Charitable Legacies: A Lawyer’s PerspectiveMichael Graham, TEPDirector

Overview

• Wills

• Legacies

• IHT & the 36% rate

• Issues in the Administration

• Capacity Issues

Wills

• Proportion of people leaving a will on death – approximately 1 in 3.

• Proportion of testators leaving a charitable legacy or share of residue – approximately 13% of estates admitted to probate.

• This equates to less than 4% of the population but this still produces £2bn p.a. (2008/2009 figures).

• Huge potential for growth.

Wills – some interesting figures

• Average age of a person dying without a will

= 68

• Average age of a person dying with a will

= 78

• Average age of a person dying with a will which includes a charitable legacy

= 80

What is in your will?

Types of Legacies

• Pecuniary – normally a gift of a fixed amount of money

• Specific – a gift of a particular asset

• Demonstrative – made by reference to an asset, e.g. a bank account

• Residuary – a proportion of the balance of the estate after payment of debts, funeral and testamentary expenses

Inheritance Tax

• Inheritance Tax (IHT) levied on estates over £325k

• Nil Rate Band transferrable between spouses

• Various exemptions – annual, small gifts, marriage, normal expenditure, BPR/APR, etc.

• Charity exemption 100%

• Issues may arise where estate is split between charitable and non-charitable beneficiaries: “grossing up”

Inheritance Tax

• Chargeable legacy expressed to be free of tax must be ‘grossed up’ to include the tax due

• This reduces the value of the residue available for the charitable residuary beneficiaries

• ‘Double grossing up’ may be required where residue itself is split – very complicated calculation

• Testators should be made aware of these potential tax implications

Inheritance Tax

Example: tax free legacy of £400k to children, residue to charity.

Legacy - £400,000.00

Less NRB - £325,000.00

Excess - £75,000.00

Grossed up at 40% (x5/3) - £125,000.00

Add back NRB - £325,000.00

Total legacy - £450,000.00

i.e. Residue reduced by IHT of £50k

If legacy had been taxable legatee would have received £370k with IHT of £30k

IHT & the 36% Rate

• Finance Act 2012 – introduced new 36% rate of IHT where testators leave 10% or more of net estate to charity

• ‘Net estate’ calculated after debts, liabilities, reliefs, exemptions and the available NRB

• Applies to each ‘component’ of an estate – i.e. free estate, survivorship assets and IIP trusts.

• Complicated calculation required but relief may be an advantage to some testators

Issues in the Administration

• ‘Executor’s Year’ – generally no complaint can be raised as to delay during this period

• No automatic right to be notified until PRs ready to distribute – but new Will to Give service may assist.

• Legacies carry statutory interest of 6% from first anniversary of death

• CGT – often overlooked by PRs who should appropriate to charitable beneficiaries before sale

Issues in the Administration

• PRs must provide residuary beneficiaries with a breakdown of funds received

• Small estates – schedule of receipts and payments

• Larger estates – full estate accounts

• Breakdown of assets, liabilities and income

• Must account for income tax in administration

• Provide beneficiary with R185

• Charities can reclaim income tax paid

Capacity Issues

• EPAs – have executors checked no funds have been dissipated pursuant to an EPA?

• Status of gifts made under EPA – limited authority

• Gifts made to charity by attorneys

• Not an issue with controllership as Court approval required

• Incapacitated donor – statutory will?

LitigationJonathan ForresterDirector

Pitfalls of Litigation

• Delay

• Costs

• Impact upon Charitable Legacies

Delay

“litigious conflict which has already gone on longer than any continuous period of war of which I am aware in the history of the peoples of these islands since the defeat of the aged but gallant Earl of Shrewsbury by the banks of the Dordogne on 10 October 1453 brought to an end the 100 years war”.

Mr Justice Deeny

Costs

“It’s about a Will, and the Trusts under a Will – or it was, once. It’s about nothing but costs now. We are always appearing, and disappearing, and swearing, and interrogating, and filing and cross-filing, and arguing, and sealing, and motioning, and referring, and reporting, and revolving about the Lord Chancellor and all his satellites and equitably waltzing ourselves off to a dusty death, about costs. That’s the great question. All the rest by some extraordinary means, has melted away” Charles Dickens, Bleak House.

Challenges to Charitable Legacies

• Validity of the Will

• Inheritance (Provision for Family and Dependants)

(Northern Ireland) Order 1979

• Proprietary Estoppel

Validity of the Will

• Due Execution

• Testamentary Capacity

• Knowledge and Approval

• Undue Influence

Testamentary Capacity

“It is essential ….. that a Testator shall understand the nature of the act and its effect; Shall understand the extent of the property of which he is disposing; Shall be able to comprehend and appreciate the claims to which he ought to give effect;”

Inheritance (Provision for Family and Dependants) (Northern Ireland) Order 1979

• Role of the Court

• Eligible Applicants

• Reasonable Financial Provision

• Statutory Criteria

Statutory Criteria

The financial needs and resources of each applicant, including those likely in the foreseeable future; The financial needs and resources of any beneficiary under the estate; The obligations and responsibilities which the Deceased had towards the applicant; The size and nature of the estate and the effect any Court Order might have on any business undertakings; Physical or mental disorder of any applicants or beneficiaries; Any other matter (including conduct) which in the circumstances the Court considers relevant. Conduct should only interfere with the award of the Court it is both “obvious and gross”.

Proprietary Estoppel

• Representation

• Reliance

• Detriment

Classic Threefold Test

“If A, under an expectation created or encouraged by B that A shall have a certain interest in land thereafter, on face of such expectation and with the knowledge of B and without objection from him, acts to his detriment in connection with such land, a Court of Equity will compel B to give effect to such expectation”. Oliver J in the case of Taylor Fashions Limited v Liverpool Victoria Trustee Company [1982].

Case Studies

•Key & Others v Key & Others [2010]

•Mulholland v Kane [2009]

Avoiding the Pitfalls

• Alternative Dispute Resolution (“ADR”)

• Avoid Trial by Ambush

• Early Calderbank Offer

Contact Details:

Michael Graham, Director, Private Clientm.graham@cfrlaw.co.uk028 9027 1332

Jonathan Forrester, Director, Litigationj.forrester@cfrlaw.co.uk028 9027 1341