Most people remain unaware of the nuances between methods of leaving money to charity, but, there is no one-size-fits-all solution.
Below, we look at some of the issues relating to charitable legacies, and provide guidance on how to navigate an area that is trickier than many people think.
According to research, 80 per cent of people who plan to leave a charitable legacy plan to do so using a fixed sum. For many people, this is the obvious option, unaware as they are that alternatives exist. It can also be the most problematic as the amount stays the same even if the individual’s personal circumstances change over time.
For example: an individual’s estate is worth £500,000 and intend to leave £100,000 to charity with the other £400,000 split between two children. If they subsequently enter a care home for a sustained period, shrinking the value of their estate to £200,000, potentially only £100,000 of this will go to the children, or just £50,000 each.
Inflation is another consideration as fluctuations could ultimately overvalue or undervalue a charitable gift in relation to the rest of the estate. If a fixed sum is bequeathed, the individual will have to regularly assess the situation and update their will where necessary.
Bequeathing a residuary of the net value of an estate can be much more flexible if someone is concerned about any changes to the value of their estate. This helps to ensure other beneficiaries are provided for in addition to the charity, reducing the possibility of leaving less than someone realised to their beneficiaries.
For example: suppose the net value of an estate is £500,000 and the individual decides to leave 10 per cent to charity. Even if the estate is reduced to £200,000 through care home fees, the other beneficiaries would receive the lion’s share, with the charity receiving a proportional £20,000.
The third option is to leave assets such as land, property, shares and valuables. As with pecuniary gifts, it is important to remember that the value of an asset can appreciate or depreciate greatly over time, meaning close attention to fluctuation must be paid.
Rising house prices combined with the government freezing the threshold above which IHT is paid, has resulted in the number of people expected to pay IHT predicted to rise by two-thirds in the next two years. As more and more people join the property millionaires club - particularly in London and the South East - more people are being pushed over the £325,000 IHT nil band rate but leaving a gift to charity can help alleviate this.
First, any charitable gift made upon death, or in the seven years preceding, is deducted from the total estate value. If, however, 10 per cent or more of the total value of the estate is gifted to charity, the IHT rate is reduced to 36 per cent; a significant incentive for additional acts of philanthropy. Depending on the estate, this reduction may even save money overall as well as providing more to worthwhile causes.
Many people do not realise that wills are made public and can be viewed by anyone when you die. Understandably, some charities can be quite proactive in tracing the families of the recently deceased who have left assets to them to claim their bequest. To avoid this, a bequest can be left in a will that does not specify the exact charity. Then, in a Letter of Wishes (a non-legally binding document that can accompany a will but is not made public) you can name a charity, requesting the gift to be made by an executor.
Another risk of leaving a charitable legacy is that any beneficiaries may be disappointed they are getting a smaller share than they thought – particularly if the donation is substantial. To help avoid this issue, it is a good idea for individuals to talk through their decision with beneficiaries, ensuring they understand and accept their reasoning.
Often, the safest way to leave a charitable legacy is by nominating a set percentage of the net value of an estate as this provides the most flexibility. If an individual is concerned about charities chasing next of kin for money, it may be an idea to advise them not to specify which charity they want to donate to in their will, but rather, in the Letter of Wishes which is stored alongside. This allows their executor to carry out their wishes in their own time, preventing potential stress and aggravation.
Given the legality of a Letter of Wishes, it is possible that the money could go to a different charity of their executor’s choosing, which is why choosing executors carefully is so important.
If someone wants to add a charitable legacy to their will, or update the one they currently have, the easiest way to do so is with a codicil. This avoids having a new will drawn up by simply amending the terms in their current one. It is probably a good idea to advise a client to speak to a legal expert to ensure this is done correctly.
If, by the time someone dies, their chosen charity has ceased to exist, their executors should be able to choose a similar charity, but this can sometimes be tricky. To ensure things go smoothly, it is a good idea to advise clients to include a section in their will which specifies that executors can gift to another charity which closely reflects their wishes. Another way to avoid this would be to specify a charity in the Letter of Wishes rather than in the will.
Some people may want their donation to be used for a particular purpose, such as leaving money to a hospital, but only wanting it to go to the paediatric ward. This is known as a ‘conditional’ or ‘restricted’ gift and would make the legacy subject to ‘binding obligations’ which may or may not be possible for the charity to meet.
According to the Institute of Fundraising, an organisation must accept the terms of the binding obligation before accepting the donation. If they are not able to do so, they are required to contact the estate executor or administrator to inform them before accepting the gift.
The best way to avoid confusion or disputes is, again, to request that the donation is used in a particular way in a Letter of Wishes, but leaving it up to the executor’s discretion.
Emma Myers is head of wills, probate and lifetime planning for Saga Legal Services
Key points
Most people remain unaware of the nuances between methods of leaving money to charity.
Bequeathing a residuary of the net value of an estate can be much more flexible if there are concerns about changes to the value of an estate.
A codicil offers the easiest way for someone to add a charitable legacy to their will, or update the one they currently have.
