One theme often comes up again and again for charities, not-for-profits and social enterprises relates to how the organisation will be governed. This same issue applies whether the particular involvement is in education, relief of poverty, youth work, the arts or some other worthy cause. Governance structures are of critical importance.

Different organisations have different approaches to governance and the appointment of those in charge. Below we have described some of the options which are open when considering how to structure a board or governance body.

These represent what we consider to be the most commonly used methods for governance as well as the pros and cons of each for you to consider. Obviously this is an overview document so there are many factors to think through but we hope this will provide a good sense of the options.

Governance Structures Option 1: Trustees appoint Trustees

Overview: When a vacancy or specific need becomes apparent, the Trust identifies a possible trustee and a working relationship is begun. The Board appoints trustees to fill vacancies or as additional trustees. This is then approved at next AGM by those attending / members. Often there are provisions that at each AGM one fifth of Trustees are to retire (longest serving first).

It is fairly common for Charitable Trusts to have an appointment process like this that gives the power of appointment to the current trustees but gives a veto right to another defined group.

Positive:

Trustees retain control over who is approached.
Board can appoint trustees directly.
AGM involved in process so two levels of approval are required.

Negative:

Process not always followed well creating possible irregularity in the appointment of trustees.
Less involvement of wider community.

Potential for incoming trustees to shift the focus of the Trust over time without any control mechanism to preserve original vision.

Governance Structures Option 2: Trustee Elections

Overview: Election of Trustees at each AGM so public call for nominations before that.

Positive:

Wider community involvement in process.
Greater potential pool of trustees with diverse experience.

Negative:

Uncertainty as to background of potential candidates and understanding of special character.
External engagement required eg advertising vacancies.

Governance Structures Option 3: Hybrid Model

Overview: Provide for election of some Trustees from certain backgrounds eg one Trustee appointed by employees. Others to be appointed by combination of above eg election / Trustees choose who to appoint.

Positive:

Incorporates elements that are positive in above examples eg diversity, involvement in process, ability to choose some trustees.
Has more checks and balances.

Negative:

More complex appointment process may be harder to administer.
Some voters may not have a strong connection with any special character.

Reflections on these options

In our experience the most common structure is for the existing trustees to have the power to appoint replacement trustees. The simplicity of this approach is one of the key reasons for its popularity.

In some cases, the trustees’ power of appointment is subject to a right of veto granted in favour of the group or entity that originally established the Charitable Trust. This is a viable approach and reduces the risk that the incoming trustees may over time shift the focus of the Trust.

Having elected trustees is more akin to an Incorporated Society model where members of the society elect Board members from time to time. The main negative of this approach is the complexity it adds to the appointment process. If notice deadlines are missed by the trustees, irregularities will arise in the appointment of trustees.

In considering which approach to adopt, the trustees should also take into account the different roles a Trust performs – governance vs administration/upkeep of properties etc.

Every situation is unique. We hope this short summary of some common options is helpful and would be happy to discuss any of them with you in more detail than can be contained in this overview.

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide. Reliance should not be placed on this article where any specific issues are concerned.

Introduction

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.

Summary

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.

Our team is experienced with charities, social enterprises and trusts that are common in this area of law. We would be happy to assist you in your journey. For more information, please feel free to contact Steven Moe at stevenmoe@parryfield.com or 021 761 292. We have free resources for start-ups, boards and companies including “Start-ups Legal Toolkit” which covers the key issues we see people face when starting out (it’s a free PDF guide in the resources section of this site).

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