Charitable purpose trusts offer a unique combination of tax benefits, legal protections, and philanthropic opportunities, making them a valuable tool in international estate planning. By carefully structuring these trusts, individuals can achieve both personal and charitable objectives, ensuring that their legacy endures while benefiting society. For tailored advice on setting up a charitable purpose trust, contact PBL Law Group to discuss your estate planning needs.