Estate Planning Options for Charitable Giving

People who are most in need in our society are often being overlooked. Charity, therefore, serves a vital function for providing necessary resources for the most vulnerable.  In Hong Kong, there are thousands of charities approved by the Inland Revenue Department (“IRD”). Charitable giving aside from the purpose of advancing worthwhile causes also helps to reduce taxes.

Inter-vivos donation is not uncommon. However, people tend to forget they can still make an impact to society even after they pass away. Charitable giving, therefore, is certainly an attractive option that everyone should consider for one’s estate planning. While we previously discussed how one can set up a charity in the article Starting Your Own Charity, today we navigate through other methods (other than setting up a charity) to effect a charitable giving as part of your estate planning.

The first step: making a Will

Basic estate planning generally starts with a Will.

If a person finds a charity that aligns with one’s value, he/she can make a charitable bequest under his/her Will. In order to ensure that such charitable bequest can be properly made after his/her death, the testator should identify the following:

• name of the charity
• address of the charity and
• registration number of the charity.

The drafter of the Will, on the other hand, has the duty to confirm whether the name of the charity given by the testator is accurate and whether the said charity still exists. A charitable bequest is usually made in the form of a pecuniary gift. However, one should consider making such charitable bequest in terms of percentages of your estate. The reason is that one can never contemplate the amount of money that is left in the estate when one passes away. Therefore, by making the charitable bequest in terms of percentages, a portion of the estate can be effectively guaranteed to be passed to the charity.

A charitable bequest under the Will is usually followed by two additional clauses, namely:

1. charity receipt clause and
2. cy-près

Charity Receipt Clause

The purpose of a charity receipt clause is to discharge the executor’s responsibility of making such a payment to the charity. Usually, the receipt is given by a treasurer or another appropriate officer of the charity. In fact, it also offers protection to the executor, so that he/she will not be liable for making such payment.

Cy-Près Clause

There could be situations where a charitable organisation was still in existence when the Will was made, but ceased to exist or merged with another charity or even changed its name afterwards. Therefore, it is always good to have a “backup plan”.

Cy-Près clause comes in place when the initial charitable bequest becomes impossible or impracticable to be effectuated. In order for the cy-près clause to operate, a “general charitable intention” has to be found under the Will. If such intention is found, the cy-près clause will apply allowing the executor to apply the charitable bequest for other purposes as close as possible to the intention of the testator, so that such bequest remains dedicated to the charity.

Charitable Purpose Trusts

Trust law in Hong Kong does not recognize “Purpose Trusts”. This is mainly because of two reasons, namely:

1) there are no identifiable beneficiaries to enforce the Trust which run afoul the long established “beneficiary principle” under Trust law and/or

2) the purpose of the Trust may be uncertain. However, a Trust with charitable purpose is an exception. The issue then turns to “what qualifies as charitable purpose”.

Charitable purposes are classified into four categories:

1. relief of poverty: a) gifts for the aged, sick and disabled ; b) relief of victims of a particular disaster
2. advancement of education: a) donation for scholarships, professorships and prizes to schools ; b) donation to scientific research
3. advancement of religion: a) promotion of teaching of religious bodies ; b) restoration, decoration repair and maintenance of a church (as long as the church is not a private chapel)
4. other purposes of a charitable nature beneficiary to the community not falling under any of the preceding categories: a) relief of physical and mentally disabled individuals ; b) protection of animals ; c) protection of the environment

From the abovementioned examples of “charitable purpose” of each category, they all have a certain public character and value. This means that a Charitable Purpose Trust must be for the benefit of the public or at least a particular category of individuals. Because a Charitable Purpose Trust performs a “public function”, they are amenable to judicial review. This means that it is the Court – not the settlor – that has the final say as to whether the Trust is a charitable one.

Some examples of purposes that were held not to be charitable by the Court are:

• attainment of a political object
• encouragement of a particular sport
• promotion of personal benefits
• scholarship provision for employees or ex-employees.

What do you need to consider when setting up a Charitable Purpose Trust?

This type of Trust is usually set up by way of a Trust Deed. In order to ensure that the Trust is exclusively for charitable purpose, one must set out clearly and at the outset of the Trust Deed the background and the reason for setting it up.

The governing provisions of the Charitable Trust Deed is as equally important as the background and the purpose. Although Charitable Trusts may have different governing provisions, the common provisions include:

1. the identity of the Trustees
2. the identity of the Beneficiaries (e.g. criteria to become a beneficiary)
3. the definition of Trust Fund
4. the duration of the Trust – i.e. Trust Period
5. the mechanism to deal with the surplus or deficiency of Trust Fund after the Trust is being wound up
6. the eligibility, appointment, replacement and removal of Trustees and/or contingent Trustees
7. the powers, duties and liabilities of the trustees – e.g. application of Trust Fund, investment of Trust Fund, application of income and appointment of professionals to assist, etc.)
8. provisions related to the operation, administration and management of the Trust – e.g. how and when the meetings among the trustees should be conducted, who should sign cheques and keep clear record of all the transactions, etc.
9. Cy-Près Scheme
10. the governing law and jurisdiction of the Trust

After the Trust Deed is properly executed, the final step is to make an application to the IRD under section 88 of the Inland Revenue Ordinance, Cap 112 to ensure that the Trust is to be exempted from tax in relation to income and property.

What happens in the eventuality of breach of Charitable Trust?

In the event that there is a breach of a Charitable Trust, the following parties are entitled under Hong Kong law to bring an action to the Court to either complain about the breach of Trust or supposed breach of Trust, or for the requesting a better administration of the Trust:

1. two or more people who have obtained consent from the Secretary of Justice in writing
2. the Secretary of Justice; or
3. all or any one or more of the Trustees or individuals administering the Trust, or claiming to administer the Trust, or individuals otherwise who have an interest in the Trust.

It is understandable that individuals in category (c) can bring actions to the Court if there is a breach of a Charitable Trust. The reason that a Secretary of Justice also has the standing to bring such actions is because Charitable Trusts performs a “public function”. He/she therefore has a duty to act on behalf of Hong Kong as “guardian” or “protector” of the public interest to protect and enforce Charitable Trusts in Courts.

Life Insurance Policies

A life insurance policy is generally taken out for protecting your loved ones from the financial standpoint. However, it can also be an Estate Planning option for a charitable gift. In fact, some people support certain cause and some insurance companies act as the sponsors of that specific cause.

One can name a specific charity as the beneficiary under the life insurance policy. Each insurance company differs as to the content of the policy itself and the best way to navigate through the different options is to get in touch with a few reputable insurance agents.

Takeaways

How to structure your Estate Planning is an issue that one should have in mind and should periodically review.

Charitable giving as part of the Estate Planning is not the hallmark of the wealthy. Instead, everyone can make an impact when they are alive or after they pass away. The abovementioned examples are the most common methods to effectuate a charitable giving. One can choose one method or a combination of two or more methods, depending on the size of the assets and specific circumstances.

What is important, however, is to seek professional advice from a solicitor who has a specific expertise in drafting such legal documents in order to ensure that your intention of making such charitable giving can come to fruition and can lend the needed help to causes one is passionate about.