This article describes the steps to set up a charitable trust and key points to consider.
02 Feb 2017 Post by:
, Steven Moe
So you have a great idea that just might make a difference in the world, but are wondering about how to formalise a legal structure that would help you do that? A charitable trust is one of the most commonly used options in New Zealand. This article describes the steps to set up a charitable trust and key points to consider.
Advantages of a charitable trust
A charitable trust can provide a number of advantages. For example:
- Reputation: Funders and donors tend to gain comfort if the entity is a charitable trust (rather than a private business or individual). Where a company sets up a charitable trust and invites staff to participate, they will be motivated by the charitable purposes.
- Tax status: There can be tax advantages in registering as a charitable trust with Charities Services (see below).
- Longevity: A trust is not dependent on one individual and can go on long after the founder ceases to be involved, in “perpetuity” in fact.
Great examples of charitable trusts in New Zealand include World Vision, The New Zealand Breast Cancer Foundation, and Ronald McDonald House.
Key points before setting up
To set up a charitable trust you will need a founding document for the Trust – called a Trust Deed. This is the legal document which sets out the key elements of the Trust. The questions you should answer before you see your lawyer are as follows:
- What are your purposes? A charitable trust must be charitable. That may sound basic but it isn’t necessarily as easy as having a good idea – for example if you want to develop a new type of transport that is safer than a car then it sounds great but by itself that purpose won’t be “charitable”. You need to fall within one of the following categories to count as a charity:
- Alleviate poverty: This does not just apply to the destitute but could be for those that fall below the ordinary standard of living. It could be achieved through financial means but also through practical means such as providing food and shelter;
- Promote education: Whether something is deemed to be charitable under this category will depend on its usefulness and its educational value;
- Promote religion: This is about the promotion of a wide range of spiritual teachings. Charitable purposes under this heading could range from the provision and maintenance of ministers/religious leaders to the provision of buildings for worship. However, it does not include just the promotion of certain ethics.
- Other charitable purposes beneficial to the community: This in a way is a “catch-all” provision. It can include such purposes as the promotion of health and recreational facilities. However, a trust will not be deemed charitable under this category if it is not for some public benefit.
Whether your purposes will fit the definitions is something that we can discuss with you.
Other questions to answer
Are political purposes okay? One of the historical fundamental aspects of charitable trusts is that they are not underpinned by some political purpose. However, as of 2014, the New Zealand Courts have found that if a charitable trust has an ancillary (secondary) purpose that is political in nature, then that does not automatically exclude the trust from being charitable if there is still some public benefit. What is important to remember is that this political purpose must be secondary to the main charitiable purpose and whether or not the trust is deemed charitable will be decided on a case by case basis.
What will be your activities? Once you have purposes it is important to think about the practical side of how you will implement those purposes. Will that involve running seminars and workshops? Providing scholarships? Promoting participation by volunteers? Jot down all your ideas so they can be incorporated in the Trust Deed
What will your name be? Usually charitable trusts will have a name that reflects their charitable purposes or what they aim to achieve. However, before finalising a name you have to be certain that your trust will be able to use that name. The name cannot be the same or similar to the name of another charitable trust or any other corporate body. If you do decide to use a name similar to that of another trust or corporate then you may need to have the written consent of that trust or corporate to use it.
Who will the trustees be? The trustees are those who meet and guide the Trust in the future. They can also be great ambassadors for the cause. Choose them wisely and consider having a variety of people involved who bring different skills. For example a charity focussed on education of young people should try to have teachers involved but also those with other skills.
Incorporation. Trustees can apply to the Registrar at the Companies Office for incorporation as a board. The benefits of doing this include:
- The Trust becomes a separate legal entity with separate legal liability. This generally means that the trustees are not personally liable for the legal commitments of the Trust.
- If the Trust owns real estate or other registered assets, it does not need to update the title or ownership register every time the trustees change.
Tax status and whether you want to apply for tax exemption. If you want to have the benefit of a tax exemption and the ability to issue charitable receipts for donations, you will need to register your charitable trust with Charities Services.
Practical considerations, cost and timing involved
Before you take the next steps it is worth knowing a few practical points, which include:
- Writing the Trust Deed – particularly the charitable purposes can take a few weeks to get all trustees on board and an agreement. Important issues such as the statement of purposes, who hold the power to appoint and remove trustees, are best decided before the trust deed is signed.
- Time frames involved to get decision – a few days for Companies Office, a few weeks/months for Charities Services.
- Registering with Companies Office – this is a free application which must be signed by all trustees. In addition one trustee must sign a statutory declaration in support of the application and attach a certified copy of the trust deed.
- Time frames for incorporation – 1-2 days once application documentation signed.
- Cost for application – this is a free online application on the Charities Services website.
- Application requirements – the application form is reasonably detailed. It must be accompanied by a statutory declaration from one of the trustee applicants. Charities Services, when considering your application, will want to see good evidence of the Trust’s existing or intended charitable activities so that it can satisfy itself the actual activities are genuinely charitable.
- Time frames for registration – this can take up to three months from the time Charities Services receive application.
- Time frame for tax exempt status – Charities Services should notify IRD directly once your charitable registration is approved, but it can take a few weeks for your trust to show up on the IRD’s list of donee organisations.
- The availability of trustees to sign documents – this can depend on where your trustees are.
Although setting up a charitable trust can take time, it is often a most worthwhile structure to have in place. We have helped many charities over the years and would be happy to discuss your situation with you.