Why would individuals choose to leave charitable legacies in their Wills?

Individuals may leave bequests to charities for a number of reasons including very personal ones.  However, a key fact to highlight to potential donors is that charitable bequests in a Will are free of Inheritance Tax ("IHT").  They may also reduce the rate of IHT payable upon death.  All estates are assessed for IHT and any estate over the nil rate band threshold (currently £325,000) is taxed at 40%.  However, the law changed in 2012 so where someone leaves more than 10% of the net value of their estate (i.e. after the deduction of any debts, liabilities, reliefs and the nil rate band) to charitable beneficiaries, a reduced rate of 36% for IHT may apply to the taxable estate. 

What type of legacy can individuals leave to charities in their Wills?

A testator can leave different types of legacies in a Will:

• A specific legacy is a specific item such as a piece of jewellery, furniture, painting etc.  and the charity could use the item for their work or sell the item and use the proceeds.
• A pecuniary legacy is a cash amount which can range from a small donation to a large lump sum. 
• A testator may leave a residuary legacy.  This is a gift of either a share or indeed the whole of their estate after the payment of any debts, liabilities and other legacies.  
• Finally it is possible within a Will to create a charitable trust or endowment in perpetuity which would set aside some or all of a person's estate for charitable causes.  This would be registered with and regulated by the Office of the Scottish Charity Regulator and the funds would only be applied towards the charitable purposes specified in the Will. Gifts to such a Trust are also free of Inheritance Tax.

A charity should try to encourage any potential donors to keep the charity informed as to any legacies left to it in a Will. 

The charity has changed its name, does this matter?

It is very common for charities to change their names but less so for testators to update their Wills to reflect such changes.  A charity may have to prove that it is the right beneficiary under the Will by demonstrating any name changes, amalgamations and/or mergers.  If correctly drafted, Wills should allow Executors to give effect to legacies notwithstanding such changes.   

The testator has died leaving a legacy to a charity, what should the charity do?

A charity is usually informed of a death by the Solicitor or Executor who is dealing with the deceased person's estate.  The charity should ask for a copy of the Will and Confirmation to check its entitlement to benefit from the estate.  As a residuary beneficiary, a charity would be entitled to check whether it can enhance its legacy by the sale of any assets but it would have to liaise with the Executors and any other beneficiaries so as to do so in a tax efficient way.

When will the charity receive the legacy? What happens if it is taking some time?

A pecuniary or specific legacy can be paid out or transferred quite early in the process of administering the estate.  However, if the charity is due to receive a residuary legacy, it may have to wait some time before all of the funds have been ingathered.  A solution to this is for a charity to be paid interim payments during the course of the administration as funds are received and then a final payment at the end.  All transactions must be accounted for in an estate and therefore a charity may wish to request sight of the Estate Account to make sure that the legacy received is correct.  If any income has accrued whilst administering the estate, a residuary beneficiary should receive a proportionate share and again, this can be verified by the Estate Account. 

If you are a charity and would like to find out more about receiving legacies or an individual who wishes to update your Will, please contact one of our specialists below.  

(Last update August 2013)