Giving to charity? Get it right
We have all seen the headlines when gifts to charities go wrong, and end up in contested, bitter and expensive litigation.
The recent case of Gill v Woodall, Lonsdale and RSPCA highlights the problems that can arise where an estate is left to a charity rather than family. In this case, the RSPCA lost its battle at the High Court to keep a legacy, worth around £2 million, after the daughter of the deceased claimed her mother had been coerced into making a Will leaving her estate to the RSPCA. The Court ordered the Will to be set aside and the estate passed to the daughter.
So how can potential problems be avoided?
The starting point is ensuring that the bequest document (usually the Will or a trust) is correctly drafted. Professional drafting is important to ensure that full advice is given on the potential conflicts that may arise and to minimise any challenges to the validity of the document.
The wording of the gift is also key to ensuring that the gift passes to the correct charity. Many charities publish recommended wording to use in making a bequest (normally via their website), ensuring that the correct charity number, name and address are used. This should help to prevent legacies failing for an incorrect description, or passing to a corporate entity used by the charity which may not benefit from the same tax reliefs, most importantly Inheritance Tax (IHT).
Once a testator has died, errors can occur in the administration of the estate and given that an increasing number of estates are being administered without professional advice, there are a number of pitfalls that lay executors may not be aware of.
A common misconception is that the executors can give the deceased’s personal effects to family members or friends when they may not be entitled to do so. If a charity or charities are the beneficiaries of an estate, their approval to such gifts may be necessary, particularly if the items being gifted are of significant value.
Another costly mistake (especially in rising equity or property markets) is the failure to mitigate capital gains tax when assets are sold by the executors. An unsuspecting executor can trigger a charge to the estate rather than allowing the charity to make an exempt gain, thereby reducing the amount that passes to the charity.
Similarly the executor should ensure that they provide the charity with the appropriate income tax calculations and tax deduction certificates to allow a claim for repayment of income tax to be made, if appropriate.
Without professional advice, the effect of the “grossing up” rules may not be understood. These rules set out how the IHT is payable where an estate passes to a mixture of non-exempt beneficiaries and exempt charities. It is an area where an inexperienced executor can be caught out and inadvertently miscalculate the entitlements between the taxable and non-taxable beneficiaries, and the wording of the will is critical in this.
The case of RSPCA v NJ Sharp & others highlighted the problem of payment of IHT: the testator gifted a property to his friends and brother, leaving the remainder of his estate to the RSPCA. The wording of the gift was ambiguous; one interpretation resulted in no IHT being paid and a larger share of the estate passing to the RSPCA, and the alternative interpretation resulted in a significant IHT liability. The case was brought to court to decide the correct interpretation, and the judge effectively decided against the RSPCA and ordered the IHT to be paid.
A full explanation of the issue to the testator may have resulted in his intentions being made clear, and the need for litigation avoided.
Bequests to charities are a crucial form of their income. In the current economic climate it is even more important that charities maximise their entitlements and secure what is due to them. Charities are very grateful for any bequests they receive, but they have a duty to check that an estate has been administered correctly and they have received everything they are entitled to.
Lay executors need to be aware of these issues and seek professional advice if they are unsure about their duties and responsibilities. In addition, anyone seeking to leave gifts to a charity in their Will should take steps to ensure their wishes are carried out so that the charity they wish to benefit does so in full.
Published: 30 Nov 2010