Doing good

Doing good

May Wong

Making regular long-term financial donations to a charity is a very rewarding endeavor – why not consider going one step further and setting up your own foundation or charity?

For those who like to be in control of their money it’s the perfect solution: your own charity or foundation offers the tax benefits of donation plus complete control of the capital. And, with your own charity established, fund raising activities can increase your charitable clout beyond your own donations.

There are many angles to consider before making this step. Setting up a charity or foundation is, in Hong Kong, and from a legal and technical standpoint, no more difficult than setting up a company.

The difference between a charity and a foundation is in the operation: a charity runs its own programs while a foundation supports other charities and grant seekers financially. But foundations also run their own programs in the form of prizes, awards, education and exhibitions; while charities such as Hong Kong’s Community Chest also donate money to other charities on behalf of other private foundations – the lines are blurred. The box shows which activities the Hong Kong courts have considered charitable.

If the entity is going to be a foundation appealing for public donations, then in Hong Kong, for example, the trust must also apply for Section 88 – charitable status, which means they can offer a receipt to the donor for tax exemption. The trust in that case, would also have a Project Committee to seek for different projects that fit the mandate of the trust, and also to conduct fund raising activities.

There are two angles to consider: setting up a charity while still alive; and using life insurance as greater leverage to set up a charitable trust in the event of your death. While the financial structures and operation of both concepts are very different, the fundamental concept is the same, and require some thought on what good works and society change the trustee would like to achieve.

Setting up a charity

According to a local charity expert who has worked with many leading NGOs and companies in setting up charities and foundations, setting up a new charity is “no small feat”.

May Wong is Associate Director with Asian Charity Services, an advisory firm which helps NGOs establish strategic focus, fund raise and find the right people.

She warns against jumping in without careful research and strategic direction, giving several pointers to the would-be Bill Gates or Li Ka Shing.

The first step is to identify the particular social need. “In order to run a charity well you need to have a clear vision and a clear understanding of how your work will actually bring about the outcome that is to solve a particular social issue,” says Wong. “Just because you see something interesting or are touched by something interesting does not mean you naturally have a solution for it.”

While Hong Kong is a crowded market in terms of charities, Wong says this doesn’t mean all the needs are necessarily being met – she advises market research as the second stage. Even if needs are being met by existing charities, however, some people may believe the approach or values of existing charities are not helping address the problem.

A third and very important consideration is finding the right people to work with. “There are actually a limited number of social workers out there,” says Wong. “Are you able to actually identify the right kind of people you can work with – and are you actually in some way taking away precious resources by starting up a new charity?”

Most important, Wong says, is creativity. “It’s a huge factor. It’s not about charity; it’s about what are the issues in our community and coming together and collaborating to solve them.” Wong describes her work as “capacity building” – how to equip an organization so they can work well, efficiently and sustainably over the long term.

Financially, Wong recommends charities build up a six-month reserve at the very minimum, while better funded operations would have a year’s reserves.

For those not quite ready to make the leap of setting up their own charity or foundation, Wong recommends joining the board of an NGO. “If you’re not sure about what your next step is, joining a charity board is a good way to see how social issues may be addressed, and to actually have some hands-on experience to learn how an organization would tackle the issues, and what kinds of resources or issues are involved.”

Money – hard facts

Most charities Wong helps have an annual operating budget around HK$40 million – what she would call a medium sized charity – but Asian Charity Services does work with smaller charities with annual budgets less than HK$500,000.

Indeed, it is not cheap to run a private trust or foundation, especially those which are accepting public donations and requiring certain local charitable status, which means lawyer’s fees and accountants and other professional fees.

For those restricted on budget, or those aiming to fulfill our US$1,000 per month challenge, another option is to use life insurance to fund future charitable projects. While it’s not something you will ever get to see yourself, you can still have a large impact on society after your death.

In fact, such strategies are considered as relatively good leverage of capital, especially for those who are not leaving dependents (wife, husband or children) behind. For example, with Transamerica, a 40 year old female non-smoker can take out a US$8 million policy for a fixed 30 term insurance for US$12,795 premium per year, or roughly US$1,000 a month. If the person is still alive at age 70, she can renew her insurance for up to 10 more years at a much higher premium. This is money she never gets to see, but a legacy she can leave behind to help a lot more other people.

The dynamics of funding and operating the charity or trust are then very different. Based on the life insurance funding method, there is usually no or very little costs during the lifetime of the philanthropist, since the trust is inactive. But once the trust is activated, and depending on the trustee managing the trust and the size of the trust, it could range from US$8,000 to US$10,000 a year for an US$8 million trust fund.

Just as May Wong’s advice above, the advice for those setting up such structures is to think very clearly about the mandates and aims of the trust. If it is to kept alive in perpetuity, it will need detailed mandates, covering what projects to invest in, what to avoid, and how to appoint an investment committee who will abide by the mandates of the trust. A representative of the trustee will usually be sitting on the committee to ensure proper governance and usage of funding is according to the mandate. BM