Leticia Jennings of Bates Wells & Braithwaite London LLP shows you how to make sense of legacy funding

Whether putting money in a collection tin or setting up a direct debit, 74% of the population gives to charity in their lifetime. But, according to leading analysts of the legacy sector Legacy Foresight, just 7% of people die leaving a legacy to charity in their will.

Primarily, the discrepancy is down to how much harder it is to leave a legacy than it is to make a lifetime gift. For a start, you have to make a will – something many people just don’t do. In fact, according to 2007 research from the National Consumer Council, half to two-thirds of the adult population have not made a will, and a number of those that do exist are likely to be invalid for one reason or another.

On the surface, it seems like a golden opportunity for fundraisers, but wills are a technical area and many fundraisers simply do not feel sufficiently knowledgeable about wills to discuss legacies with potential donors.

Back to basics

Simply put, a will is a legal document that directs who should receive a person’s assets when they die. Anyone who doesn’t make a valid will dies “intestate” (without a will), which means they have no say over where their assets end up. Intestacy rules are applied in this situation and those rules determine what happens. It may not be – and often isn’t – the persons that would have been chosen who end up receiving the assets. And, of course, a charity cannot benefit if a person dies intestate.

A charity can benefit, however, if a person makes changes to an existing will before they die that include leaving a legacy. There are two ways of doing this: either by drawing up a new will, or by drafting a codicil, which is a simple document that amends an existing will.

A donor can leave the same types of legacy to your charity that he or she could give to an individual. These include specific gifts (jewellery, shares, artwork, property, cash); cash or pecuniary gifts; residuary gifts (what is left over of an estate after deduction of debt, inheritance tax and certain expenses) and reversionary gifts (which follows on from an earlier interest given in the will, e.g. a testator might leave property to his or her spouse with the property going to charity on the spouse’s death).

Pecuniary legacies to charity tend to be relatively small, while residuary gifts are larger by comparison, although there tends to be fewer of them. The average value of a pecuniary legacy is around £2,600 and the average value of a residuary gift is £35,000, according to latest figures from Legacy Foresight.

What happens next?

Once a donor has died leaving a legacy, the first challenge to overcome is finding out about it. One way of doing this is to rely on the executors of the will to inform you – and it’s reasonable to expect that this will happen relatively quickly. Executors are legally bound to inform charities of the existence and nature of their legacy, and many do this shortly after the death. Some, however, will wait until they have obtained the grant of probate (the legal document required to release the funds) before they contact a charity, and this can take longer.

An alternative method is using a notification service like Smee & Ford, which notify charities whenever a grant of probate is issued.

However you establish that a legacy has been left, it’s essential that you make contact with the executors as early as possible. The information you need to get includes a copy of the will and any codicils; an indication of the likely value of your legacy; the approximate timeframe for receiving it; and details of any complications in relation to the estate, such as whether the estate is insolvent or if there are any potential disputes over the will.

From then on, keeping on top of the legacy administration is crucial. Seeking regular updates from the executors and requesting interim accounts if your charity is entitled to a residuary gift are all things you can do to help make sure you receive what you are entitled to. Check the accounts carefully, and look out for anything peculiar such as odd expenses or missing assets.

Potential pitfalls

Executors are increasingly asking beneficiaries to provide them with an indemnity before they will pay out the legacy. An indemnity is a legally binding document that means the charity would be obligated to repay some or all of their legacy in certain circumstances. Charities should be wary of agreeing to an indemnity, particularly where it is unlimited in amount, extent and/or time, and should seek legal advice before entering into it.

Executors present another potential challenge. Some will charge a fee for administering the will, but they can only do so if they have what is called ‘power of charge’ – a provision in the will that allows them to charge. Professional executors, such as solicitors, also have a statutory power which allows them to charge in certain circumstances. Either way, if a charge is being made, it’s worth querying it with the executors and checking that their fees are reasonable. It is possible to challenge executors’ fees relatively easily and cheaply in some circumstances, even if the executor is a solicitor and you are not their client, so it is wise for charities to take legal advice if there is any doubt.

Dealing with disputes

Statistics show that the number of contentious cases is on the rise, with the number of contested cases brought before the courts more than tripling between 2006 and 2011. If the will is challenged, the charity beneficiary faces the prospect of legal proceedings, which can be time-consuming and costly.

Although any gift can be challenged, disputes often centre on residuary gifts, chiefly because they’re more lucrative. The dispute is usually between the residuary beneficiary and the person challenging the will. Should your charity find itself in this situation, there are options available to you.

For example, the current law requires the solicitor who drew up the will to provide a full statement of evidence about the preparation of the will and the circumstances in which it was executed, along with a copy of the will file, to anyone who has an interest in the disputed will.
You can also make enquiries of family members, close friends and neighbours of the deceased. In certain circumstances, such as where capacity or under influence issues have been raised, medical records can also be requested.

Having access to this information will give your charity a solid platform on which to make a decision about whether to fight, settle or concede.

It may be that the charity beneficiary and the person challenging the gift can settle the matter through some kind of informal negotiation or mediation. But, if not, either party can issue legal proceedings. Although every case is different and there will often be occasions where a dispute cannot be avoided, minimising the risks is possible by seeking advice as early as possible.

Definitions

Testator/Testatrix: Man or woman who has died leaving a valid will

Executor (or Personal Representative): Person (or people) appointed by the testator or testatrix in his or her will to administer his or her estate

Legacy (or Bequest): Gift made to a person or organisation, such as a charity, in a will

Beneficiary: Person or organisation who receives a legacy under a will

Grant of Probate or “Grant”: Document which certificates that the will is valid and affirms the executors’ authority to deal with the deceased donor’s assets in accordance with the will

Inheritance Tax

Inheritance tax is the tax payable on the value of a person’s net assets when they die. The amount that has to be paid varies according to value of the assets, but gifts to UK charities are exempt.

In 2012, the Government brought in a new inheritance tax incentive designed to encourage more people to leave a legacy to charity in their will. This new incentive, for deaths on or after 6th April 2012, provides that where a donor leaves 10% or more of his or her net estate, after certain deductions, to charity, the inheritance tax rate that will apply to the rest of his or her estate will be reduced from 40% to 36%.

This means that legacies left to charity can reduce the amount of inheritance tax that would otherwise be payable: a useful tool for encouraging donors to give legacies to your charity. It’s worth bearing in mind however, that tax exemption is only likely to be relevant to relatively wealthy donors, because inheritance tax is only charged on estates valued at higher than the ‘nil rate band’, which is currently £325,000.