For high net worth families, philanthropy can become a way of passing on values and a sense of shared purpose to the next generation. A Private Ancillary Fund (PAF) is one of the most effective structures available to achieve this goal.
What is a private ancillary fund?
A PAF is a trust structure built specifically for charitable giving. The family, or an individual, contributes capital to the fund and receives an upfront tax deduction. The fund then distributes to eligible charities over time. Because the capital can be invested and grown, the fund can support giving well beyond the life of the person who established it.
Unlike a one-off donation, a PAF separates the act of giving money away from the act of directing where it goes. That separation is what makes it such a useful intergenerational tool.
Why consider a PAF for intergenerational wealth?
Several features make PAFs particularly well suited to families thinking beyond a single generation:
- A permanent structure. There is no requirement to wind the fund up on passing. It can continue indefinitely, supporting causes the family cares about for decades.
- A minimum, not a maximum. PAFs must distribute at least 5% of the fund’s value as at 30 June of the previous financial year, but there is no cap. As a result, families can vary their giving each year depending on the cause.
- Family control of the trustee. Family members can sit on the trustee board, subject to at least one independent “responsible person” director. This gives the family ongoing say over which causes receive support.
- Flexibility in giving. Distributions can go to a broad range of registered charities. Consequently, the fund’s focus can evolve as family interests and community needs change over time.
How does it help continue a legacy?
The mechanics of a PAF create natural opportunities to bring the next generation into the family’s giving:
- A seat at the table. Adding adult children as trustee directors gives them direct involvement in deciding where money goes. This happens well before they may take on broader responsibility for family wealth.
- A shared decision-making process. Many families use an annual distribution meeting as a forum for the wider family. Not just the trustees, but the whole family, to discuss causes, review impact, and debate priorities together.
- A training ground. For younger family members, participating in a PAF is often their first exposure to trustee duties, investment oversight, and stewardship of a shared asset. It builds capability ahead of larger governance responsibilities elsewhere in the family’s structure.
- Room for the next generation to add their own contribution. A PAF is not limited to the founder’s initial gift. Family members can add to the fund over time, and each contribution is personally tax deductible to the person who makes it.
What we’re seeing
Families often assume the initial contribution needs to be sized once and left alone. In practice, however, the upfront tax deduction can be spread over up to five income years. This gives families more control over the timing of a larger contribution, particularly where it relates to the sale of a business or property.
What to consider before establishing a PAF
A PAF is not the right fit for every family. Establishment and ongoing compliance costs need weighing against the amount being contributed. Furthermore, the fund requires a genuine, ongoing commitment to governance, including an annual return to the ATO and a compliant investment strategy.
Where a family has meaningful capital to commit and multi-generational intent behind their giving, however, a PAF gives that intent the form of a durable structure.
Speak to us
Every family’s circumstances and their reasons for giving are different. If you’d like to discuss whether a private ancillary fund is the right structure for your family’s philanthropic and legacy goals, please get in touch with Mark O’Toole, Daniel Lunardi, and the Ascent Private Wealth team.
The advice provided here is general in nature only as, in preparing it we did not take account of your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should consider the relevant Product Disclosure Statement before making any decision relating to a financial product.