The meeting of financial planning and philanthropy

We as citizens need to understand and build sustainable social capital.

Yesterday in South Africa we celebrated Freedom Day – this was the day in 1994 when the first democratic election was held and this carried the hope of a more equal country for all our citizens.

This has got me thinking about the “economics of enough” – once one has attained a level of economic freedom how does one effectively participate in building a better South Africa? – Abraham Maslow expressed this in 1943 when he introduced the theory of the “hierarchy of needs”, which moves from a base of physiological or basic needs to those ultimately of self actualisation.

What has this got to do with financial planning?

It is where financial planning and philanthropy meet.

In many parts of the developed world the establishment of foundations or charitable trusts, as is more commonly known in this country, has been an evolving and growing sector of the global economy – one of the most illustrious being The Bill and Melinda Gates Foundation. The formation of such structures is an important tool in the financial planner’s tool box as they work with wealthy clients.

Over the recent past, the development of charitable trusts in South Africa has been slow with few new trusts having been established and in this context I am excluding family trusts. There are many explanations for this which could include a migration of wealth out of South Africa, the redistribution of wealth through Government policy etc. Nevertheless, the situation remains that South Africa has one of the highest Gini coefficients in the world; this is an index which measures the inequality of income.

Yes we can focus on inequality of income and wealth, but this is the thin edge of the wedge which fails to express the full picture and understates the enormous potential of this country and its people. To construct an inclusive South Africa, we as citizens need to understand and build sustainable social capital and this is the call on each of us.

The initial step in the financial planning process is for the planner to establish with one’s client their goals and aspirations. Sadly, in many cases the expression and understanding of these goals do not go deep enough and therefore tend to stop at ensuring sound retirement funding plans and possibly some sort of legacy for the client’s family. This more inward focused or selfish goal setting misses the wonderful opportunity a client may have to go beyond themselves and their family to establish far reaching dreams to build social capital. This could involve the client, and even their families, in developing aspects of life which they are passionate about and could involve them well into their retirement years.

Charitable Trusts

Setting up a charitable trust:

It is vitally important that such a trust is properly established. Meaning that its purpose is well described and has a wide enough mandate for trustees to act as is intentioned by the founder. This includes that the trust qualifies for and receives public benefit organisation (PBO) status and possibly Section 18A approval. (Section 18A enables potential donors other than the founder to benefit from the tax deduction that is available for up to 10% of their taxable income when donating into a charitable trust.) These benefits are there for the use by all donors and are intended to motivate people to give.

The establishment of such a trust does require specialist advice which can help the donor refine their vision, narrow down the areas they wish to impact and advice on best practice. Once the Trust Deed is drafted it needs to be registered with the Master of the High Court. After that, a registration application can be made to the Sars Tax Exemption Unit to gain PBO status. The cost for such drafting and advice is about R7 500 plus VAT.

The set up of such a trust can be done in terms of Will (testamentary trust), but probably more effectively be done as an inter vivos trust, which is a trust created during the lifetime of the founder.

Why set up a Charitable Trust?

  • It allows the founder to direct their wealth to certain purposes and projects which they are passionate about;
  • Encourages a spirit of generosity;
  • Provides a platform for sustainable and multi-year giving programme which allows recipients to effectively plan ahead;
  • The trust can be either for a limited time, in other words the capital and income is invested in certain projects during the lifetime of the founder or it can be continued in perpetuity allowing possibly the family of the founder to continue to enjoy the fruits of the social capital developed;
  • Capital contributed is free of donations tax (which is currently 20% of contribution) and this capital is no longer included in the founder’s estate. This latter factor can effectively reduce estate duty, which is again levied at 20% for net dutiable estates over the R3.5 million; and
  • Properly registered trusts to not pay income or capital gains tax or transfer duty.

What is an approved Public Benefit Organisation (PBO)?

  • It must be a not for profit trust registered with the Master of the High Court;
  • Its objective must be to carry out one or more public benefit activities;
  • The activities must be carried out in a non-profit manner with philanthropic intent; and
  • The benefits of the activities of the trust must be widely accessible to the general public.

What are considered public benefit activities?

  • Welfare and Humanitarian;
  • Healthcare;
  • Land and Housing;
  • Education and Housing;
  • Religion, Belief or Philosophy;
  • Cultural;
  • Conservation, Environment and Animal Welfare;
  • Research and Consumer Rights;
  • Sport;
  • Providing of Funds, Assets or other Resources; and
  • General.

Looking at the financials:

While there are no certain rules it is thought that an initial donation of R2 million should be sufficient to establish a charitable trust and if desired further amounts could be added over time. The suggested amount for the initial donation is considered in terms of the set-up costs, the ongoing governance and maintenance of the trust.

The R2 million donation would be free of donations tax and would qualify for a limited tax deduction (if Section 18A approval has been gained). Further amounts donated should enjoy the same benefits.

Once the funds are in the trust and invested, any income or capital gains made should be tax-free.

An example of a simple estate duty calculation which assumes a single tax payer and the formation of a R2 million charitable trust:


Prior to Charitable

Trust establishment

Post Charitable

Trust establishment

Gross estate value

R20 000 000

R18 000 000

Less retirement funding

     7 500 000

     7 500 000

Less deductible expenses

        200 000

        200 000

Gross dutiable estate

R12 300 000

R10 300 000

Less Abatement

     3 500 000

     3 500 000

Net dutiable estate

R 8 800 000

R  6 800 000

Estate duty @ 20%

   1 760 000

     1 360 000


This simple calculation demonstrates an estate duty savings of R400 000 and these additional funds can be more effectively utilised for the purposes of your charitable trust.

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