Introduction

Protecting your assets and ensuring your financial security is a key aspect of managing wealth. For individuals looking to protect their assets across borders, charitable purpose trusts present a distinctive strategy. These trusts not only help in protecting your wealth but also enable you to contribute to charitable causes you care about. This article will delve into the advantages of charitable purpose trusts and contrast them with alternative trust structures. It also aims to offer useful perspectives on planning your estate internationally. If your goals include tax efficiency or establishing a meaningful legacy, this information is designed to assist you in making well-informed choices.

Understanding Charitable Purpose Trusts

Charitable purpose trusts are specific types of legal arrangements designed to manage and distribute resources for charitable work. To be officially recognized as a charity by the relevant regulatory body, these trusts must adhere to certain legal criteria. These criteria are designed to make sure the trust functions as a non-profit entity, focuses on charitable purposes that benefit the broader community, and avoids actions that could disqualify it. Activities that could lead to disqualification include those that primarily serve private interests, political objectives, or governmental roles.

Generally, to keep certain advantages, such as tax exemptions, charitable trusts are typically required to ensure their funds are only granted to other non-profit organizations or officially registered charities. This requirement is often stated in the trust’s legal paperwork, highlighting the significance of careful planning and management. This diligent approach is essential for both complying with legal requirements and effectively achieving the trust’s charitable objectives.

What Exactly is a Charitable Purpose?

The definition of a charitable purpose is provided in the Charities Act 2013 (Cth) and further clarified in the Charities Consequential and Transitional Act. According to this law, a charitable purpose includes a wide array of activities. These activities range from protecting fundamental human rights and encouraging understanding and acceptance between different groups to various modern charitable activities like prevention efforts, education initiatives, research projects, and public awareness campaigns.

Charitable trusts, like foundations that make grants, have a distinct function within this system. Unlike other non-profit groups that directly carry out actions to achieve particular goals, charitable trusts mainly concentrate on distributing funds. These funds are allocated in a way that empowers other organizations to effectively work towards their own charitable objectives.

The concept of ‘charitable purpose’ has developed over time through decisions made in courts and changes in legislation, adapting to shifts in society. The Charities Act 2013 provides a list of twelve recognized charitable purposes:

• Improving health outcomes
• Enhancing educational opportunities
• Promoting welfare in society and the community
• Supporting religious activities
• Developing cultural initiatives
• Fostering understanding, respect, and acceptance between various groups within Australia
• Protecting and advancing fundamental human rights
• Strengthening the safety and security of Australia and its people
• Reducing or ending the suffering of animals
• Protecting and improving the natural environment
• Other purposes that benefit the general community
• Advocating for or opposing changes to laws, policies, or practices that relate to the purposes listed above.

Essential Elements of Charitable Purpose Trusts

A charitable trust is a specific type of trust set up to advance charitable activities. Like all trusts of this kind, there are several essential elements that must be in place for a charitable trust to be legally valid and function as intended. Below is an explanation of these core components:

Essential Element	Description
Clear Intention	Establishing a charitable trust requires a clearly stated and obvious intention. This is known as certainty of intention. The person creating the trust (the settlor) needs to express a desire to form a trust specifically for charitable aims. This is usually done through a formal document like a trust deed or a will.
Defined Assets	A trust must have clearly identified assets or property, referred to as certainty of subject matter. These assets are the resources that will be used to generate funds or benefits for the charitable work the trust supports. It’s crucial to precisely define these assets to prevent any legal issues about how they are used.
Identified Purposes	The recipients of the trust’s benefits, which in a charitable trust are the charitable purposes themselves, must be clearly defined. This is known as certainty of objects. The trust’s goals must be officially recognized as charitable under the Charities Act 2013, as previously discussed.
Establishment and Timeframe	A charitable trust can be created in a few ways. It can be set up by someone while they are living, either through a declaration of trust or by transferring property to the trust. Alternatively, it can be established through a will, taking effect after someone passes away. Unlike some other types of trusts, charitable trusts can exist indefinitely. This is made possible by legal safeguards, such as the Perpetuities Act 1984 (NSW), which allows these trusts to operate for longer than typical time limits.
Regulatory Supervision	Charitable trusts are overseen by the government, typically through the Attorney General. This supervision is in place to make sure charitable trusts are managed correctly. The Attorney General has the power to enforce the terms of the trust or even take over its management if needed to ensure it achieves its charitable goals.

These essential elements are in place to ensure that charitable trusts operate in a transparent and effective way.

Benefits of Charitable Purpose Trusts for International Estate Planning

Charitable purpose trusts are a valuable option in planning your estate across international borders. They uniquely combine the desire to create a philanthropic legacy with practical financial and planning advantages. The main benefits of using charitable purpose trusts for estate planning are:

• Legacy and Philanthropy: Through charitable trusts, individuals can establish a long-lasting legacy by making substantial contributions to charitable organizations or causes. By creating these trusts, people can be sure that their support for these causes will continue beyond their own lives, making a significant and enduring impact on the community and the issues they value.
• Tax Advantages: From a financial standpoint, charitable purpose trusts can provide notable tax benefits:
  • Bequests: When you leave direct gifts to charities in your will, these amounts can be deducted from your estate for tax purposes. This may lead to a considerable decrease in the overall estate tax owed.
  • Charitable Remainder Trusts: These trusts can offer income tax advantages to the person who sets them up. After the person’s death, the assets remaining in the trust are then transferred to the designated charities. This transfer can reduce the amount of the estate that is subject to taxation.
• Integrated Financial and Charitable Planning: Trusts that leave a remainder to charity are useful for achieving both financial planning goals and charitable giving objectives. They can provide a consistent income for the donor during their lifetime while also ensuring a charitable donation is made after their passing. This approach provides financial security for the individual while also securing future benefits for charitable causes.
• Control and Flexibility: When donations are structured through charitable trusts, donors have a degree of control over their charitable contributions. They have the option to specify the amounts of their gifts, choose particular charities to receive support and establish conditions for how the funds should be used. This allows donors to align their philanthropy with their personal charitable strategies and family estate planning needs.
• Potential for Indefinite Duration: In contrast to some other types of trusts, charitable trusts have the potential to exist indefinitely. This means they can offer ongoing support to charitable causes for generations to come.

Limitations of Charitable Trusts for International Estate Planning

Despite their benefits, charitable trusts also come with certain difficulties and restrictions. These include:

• Complexity of Legal Rules: Administering a charitable trust involves dealing with intricate legal rules. Because of this, it is usually necessary to get advice from legal experts.
• Lack of Separate Legal Entity: Charitable trusts themselves are not recognized as separate legal entities. This means they cannot directly hold assets or sign agreements. Instead, all property and contracts must be managed and held by the trustees personally.
• Potential Personal Responsibility for Trustees: Trustees might be held personally responsible for any debts or obligations the trust incurs. This means their personal assets could be at risk.
• Regulatory Compliance: Charitable trusts are subject to tight rules and regulations. If the trust is officially registered as a charity, for example with the ACNC, it must meet specific requirements. These can include keeping detailed financial records and adhering to certain standards of governance.

Charitable Purpose Trusts Compared with Other Types of Trusts

Feature	Charitable Purpose Trusts	Non-Charitable Purpose Trusts	Traditional Trusts	Discretionary Trusts
Main Goal	Primarily aimed at benefiting society (for instance, through education or poverty reduction)	Established for specific goals that are not related to human beneficiaries (like maintaining property or caring for pets)	Provide benefits to specific individual beneficiaries (such as family members)	Primarily structured to give the trustee freedom in deciding how to distribute assets to beneficiaries
Beneficiaries	The public benefits indirectly through the charitable activities that the trust supports	No direct benefit to individual people; the trust serves a stated purpose	Specific individuals or groups are designated as the beneficiaries	Beneficiaries should be identified in the trust deed; the trustee decides on the distributions
Duration	Typically ongoing, as long as the charitable goal stays meaningful	Can potentially last indefinitely, depending on the specific rules of the jurisdiction where the trust is established	Typically limited in duration, often linked to the lifespan of the beneficiaries or set for a specific number of years	No set duration; the length of the trust depends on the trustee’s decisions and the terms outlined in the trust document
Enforcement	Government agencies oversee these trusts to ensure they follow charity laws	Because there are no traditional beneficiaries, ensuring the trust works correctly relies on appointed individuals who enforce the trust or court supervision	Beneficiaries have legal rights and can take action to ensure the trust terms are followed	The trustee has significant authority. If changes are needed, it’s advisable to seek legal counsel to avoid unintentionally creating new legal issues.
Tax Treatment	Often receive tax-exempt status. Donations to these trusts may also be tax-deductible. Beneficiaries are taxed on any income they receive from the trust.	Generally treated under standard tax regulations and do not receive special tax advantages.	Tax treatment can vary depending on how the trust is set up (e.g., grantor trusts may have different rules).	Generally, the trust itself is not taxed if income is distributed to beneficiaries. However, the trustee might be taxed on distributions made to minors or individuals living outside the country.
Rules and Regulations	Subject to strict rules to guarantee that funds are used for the intended charitable activities	Typically face less regulation unless there’s a broader public interest at stake	Governed by standard laws related to trusts and estates	Subject to typical trust regulations. It’s important to follow the specific terms of the trust. Seeking advice from legal professionals is recommended.
Distributions Outside the Country	Primarily operate within the country, but in some cases, up to half of their income can be distributed to charitable activities overseas	Rules regarding overseas distributions are not specifically defined and depend on what is stated in the trust deed	Usually not designed for distribution to overseas entities	Permitted. However, the trustee may be subject to taxes on distributions to beneficiaries who are not residents of the country, and non-resident beneficiaries might be eligible to claim tax credits.

Guide to Establishing a Charitable Purpose Trust

Setting up a charitable purpose trust involves several important steps to ensure it works correctly and meets all legal requirements. Here’s a simple guide to help you understand the process:

Starting the Trust

1. Beginning the Trust: While you can set up a charitable trust through instructions in your will, it’s not required to do so this way. Typically, a trust starts with some initial funds, called capital or corpus, which are meant to be held long-term. The money earned from this capital is then regularly used to support different charitable activities.
2. The Attorney General’s Role: The Attorney General acts as a protector for charities. In this role, they represent the government in overseeing how charitable trusts are run. This includes making sure the trust’s charitable goals are being followed and that the trust’s assets are protected properly.

Dealing with Problems in Charitable Gifts

1. Charitable Gifts That Can’t Be Fulfilled: Sometimes, a charitable gift mentioned in a will cannot be given as intended (for example, if the charity no longer exists or has changed its name). How this is handled depends on the gift’s value:
   • For gifts valued at less than $500,000, you can apply to the Attorney General under under Part 4 of the Charitable Trusts Act 1993.
   • For gifts valued at more than $500,000, you must apply to the Court.
2. How to Apply: The application process involves confirming that a charitable trust exists. If it does, it may lead to creating a plan called a cy-près scheme. This plan allows the funds to be redirected to a similar charitable purpose if the original purpose can no longer be achieved.
3. Informing the Public and Putting the Plan in Place: If no one objects after a public notice period of one month, the order to set up the cy-près scheme is finalized. This order is then made public and becomes effective 21 days after it’s published unless someone formally challenges it.

Applying for a Cy-près Scheme

1. Information Needed: Those applying need to provide detailed information, which includes:
   • The document that created the trust.
   • An explanation of why the trust is failing and details of the proposed alternative plan (cy-près scheme).
   • Details about who are the current trustees and beneficiaries.
   • Information about the trust’s finances and property.
2. Review and Decision Process: The Crown Solicitor will review the application and then advise the Solicitor General. If it’s agreed that the trust’s original purpose can no longer be effectively achieved, the Solicitor General may approve proceeding with a cy-près scheme.

Application of Charitable Gifts by the Governor

1. The Governor’s Role under the Sign Manual: Sometimes, even if there isn’t a formal charitable trust, someone may have expressed a general wish to give to charity (for example, gifts intended for “the poor” or “medical research”). In these situations, an application can be made asking the Governor to use their authority to decide how the gift should be used.
2. Requirements: Those applying must provide:
   • The document that shows the intention to make a charitable gift.
   • Any relevant court orders and details about how it’s proposed the gift will be used.
   • Details of the people involved and the value of the gift.
3. Decision by Attorney General: Legal experts will assess the application. If they believe it is appropriate, the gift can be distributed under the Governor’s direction. If not, the application might be considered under the Charitable Trusts Act if it meets the necessary conditions for that act.

Showing Charitable Purpose for Official Registration

To become officially registered, an organization needs to clearly demonstrate its charitable purpose. This can be done through:

• Official Documents: The organization’s main documents should clearly state its charitable purpose.
• Supporting Documents: Additional documents like annual reports and financial statements can be provided as evidence.

Advantages After Registration

Once registered, the organization’s specific type (for example, a Public Benevolent Institution) can affect the tax benefits it can receive. More paperwork might be needed to support these specific classifications.

Setting up a charitable purpose trust involves complex legal requirements and complying with state and national rules. It is recommended to get advice from legal professionals throughout this process to make sure all legal and compliance obligations are fulfilled.

Legal Rules and Regulations for Charitable Purpose Trusts

Charitable purpose trusts operate within a strict set of legal and regulatory guidelines. It’s essential to follow these rules to ensure they function properly and meet all requirements. Here’s an overview of the key legal and regulatory aspects of charitable purpose trusts:

Legal Status and Structure of Charitable Trusts

Charitable trusts are different from other non-profit organizations because they don’t have a separate legal identity. This means the trust itself cannot own property or sign contracts. Instead, the trustees must hold all assets and enter into agreements in their own names. Furthermore, the trustees are personally responsible for any debts or liabilities the trust might have. According to the Charities Act, these trusts must exist solely to benefit the public and serve a clearly defined charitable purpose.

Registration and Meeting ACNC Requirements

To qualify for tax benefits and other advantages, charitable trusts need to be registered with the ACNC. Charities that are registered must:

• Keep Proper Financial Records: It is crucial to maintain accurate and complete financial records for accountability and to meet compliance standards.
• Submit Annual Information Statements (AIS): This involves providing a summary of the charity’s financial activities and other operational details each year. The AIS is available for public viewing on the ACNC website unless there are specific reasons for privacy.
• Maintain Good Governance Practices: This includes having a strong management structure in place to ensure the charity is well-run and accountable.

Annual Reporting Responsibilities

The specific reporting duties depend on the charity’s size, categorized as small, medium, or large:

• Small Charities: These are charities with an annual revenue of less than $500,000 (starting from 2022). They need to answer financial questions in their AIS but are not required to submit a full financial report or have their accounts officially audited.
• Medium Charities: These charities have an annual revenue between $500,000 and $3 million. They are required to submit a financial report. Depending on their classification as a ‘reporting entity’, they may need to prepare general-purpose financial statements that comply with specific accounting standards. Charities that are not ‘reporting entities’ can choose to prepare special-purpose financial statements, but these must still meet basic accounting standards.
• Large Charities: These are charities with an annual revenue of more than $3 million. They must submit financial reports that have been audited. To increase transparency, these charities also need to disclose the salaries and benefits paid to key management personnel, starting from the financial year 2021-22.

Transparency in Finances and Transactions with Related Parties

From the 2022-23 reporting year onwards, all charities are required to disclose any transactions they have with related parties. This requirement is designed to improve transparency around transactions that could involve conflicts of interest, ensuring that all dealings are conducted ethically.

GST Registration and Rules

Charitable trusts must register for Goods and Services Tax (GST) if their annual GST turnover reaches $150,000 or more. However, charities can benefit from GST concessions, where some types of income may be considered GST-free. Registration also allows eligible charities to claim credits for GST they have paid on purchases, which can provide significant financial benefits.

Getting Back Tax Credits on Dividends

Charities that are approved for income tax exemption may be able to get a refund of tax credits attached to dividends they receive from company shares. This refund can be a valuable financial resource.

Conclusion

Charitable purpose trusts provide a distinctive mix of tax advantages, legal safeguards, and opportunities for charitable giving. This makes them a highly useful instrument for planning estates across international borders. By thoughtfully designing these trusts, individuals can successfully meet both their personal goals and their charitable aspirations. This ensures their lasting legacy while also providing ongoing benefits to the wider community. For personalized guidance on establishing a charitable purpose trust, please reach out to Samoa Offshore Legal to discuss your specific estate planning requirements.