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Legacy GivingGetting it Right
19 March 2014
What can happen when legacies go wrong?
Andrew DigwoodPartner
What can happen when legacies go wrong?• Conflicting duties of charity trustees around legacies• “The RSPCA cases” - two very different scenarios -
valid / invalid will• Gill v Woodall [2010]• RSPCA v Sharpe [2011]
RSPCA v Sharpe - the facts
The facts• Prior gifts to family and friends - residue to
the charity• Beneficiaries’ position - Gift of full nil-rate
band + gift of property = charge to IHT• All tax to be paid from the estate before
the residue passed to the charity• Charity’s position - Take both gifts into
account up to the tax threshold• Then residue passes free of IHT to RSPCA
RSPCA v Sharpe - the Court’s decision
1st instance - critical of the charity“Putting a burden on the deceased’s relatives & friends”Appeal - charity’s argument unanimously upheldBut reputational damage already done?
Gill v Woodall - the facts
• Mr & Mrs Gill - mirror wills to each other and in default to the RSPCA
• 1999 - Mr Gill’s death 2006 - Mrs Gill’s death• Mrs Gill’s mental health / Mr Gill’s “domineering” nature• Dr Gill - sacrificed pursuit of academic career to live
adjacent to and work on farm
Gill v Woodall - the Court’s decision
• Dr Gill’s 1st instance claim• Mrs Gill knew and approved contents of her will, but was
influenced by husband• And Dr Gill’s actions - “proprietary estoppel” -
“Unconscionable” for Dr Gill not to inherit• RSPCA’s appeal - failed but on different grounds• Mrs Gill did not know or approve the contents of her will
therefore no valid will
Reducing likelihood of disputes - What can charities do?• Legacy disputes rare compared to amount of wealth
gifted to charities in wills• Charity may only become aware after the benefactor’s
death• Encourage supporters to engage with charity and family
before setting up a legacy• Encourage them to take specialist advice to ensure will
drawn up carefully• Record reasons for gift both in the Will itself and with the
charity internally
Managing legacy disputes - What can charities do?• Conflicting duties for Trustees - Reputation v Maximising
Assets• Managing the press - “who’s the bad guy here?!”• Legal costs• ADR e.g. Mediation• Charity Commission - draft guidelines
https://www.charitycommission.gov.uk/media/92839/paper10obm27.pdf
Legacy Giving – Practical Advice
Gerry MorrisonPartner
Sarah GreendaleSolicitor
Topics for today
• Sector Perspectives• Register of Mergers - impact upon legacy income• Types of Gift• Reduced 10% Inheritance Tax Rate• The 10% Test • How Charities might take Advantage • Points to Consider in Appeal Literature• Take Care• In Summary
Sector Perspectives
• Legacy Monitor Consortium (Legacy Foresight)• Analysis of the Legacy and In-Memoriam Sectors• Appraises the state of the markets, produces income
forecasts and researches donor motivation• Latest data shows the income of the Legacy Monitor
Consortium’s members from gifts in Wills was £1.11 billion in the year to December 2013
• Legacy income increased by 3.8% last year £1.11 billion compared with £1.07 billion in the previous year
Sector Perspectives
• Data shows average residual values of £53,600• Residual value = remainder of the estate left after
bequests and specific legacies have been distributed and all debts cleared
• Caution - Legacy Foresight reports £53,600 figure misleading because recent inflation rates of between 3% and 5% mean the real value of residuals was “still considerably lower than in 2008”
• Average pecuniary or cash legacy made to charities reported to be worth £3,400
Sector Perspectives
• Data also showed cash legacies have been falling gradually from a high of £3,700 in the first quarter of 2012, after 6 years of steady growth
• Legacy Foresight believes this is due to the recession and apprehensive legators writing smaller cash gifts into their Wills
• Cash legacies account for 8% of all legacy income, whilst residual legacies represent almost 87%
Sector Perspectives
• PR Exercise• Report in Third Sector (18 February 2014) states survey
by Key Retirement Solutions finds that only 25% of respondents plan to support charities in their Wills
• 2,064 people polled commissioned by Key Retirement Solutions (Retirement Services Firm) and carried out by the online polling company YouGov
• 60% of those surveyed did not believe leaving a legacy gift was important
Sector Perspectives
• Research has found a higher proportion of younger people planned to leave gifts to charity in their Wills than older people
• Increase awareness amongst supporters museums/arts charities - amongst those surveyed who were planning to leave legacy gifts, the top cause to support was cancer charities and animal welfare was the second most popular choice
Sector Perspectives
• 58% of respondents to the survey said they would make legacy gifts because they wanted to support causes with which they had a personal association
• Only 5% of those who would leave money to charity in their Wills said it would be for tax reasons
• Tax may not be the primary motivating factor, but may be a lack of awareness or encourage people to give more (particularly high earners)
• 40% who responded to the survey said reputation was a key factor
Sector Perspectives
• 46% said their choice was down to a charity’s mission statement, aims and values
• Most important factor cited in choosing which charity to support was having a personal link to it
• Useful to make supporters aware of the potential tax benefits of bequeathing money to charity and to consider this when preparing a Will
Register of Mergers
• Provisions originally introduced by Charities Act 2006• Register of Mergers intended to ensure legacy income to
merged charities does not “fall through the net” • Provisions now in Charities Act 2011• Charities must be aware if contemplating merger• Provisions not fool proof• Lord Hodgson’s Review of the Charities Act 2006
proposed amendment
Register of Mergers
• Whether or not Register of Mergers will take effect as intended depends upon wording used in Wills
• Many merged charities still retained as dormant “shell charities” to receive future legacy income
• Plan ahead - legacies can be a surprise and unexpected
Types of Gift
Pecuniary Legacy: fixed
sum of money
Specific Gift: gift of specific
item (e.g. property, jewellery)
Residuary Gift: a
percentage of the net Estate
Points to consider in Appeal Literature
Do: • Use the correct terminology • Encourage potential donors to seek legal advice:
– Regarding types of gift most suitable for them/the charity
– How best to ensure that their wishes are fulfilled– Having their Will/Codicil drafted by a Solicitor (STEP
member)
Points to consider in Appeal Literature
• There is no need to provide sample wording– It might encourage DIY Wills which run the risk of
• The intended gift (or the whole Will) being invalid • Expensive costs (and/or bad publicity) of rectifying the
mistakes
• Do include the following information:– Full charity name– Charity address– Registered charity number
Inheritance Tax (IHT) and Charitable Gifts
• A gift to a qualifying charity is exempt from IHT– The charity receives the entirety of the gift – The IHT amount payable by the Estate is reduced– Possible to eliminate IHT altogether
• Although reducing the IHT paid, a gift to charity affects the amount received by other non-charitable Beneficiaries
Points to consider in Appeal Literature
• The charity exemption appeals to many potential donors – But ensure that explanation is not misleading
• Encourage potential donors to seek professional advice on IHT– Especially if there is a mixture of charitable and non-
charitable Beneficiaries
Inheritance Tax (IHT) – the “10% reduced rate”
Tax rate reduced if charitable gift is 10% or more of
net Estate
IHT rate reduced from 40% to 36%
Lower rate applies to testators who die on or after 6
April 2012
The “10% test” components
Incentives for potential donors
The “10% test” Gross Estate (assets in sole name) £500,000
Less Nil Rate Band -£325,000
Net estate for “10% test” £175,000
Gift to charity of £17,500 to qualify
10% might sound like a lot to potential donors but only 10% of net estate
Could encourage more people to give to charity to get the benefit of the rules
The 3 components to the 10% test
the survivorship component• assets that the deceased
owned as a beneficial joint tenant, for example a joint bank account or a house
the settled property component• assets in which the deceased
had an interest in possession, for example an interest in the income of certain trusts
the general component• assets within the deceased’s
estate for inheritance tax purposes except for the survivorship component, the settled property component and assets in which the deceased had reserved a benefit, for example a house they had given away but continued to occupy.
The 3 components to the 10% test
• The test compares two amounts: – the donated amount = total value of assets in the component
that qualify for the charity exemption from inheritance tax under existing rules
– the base line amount= net value for inheritance tax purposes of the assets in the component after deducting exemptions’ relief and the appropriate portion of the nil rate band but adding back in the value of assets in the component to which the charity exemption applies
Potential advantages
Encourages more people to
make gifts
Supporters may be encouraged
to increase existing gifts
Can lead to increased post-death variations
Points to consider in Appeal Literature
Ideal opportunity to raise awareness and to promote: • Leaving a gift to charity by Will • Reviewing any existing gifts
Possible Deeds of Variation
Points to consider in Appeal Literature
• Technical points: – Advantages of the current IHT charity exemption– The “cost” to non-charitable Beneficiaries is reduced – The “10% test” is based on the net Estate– Increasing an existing gift might benefit charity and
other Beneficiaries
Take care
Only for deaths on/after 6 April
2012
Ensure that wording is not
misleading
Encourage potential donors to seek professional
advice
In Summary
Donating to charity in a Will has always been tax efficient and the
IHT rules are designed to encourage charitable giving by
increasing the tax benefits.
Charities can look at taking advantage of these opportunities
to increase legacy income
Any questions?
