A STARTER MANUAL LEGACY ADMINISTRATION FOR CHARITIES

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1 A STARTER MANUAL ON LEGACY ADMINISTRATION FOR CHARITIES Updated March 2008 Institute of Legacy Management

2 CONTENTS 1. About this Manual and The Institute of Legacy Management The Role of the Legacy Officer To maximise benefit to the charity from legacies received The protection of the charity's Trustees against claims When you receive a legacy...3 Notification/Monitoring...3 The Smee & Ford legacy notification service...3 Notification from administrator of estate...3 Costs...3 Types of legacy or bequest...4 Pecuniary...4 Creating a record of legacies...5 The importance of diarising...5 Co-beneficiaries Issues that could arise before the administration of the estate...7 Charity acting as Executor...7 Charity asked to renounce right to Executorship...7 Disclaiming legacies...7 Contested probate...7 Scots Law...7 The Channel Islands Administering legacies...8 Pecuniary (fixed-sum) gifts...8 Residuary Bequests a share or all of an estate after costs, tax and other gifts Tax...12 Inheritance Tax (IHT)...12 Capital Gains Tax (CGT) Budgeting for legacies...15 Projecting income...15 Having an expenditure budget...15 A training budget...16 Using a legacy administration consultant SORP The Statement of Recommended Practice in Charity Accounting...17 Restricted funds Office administration systems...19 Paper vs computer...19 Computerised systems Complaints against administrators...20 The Law Society Consumer Complaints Service (formerly the Office for the Supervision of Solicitors)...20 Institute of Chartered Accountants...20 The Banks...20 Lay Executors what can you do? fraud Receipts and indemnities...22 Power to give receipt and discharges to executors...22 Indemnities Contentious probate Useful contacts...24

3 ILM Starter Manual Page 2 1. ABOUT THIS MANUAL AND THE INSTITUTE OF LEGACY MANAGEMENT The advice we provide in this manual is intended to be a summary of good practice in legacy administration sufficient to give you a clear idea of procedures and current practice in legacy administration and some aspects of probate law. Membership of the Institute of Legacy Management (ILM) is the most popular and cost-effective way of keeping up to date with the complexities of good legacy administration. Launched in June 1998, ILM promotes professional standards in legacy administration and provides a wide range of training and support services to its members. Currently, over 400 ILM members represent some 270 UK charities, receiving half of the 1,65 billion bequeathed to voluntary organisations every year. ILM welcomes an increasing number of non-profit organisations worldwide. You can find out more and how to join at or by e- mail at However, the law is complex and is constantly changing and ILM therefore will not be held liable for any errors or omissions legal advice should be sought if there is any doubt. 2. THE ROLE OF THE LEGACY OFFICER A. To act as a representative of the charity in all dealings with executors and their agents (e.g. Solicitors, banks), members of the family and others. The following two roles are to do with particular legacies from which the charity is benefiting. Some may view them as somewhat technical. This first, wider role is that of not just representative but ambassador. Its effects permeate the other two roles, particularly in how charity legacy officers communicate with others. The role therefore calls for a range of skills that include sensitive communication and judgment when to use (or recommend) any discretion that is available, and when to stick to one's legal guns. B. To optimise benefit to the charity from legacies received Typical savings made by pro-active legacy officers are between 3% - 5% of total annual legacy income. As we shall see, these savings principally come about through ensuring estate assets are properly marketed, ensuring the correct tax treatment of charitable legacies and defending claims against estates. Please note that we are not saying maximise benefit potential gains in income on a specific case must be set against any potential loss for instance in negative PR or through detrimental effect on the charity s reputation. C. The protection of the charity's Trustees against claims If a charity fails to gain its full entitlement under a will, its Trustees may be held liable. For example, the Charity Commission can (and has) ordered a charity's Trustees to pay a charity compensation where legacy administration procedures are not being followed or are not documented. 2

4 ILM Starter Manual Page 3 3. WHEN YOU RECEIVE A LEGACY Notification/Monitoring The Smee & Ford legacy notification service The firm of Smee & Ford Ltd (part of Waterlows Legal & Regulatory since early 2006) gathers details of all proven wills in England, Wales and Scotland. The company provides a summary of relevant data from the will through its 'named' notification service, which indicates where subscribing charities are mentioned in wills. The service is understood to be used by some 650 charities, and also lets charities know where a will is ambiguous about the name of the charity or if it is incorrectly named. Notification is by post, or on disk. A separate 'discretionary' service is also available where a will indicates discretion to benefit classes of charitable organisation. This enables the charity to approach the executors of the estate on a speculative basis. Further details are available from Smee & Ford Ltd on , at or via Please note that Smee & Ford cannot notify you until the will has become a public document; that is, a Grant of Probate has been gained ('Confirmation' in Scotland), typically three to four months after death. Estates worth less than 5,000 usually do not go through this process, and therefore would not come to the attention of Smee & Ford. Wills dealt with outside the jurisdiction of England, Scotland & Wales are not inspected by Smee & Ford. Notification from administrator of estate Costs You may hear of your charity's benefit directly from the executors of the estate, or the administrators they have instructed, typically a firm of solicitors. Whilst some firms may let you know of the death of your benefactor quickly (say within weeks of the death), the Institute's experience is that many will not notify beneficiary charities until late in the administration of the estate, perhaps four to six months later or more. The delay could prejudice your ability to influence how assets are marketed or treated for Capital Gains Tax (see Capital Gains Tax in Section 6). Therefore many charities write to the administering firm shortly after receiving the Smee & Ford notification. The aim is to express condolences and appreciation, to verify if the charity is a beneficiary and (if benefiting from a share of the estate) to ask for a copy will and any codicils and a schedule of assets and liabilities. By contrast, if one of the major banks is acting as administrator of the estate, you may well hear within a couple of weeks, if not just a few days of the death. The bank will typically indicate the name and date of death of the deceased, his/her last address, the nature of your charity's benefit and (if a share of the estate) a schedule of assets and liabilities. The bank may also include a form for completion concerning how funds should be transferred in due course. (Watch out for a phrase on the form stating that receipt of the funds by the charity will give receipt and discharge to the bank - as you will see later, this may not be appropriate, and you might choose to delete the phrase before returning the form). A private individual administering an estate may properly only charge out-of-pocket expenses and disbursements. A professional (that is, professionally experienced in the administration of estates) may charge for time, expenses and disbursements. Such professionals should carry professional indemnity insurance. Expenses, disbursements and costs come out of the estate. Solicitors firms typically charge 2.5% to 4% (before VAT) of the gross value of the estate (the proportion may be more if the estate is small). Their charges are guided (in England and Wales) by the Law Society of England and Wales and in Scotland by the Law Society of Scotland Note that many will-writing firms (i.e. not solicitors practices) are becoming involved in estate administration and may not have any overseeing body, as the government has declined to regulate in this area. 3

5 ILM Starter Manual Page 4 The banks publish their fee scales and tend to charge significantly more for administering estates (typically around 4% - 5% of gross value). They often deal with larger estates. The service provided, from the legacy officer's point of view, tends to be a little speedier and more detailed than that of most solicitors, saving the need for chaser letters and giving more confidence in the treatment of taxation and in the Estate Accounts at the end of the administration. Types of legacy or bequest Pecuniary This is a fixed sum of money (e.g. 500, 5,000). Charities tend to receive a little over half the number of their legacies as this type. If the Executor has not paid out within a year of death, statutory interest may be payable (at the rate of interest for funds paid into court, which has been 4% p.a. since July Prior to December 2002 the rate had been fixed for many years at 6%. The period from December 2002 to July 2003 should, for safety, be taken to be 4%). However, you should consider very careful any negative repercussions of demanding interest, especially from a lay executor and if a major estate asset, such as the deceased s property, has been difficult to sell. Pecuniary bequests are not usually subject to Inheritance Tax. Specific. This is a specified item (e.g. "The balance of my account no at Barclays Bank", "my diamond solitaire ring", "my clothes" or "my ordinary shares in XYZ plc"). Specific bequests to charities occur relatively infrequently. Specific bequests are not usually subject to Inheritance Tax. Residuary. This is a share of the estate (or, more accurately, what is left of the estate after all debts, costs and other bequests have been settled). This type of bequest usually makes up a little under half of the number of legacies a charity may receive, but may represent 90% of the value of the charity's legacy income. A typical share of residue might be worth 35,000. Because the value of the gift is the result of all that has occurred during the administration of the estate, it is vital for legacy officers to keep a close eye on how the estate is administered and to insist on seeing a copy of the will (and any codicil) and of the estate accounts - see Section 5 for more detail on this. The administration of an estate will usually take over a year - if there are complexities, especially litigation, it may take much, much longer. Reversionary (or Interest in Remainder). This is a gift that will only be received by the charity following an event. This might be the death of an intermediary, perhaps the spouse or sister of the person who has died; or the terms of the will may be that the person has the use of a property until s/he voluntarily vacates it. The intermediary is referred to as the life tenant (or liferenter in Scotland), and the eventual beneficiaries as the remaindermen. In the meantime, the affected assets are held on trust by the trustees of the estate (often the same people as the executors), with the life tenant enjoying use of the asset (e.g. income from it, rent). The capital value should be at the least preserved and preferably grown for the remaindermen until the event occurs and the trust 'falls in'. It is possible, with the consent of all parties, to terminate a trust of this type, so that the capital of the trust is split between the life tenant and remaindermen. The procedure involved is beyond the scope of this introductory manual, but further details are available for ILM members on the ILM website. 4

6 ILM Starter Manual Page 5 Income Trust. Very rarely, a charity may find itself the life tenant of a trust - benefiting from income for a specific period (e.g. 80 years) or until the original life tenant has died. A will can of course confer a mixture of any of the above to a beneficiary - for instance a pecuniary bequest of 5,000 plus a share of the residue, or a share of the residue plus a reversionary interest in the deceased's property, currently occupied by his widow. Creating a record of legacies A charity not only needs to keep records of the legacies it receives, but needs to keep a diary system for chasing up cases, and a record of income received and expenditure paid out on each case. Cases need to be managed, especially those that are not straightforward. It is essential to create a separate file for each legacy to be received. Those for pecuniary bequests are unlikely to grow large, but those concerning residuary or reversionary legacies will at the least contain some correspondence, a copy of the will, estate accounts, possibly trust accounts and so could eventually grow to half an inch thick. Cases involving claims against the estate can be several times this size! You may find it helpful to separate cases and to colour-code them by type and/or by year. You may also find it very helpful to record specific items of information for each case either on a paper or computer system and to have a diary system to help you keep on top of the cases. In Section 9 we look in detail at the information you might record and at types of administration system that you may find useful. The importance of diarising Initially in your correspondence you will wish to convey your charity's gratitude, confirm your understanding of the nature of the bequest and perhaps explain how it is hoped the legacy might be used. Thereafter, in addition to maintaining good relations with the executor/administrator, a legacy officer needs to protect his/her Trustees against claims that the charity could have benefited more than it did. To this, it is vital to i Verify that the charity does indeed benefit from the estate. This may mean clarifying that the charity is the intended beneficiary should there be doubt, i Ensure that the correct part of the charity deals with the administrator - only certain officers (typically the Secretary and the Legacy Officer) may have authority to deal with legacies on behalf of the charity's Trustees (covered in Section 12 on Discharges to Executors), i Ensure that the charity has a copy will and any codicils and full details of assets and liabilities in cases where the charity receives a share of the estate, so that you can check how these are being dealt with (covered in Section 5 on Estate Administration), i Guard against an executor defrauding the charity by not paying up, or falsifying documents (covered in Section 11 on fraud), i Ensure that you have full accounts for the estate administration and are able to make appropriate tax reclaims (where your charity receives a residuary bequest) (Section 5, Administering Legacies). Co-beneficiaries Where other charities share in a will, you have a ready source of information and support. The benefactor has passed on and the will is in force, and so there is no competition between charities in these circumstances. Most charity legacy officers will be more than willing to share information to help resolve difficulties. It is usual, when there are significant problems, for one 5

7 ILM Starter Manual Page 6 charity (by convention the first-named of the charity residuary beneficiaries) to take the lead in order to help co-ordinate a unified response as far as possible. The corollary is where your charity is the only one to benefit in this case, you must keep carefully-diarised review dates for you will not have other charities to back you up or to let you know how they have been faring if there are difficulties. 6

8 ILM Starter Manual Page 7 4. ISSUES THAT COULD ARISE BEFORE THE ADMINISTRATION OF THE ESTATE Charity acting as Executor Unless your charity has Trust Corporation status (see below), it will not have power in its own name to deal with the estate. The charity s Trustees will need to nominate a solicitor to take out the Grant of Probate at the least and it is usual to arrange for the solicitor also to administer the estate. The charity can then be sure that the estate is administered professionally and that there is proper liability insurance in place. (A charity can nominate its own Legacy Officer to administer the estate. However, the officer could not be appointed by title, but as a named individual. If s/he were to move or retire, the responsibility for administering the estate would have to move with him/her. S/he would also need to be indemnified by the charity, and to have received appropriate training.) If a charity expects to be named more often as an Executor or Trustee, then it may be worthwhile the Trustees delegating to the Legacy Officer the authority to nominate solicitors him/herself. Larger charities expecting to be appointed Executor more frequently can apply for Trust Corporation status. This gives appointed individuals within the charity direct responsibility to oversee the administration or even carry it out, if suitably trained/qualified and indemnified by the charity. It is advisable to seek professional guidance on this topic. Charity asked to renounce right to Executorship Occasionally, where there is no executor, your charity may not be the most appropriate body to take up the reins. It may be that another charity has greater experience or that a family member is already very familiar with the deceased s affairs and would be more suitable. In this situation, your charity may be asked to renounce its right to act as executor. This is not the same as giving up right to benefit. Again, your charity s Trustees need to pass a resolution to renounce their right to act in the estate; again, if this is likely to happen from time to time, it may be wise for you as Legacy Officer to gain delegated authority from the trustees to be able to renounce on their behalves. Disclaiming legacies It may rarely happen that a charity is asked to disclaim its benefit (or may itself seek to disclaim benefit). Benefit can only be given up when the circumstances of the matter have been thoroughly investigated (which may involve gaining legal advice) and the charity s officers are sure that the charity s Trustees will be free from the possibility of a successful claim by or on behalf of those who benefit from the charity s services. The message is: do not disclaim unless you are sure you have the grounds to do so! Many charities will therefore wish to refer this decision to their Trustees. Contested probate Charities from time to time benefit from a share of an estate where a claim is made. For instance, a disappointed relative may feel s/he should have received more, or questions the mental state of the benefactor when s/he made the will. The claim would directly affect what the charity will receive and thus the charity must be involved in the settlement of the claim to protect its entitlement and to protect its trustees. A charity cannot just wait and hope that the claim will go away or be dealt with solely by the estate executors. We give some guidance on how to deal with claims against estates in Section 13 Contentious Probate. Scottish Law The law on succession in Scotland is significantly different than in England and Wales in one particular area the rights of spouses and children of the deceased to claim a share of the estate. If you charity benefits from an estate where the person was domiciled in Scotland, the estate administrators will usually be able to explain how it works. ILM has also produced a helpful factsheet for its members. The Channel Islands Again, succession is dealt with quite differently in the Channel Islands, and the tax regime is quite separate from that in England and Wales. Specialist advice may be required if the estate is not entirely straightforward. 7

9 ILM Starter Manual Page 8 5. ADMINISTERING LEGACIES Pecuniary (fixed-sum) gifts On notification that the charity will be entitled to a pecuniary legacy, it will be clear how much you can expect. If you have been notified by a Smee & Ford notification (see Section 3), you may wish to write to the extracting solicitors to express condolences and appreciation and to confirm the entitlement. Most pecuniary legacies are paid within 6 months from the Grant of Probate ( Confirmation in Scotland). However, it may be that payment will not be received for some time. This would be the case if the estate includes insufficient cash to settle the pecuniary legacies, and, for example, the deceased s property must be sold to provide the necessary cash. If you have not received payment by the first anniversary of the death, your charity is entitled to Statutory Interest (currently at 4%) from then until payment. You are obliged to maximise your charity s benefit by requesting payment of Statutory Interest. Thereafter, you may wish to take a view on pursuing the matter further - there may be good reasons why the legacy could not be paid in time or why it might not be in your charity s interest to demand the interest. Conversely, there may be insufficient assets in the estate to pay pecuniary gifts in full. The bequest is said to have abated. If this should happen, you are able to request a copy of the Estate Accounts to verify what has happened and to query them if you require further clarification. Only the charity s Trustees and its authorised officers can give receipt for a legacy even a pecuniary legacy of If any other person in the charity gives receipt, the executors are technically not released from their responsibility to the charity. Receipt can include signing a duplicate letter from the estate administrators. Very occasionally, a solicitor will demand a receipt prior to payment; this practice is now discouraged by the Law Society. Residuary Bequests a share or all of an estate after costs, tax and other gifts. Get a copy of the Will and any Codicils. The Will (and any Codicils to it) is the legal document or instrument which confers benefit. Always obtain a copy so that you can check the wording for yourself do not rely on what you are told or even on the Smee & Ford notification. Obtain a copy either from Smee & Ford or through the Probate Registries ( 5). Getting a Schedule of Assets and Liabilities. The Executor will have needed to draw up a schedule in order to submit the necessary forms to Her Majesty s Revenue & Customs (HMRC) and to gain the Grant of Probate. If your charity has a share or all of residue, you should request a schedule of assets and liabilities after you have been notified of the legacy, so that you can see early on how the estate is made up, and can take action if, for instance, there might be a liability to Capital Gains Tax (see Section 6). When dealing with solicitors, you might suggest that it would as easy for them to copy to you the IHT 200 or IHT 205 form they will have supplied to HMRC. What if there aren t sufficient funds? Very occasionally, you will be told that there are insufficient funds in an estate to pay your charity s bequest. Gifts in a will are paid out in the following order: Gifts of specified items (specific legacies), gifts of specified money (pecuniary legacies) and lastly gifts of residue. It may be that nursing home costs ate into your benefactor s means such that the administrator s costs plus the specific and pecuniary gifts in the will exceed the value of the estate and thus there is no residue. Always ask for a copy of the estate accounts. 8

10 ILM Starter Manual Page 9 Valuation of significant assets. From the schedule of assets and liabilities, you should be able to see what assets are significant in value. Usually these will be the deceased s property and perhaps some jewellery or personal belongings. You should ask the administrator for an independent valuation of any asset(s) that you feel to be significant so that you can ensure that the price achieved is close to that of the valuation. For a property, the estate agents sales particulars will usually be sufficient. If the asset is unusual in some way, you may wish to see a second valuation. It is particularly important to check over the details of property to be sold to see if there is potential for development. Both the charity beneficiary and the Executor have a duty to maximise benefit, and this is a classic example where that duty can come into play, even if there are members of the deceased s family who may not be entirely happy. Investments. Many estates include a portfolio of investments, which should be apparent from the Schedule of Assets and Liabilities. The Executor should ask if you wish your part of them to be transferred to you (that is, in specie) or sold, so that you receive the proceeds of sale less commission. It is important to make clear your policy and then to ensure that it is followed, particularly if the stock market is volatile. If there is likely to be a gain in value in the investments and you wish your part to be sold, it is essential to contact the Executors early on to follow the Appropriation procedure (see below) to mitigate tax. If you wish your charity s proportion of the investments to be transferred, do check that your Memorandum and Articles of Association allow for the charity to receive shares. Commission rates. You may want to note that many charities request Executors to sell investments through stockbrokers Charles Stanley & Co, who run a preferential scheme offering reduced commission for charities. Details of the procedure to gain the preferential rate are shown on the ILM website ( Small numbers of shares. Very small parcels of shares can cost more to dispose of than they are worth. The ShareGift scheme (a registered charity) will take such shares to accumulate, and in due course these form part of the wide-ranging charitable programme of grants made at its Trustees discretion. Contact The Orr Mackintosh Foundation, 5 Lower Grosvenor Place, London SW1W OEJ (Tel: ) or Capital Gain. On death, there is an automatic uplift in the chargeable value of the deceased s assets, so that there is no Capital Gains Tax (CGT) to be paid by the estate. However, any increase in value from death on is liable to CGT, even if the estate is left to charity. This is because the estate is deemed to be held by the Executors as individuals, not by the (charitable) beneficiaries. There is a procedure to get round this. The Executors or administrators can appropriate the assets typically investments to the charities. This is simply a note on the administration file that the administrators have appropriated the assets and are now holding them on behalf of the charity beneficiaries as their agents. Further details are shown below in Section 6 on Tax. Property to be sold after the administration period If the Executors sell property within the administration of the estate, as is usual, it is not necessary for there to be any special procedures because beneficiaries are registered charities. However, if the property has been appropriated, assented or transferred to the charities since death, or if it is being held on trust for the charities beyond the administration period, then the sale has to comply with Section 36 of the 1993 Charities Act. That is, the property is treated as if it belonged to the charity, and safeguards have to be followed to protect the charity s Trustees. 9

11 ILM Starter Manual Page 10 Why would a charity not want the property to be sold immediately? The most common reason is that there is a tenant. If the tenancy is not protected and may end soon or can be brought to an end within a fairly short period, the charity might wish to consider deferring sale until the property is vacant and can be sold at a significantly better price. Section 36 also comes into play where the property is part of a will trust which has now come to an end and those now to benefit from its sale include charities. In essence, the law requires an independent valuation by a surveyor specifically qualified to report on the type of property in question (that is, on its condition, value and marketing). It also specifies restrictions as to people to whom the property may not be sold, and the wording to be incorporated in the contract of sale. It is particularly important to watch out that property is not being sold to a connected person" (for instance a member of the family) at undervalue. ILM has a factsheet and legal Opinion on s36 on its website, but specialist legal advice is recommended. Properties in will trusts maintenance and insurance Where a property is held as part of a will trust, so that the charity only benefits when the trust ends (or falls in), it is vital for the charity to ensure that it is adequately maintained and insured. In most wills, it is clearly spelt out that this is the responsibility of the life tenant the person who has the use and benefit of it. Very occasionally, the responsibility falls on the trust and the charity must be prepared to pay into the trust to ensure to ensure that the value of this asset is being preserved. In all cases, the charity should periodically enquire of the Trustees whether it is being maintained and insured, and if in doubt, should press for evidence such as a copy of the current certificate of insurance. What do you do if you are left small items in a will? Most charities receiving legacies will find themselves with items of jewellery, stamps, coins, and even the occasional embarrassing fur rug! The Institute of Legacy Management currently has special arrangements with Dreweatts. For details, contact John Grant at Dreweatts via at Dreweatts welcome enquiries regarding chattels bequests. Please telephone them on What do charities do about items of sentimental value to relatives? If a charity is left a share or all of residue, it often happens that the benefactor has not left any particular instructions in the will about items such as photographs or jewellery. Many charities have a policy of agreeing that items of sentimental value may pass directly to relatives subject to the approval of the Executor; however, any individual items thought to be worth more than 100 should be independently valued and offered to relatives at that valuation. Ex-Gratia claims claims on a moral, not legal basis Frequently charities are approached with requests to agree a payment to someone not benefiting under the will of the deceased. It may be someone who has shown kindness to the benefactor in his/her last years. Or it may be that the benefactor had intended to change the will and took steps to do so, but died before the new will or codicil could be executed. In that case, the claim might be from a disappointed potential beneficiary. The Charity Commission booklet CC7 is essential and should be in every legacy administrator s office, together with extracts from the Charity Commissions Operational Guidance Note OG11. You can download both from A charity simply does not have the same freedoms and discretions as a private individual to give away part of its entitlement. It may not lawfully expend its funds other than in support of its charitable objects, as laid down in its governing document, without Charity Commission (CC) approval. The charity s Trustees must have the opportunity to discuss the proposed ex-gratia gift 10

12 ILM Starter Manual Page 11 and agree to an application being made to the Commission. This power is not delegable to the legacy officer. A full factsheet, prepared by the Legal Commissioner and ILM, is available for the Institute s members. ILM has also provided a factsheet for solicitors and executors, freely available on the ILM website. In addition, the Charity Commission are able to give advice (for contact details, see Section 14 at the end of these materials). What if the charity name is incorrect? If the charity can otherwise be clearly identified (for instance the correct Charity Registration Number is given or the full address), then the Executors may feel confident to pay out. They may require an indemnity to cover themselves. If however, it is not clear which charity was intended, the Royal Sign Manual Procedure may be required. This is in effect the power of the Sovereign to choose which organisation should benefit, now delegated to the Attorney General. It is not for the Executor to make the decision. A full factsheet is available to ILM members and is also freely available on the ILM website. 11

13 ILM Starter Manual Page TAX INHERITANCE TAX (IHT) Tax has been levied with reference to the death of an individual for nearly 300 years. Originally a form of stamp duty, tax gradually became payable in relation to the assets themselves. The tax has undergone various names and forms, from Estate Duty (a.k.a. Death Duties ) through Capital Transfer Tax to Inheritance Tax (IHT). In 1984 the legislation was consolidated in the Inheritance Tax Act 1984 (IHTA 1984). IHT is usually chargeable when an individual makes a disposition (pre-death as well as by his or her Will), which results in the value of the assets in his or her estate going down. Dispositions can be divided into three groups. The first is a disposition, which appears to be a transfer of value, but is specifically excepted from being one under IHTA An example is a disposition for the maintenance of one s family. The second is an exempt transfer. This is a transfer of value, which is specifically exempt under IHTA The most important example of this is a transfer between spouses but it also generally includes gifts to charity. The third group itself divides into three types of transfer: transfers made by an individual during his/her lifetime which are immediately chargeable when made; transfers made by an individual during his/her lifetime which are not immediately chargeable when made: and transfers chargeable on death. The threshold for IHT has changed frequently over the years and in the tax year 2007/2008 is 300,000. The rate of IHT on chargeable lifetime transfers (grossed up) is 20% and tax on transfers on death is at a rate of 40%. Special reliefs apply in the case of business assets and agricultural property. Usually, charity legacy officers will be able to check IHT paid by examining the Estate Accounts, as the tax will have been levied on gifts in the will to non-exempt beneficiaries (those other than the spouse or charities). However, sometimes the tax paid is more than expected. The most common reasons are: Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers A PET gives rise to no IHT liability when made, but becomes a chargeable transfer if, but only if, the transferor dies within the following seven years. When this happens, the donee has the primary responsibility to pay the IHT due (but beware the responsibility falls on the estate if the donee does not pay within 12 months). An example might be a substantial gift to a child to help purchase a house, the parent then dying within the next seven years. IHT is payable at death by the child on a sliding scale dependent on how many years before death the gift was made. Chargeable lifetime transfers These give rise to an immediate charge to IHT at half the full death rate. If the donor dies within 7 years there may be a further charge at the death rate applicable at that date, but taper relief may apply and credit is given for lifetime tax paid. Examples of this type of transfer include gifts to companies, to certain types of trust and payments of a grandchild s school fees. Domicile In general terms, a person is domiciled in the country in which he or she has a permanent home or to which he or she intends ultimately to return. This is not necessarily the country in which he 12

14 ILM Starter Manual Page 13 or she is regarded as resident for tax purposes. In many cases, a person s country of domicile will follow the country of domicile of his or her father, but a person over16 years of age can change his or her country of domicile by choice. Generally, UK domiciled individuals will be liable to IHT on their worldwide assets whereas nondomiciled UK residents will be liable to IHT only on their assets located in the UK until they have been tax resident in the UK for 17 out of the previous tax years. After that, such persons are liable to IHT on their worldwide assets, although they retain their non-domiciled status for income tax and CGT matters. This is a complex subject, which requires specialist advice, particularly when the legal regimes in the two countries conflict. Situations where charities might pay IHT Under Section 23 of IHTA 1984, gifts to charities and settlements on charitable trusts are exempt from IHT. As a result of these exemptions, charities are generally exempt from IHT and legacies to charity are deducted from the value of the estate chargeable to IHT. As a result, the IHT payable will be that much lower. For instance, if IHT is brought about by the value of a share of residue to a private individual, a charity also sharing residue does not usually have to pay any of that tax. However, there are occasions under which charities may have to contribute towards IHT charged against an estate. Following the ruling in Cowie s Trustees Petitioners (Re Dougal), IHT chargeable on pecuniary or specific bequests in wills is divisible between residuary beneficiaries regardless of whether they are exempt or non-exempt. Thus, if pecuniary bequests to nonexempt individuals (e.g. children and friends) total more than the IHT threshold, the residuary beneficiaries will bear the tax, whether charities or not. Benham/Ratcliffe. There have been occasions where the rights of charitable exemptions in mixed residue estate have been challenged. In Re Benham (deceased), the judgement was in favour of IHT being shared by the residuary beneficiaries, regardless of the terms of the IHTA This ruling was overturned by the ruling in Re Ratcliffe (deceased) which took note of the Benham decision but restored the status quo under which, in a mixed residue estate, IHT on residue is borne entirely by the non-exempt beneficiaries. For mixed beneficiaries (i.e. exempt and non-exempt) to share the burden of tax, the wording of the will has to be very specific not just the usual division of residue into stated proportions. Deeds of Variation and IHT Under Section 142 of the IHTA 1984, legacies can be disclaimed or wills varied so long as any variation or disclaimer is in an instrument in writing (usually a deed), to which the persons relinquishing benefits are parties. In addition, the instrument must be made within two years of death and must specifically state that Section 142 is intended to apply to the variation. The best known example is the Deed of Variation (or Deed of Family Arrangement). This is a generous concession by the tax authorities and one that can result in substantial savings in IHT. Examples of this are where will trusts are terminated by consent of the beneficiaries and/or where wills are varied following two related deaths within the two year period. Deeds of Variation are valuable to charities, but care must be taken to check draft Deeds to ensure that they are both correct and effective, as they have the effect of replacing parts of the original Will. Legal advice should be gained. Summary IHT is a complex tax and the points above are only a brief summary of the main provisions. It is strongly recommended that professional advice be taken where any IHT liability is likely to arise. 13

15 ILM Starter Manual Page 14 CAPITAL GAINS TAX (CGT) The application of CGT to the personal representatives (PRs) of deceased person can be summed up in three principles, which are: 1. The PRs are deemed to acquire the deceased s assets at market value at the date of death. 2. Assets sold during the administration period are liable to CGT in accordance with the normal rules, subject to additional rules concerning allowable expenditure. 3. The transfer of assets to beneficiaries is not a disposal for CGT. Under Section 257 of the TCGA 1992, gifts to charities are exempt from CGT. This exemption can generally be secured during the administration of an estate by the PRs appropriating or assenting the assets into the name of the charity and then selling as bare trustee on behalf of the charity. Appropriation is simply a note on the administration file that the administrators have appropriated the assets and are now holding them on behalf of the charity beneficiaries as their agents. The Inland Revenue accepts that an appropriation on paper is sufficient; there is no need for legal transfer of the assets. However, if an Executor wants to be sure that the Inland Revenue will accept the appropriation, a Memorandum of Appropriation can be used an example can be found on the ILM website, solicitors section. For appropriation of land, appropriation must be carried out prior to exchange of contracts. For CGT purposes the assets are deemed to have been appropriated at probate value (Section 62(4) of the TCGA 1992). For the purposes of the Estate Accounts, investment values are usually taken to be the middle market price at the close of trading on the day of appropriation. Where some of the investments need to be sold for administration costs or payment of legacies, the balance can still be appropriated to reduce the CGT burden. If the administering firm does not take these simple steps, then it may be in breach of its responsibilities to maximise the benefit to the estate. It might be worth noting that the major bank executorship departments appropriate investments by default. For the year of death and the following two years, PRs are entitled to the CGT annual exemption. Subject to this, CGT is charged at the rate of 40% - although this will be subject to taper relief in later years. INCOME TAX Most income (including all investment income) accruing to charities is exempt from income tax and, as a result, charities can recover income tax paid by PRs during an administration. For instance, the deceased may have held building society accounts that continue to pay net interest during the early part of the administration of the estate. Charities can recover their share of that tax. No recovery of the tax credit attaching to dividends may now be made. The tax can now be claimed only for those years in which the money is actually paid by the executors to residuary beneficiary charities, which may not be the year it was received by the estate. Charities may now claim at a maximum rate of 20% against bank and building society interest. To recover the tax suffered by the executors, it is necessary for the charities to obtain from the executors a Form R185 (Estate Income) form setting out the charity s share of the income, with a separate certificate for any year in which income has been paid to the charity, including any income accrued at the date of death but paid afterwards. From June 2003 a new version of the Form R185 (Estate Income) is available, which uses the same box numbers and references as the trust income pages on the self-assessment return. A copy of this form is available from the Revenue website at Claims for repayment of income tax have to be made within six years of the year of assessment in which the income arose. 14

16 ILM Starter Manual Page BUDGETING FOR LEGACIES Projecting income Annual budgeting. If you receive a modest number of legacies each year, then you will find it difficult to estimate your future income one large legacy can throw your projections completely askew. The golden rule is Budget conservatively. A popular way of budgeting is to base projections on numbers, not values, and then apply average values for pecuniary and residuary bequests, excluding unusually large legacies. So, if you safely expect to receive around 10 residuary and 15 pecuniary bequests next year, and the average value (excluding very large bequests) is 35,000 and 2,000 respectively, you might expect 10 x 35,000 (= 350,000) plus 15 x 2,000 (= 30,000), total 380,000. You may also want to consider external factors such as whether house prices (which affect shares of residue) are increasing or not, and the stock market, or other factors which are especially affecting your charity s ability to attract bequests. Cash flow. Many charities use a system of predicting when individual legacies are likely to be paid out. For example, you may find that residuary legacies tend to pay out in stage payments with an interim payment of around 70% of the total expected amount about 7 months after the Grant of Probate and a final payment about a year after the Grant. However, it takes only one unexpected windfall to blow your calculations apart, so do take a long view and budget conservatively. Having an expenditure budget Regrettably, legacies are not just about income. There will be occasions when you need to spend. Legal costs Trustees of charities tend to hate the idea of paying lawyers; there is a perception that no charity should be seen by its supporters to be querying any gift received, and that supporters would withdraw their support in droves if they knew. However, that is not necessarily the case many supporters expect the charity to uphold the wishes of its benefactor. In addition, one role of a legacy officer is to protect the charity s trustees and this may well have to be done through obtaining legal advice and, if necessary, taking legal action. If a charity does not have a legal costs budget, it may be failing in its duty to protect its own Trustees. The budget does not have to be large. The larger legacy-earning charities typically spend a little over 0.1% (one-thousandth) of their legacy income budget on legal fees. Expenditure on will trusts, will copies, notification service etc Very occasionally, it is necessary to invest funds in a will trust property (i.e. where the charity will eventually benefit following the death of an intermediary such as the benefactor s widow). An example would be where there is no provision made in the will for capital costs to ensure the property remains in good condition the renewal of a porch roof would be an example. Such expenditure may fall on the trust, and thence on the remaindermen those who will eventually benefit. It may be that you are having difficulty obtaining a copy of the will from the administrator. Will copies in England and Wales can be purchased for 5.00 from The Court Service at the Probate Sub-Registry, Duncombe Place, York, YO1 2EA. Costs such as those mentioned above are specific to the legacy case you are dealing with and necessary to ensure you are receiving proper entitlement; you may therefore feel that they are a justifiable expense to be debited against legacy income in your charity s management accounts. At the beginning of these materials, we mentioned the wills notification service of Smee & Ford Ltd. Advice on their current fees may be obtained on

17 ILM Starter Manual Page 16 A training budget ILM is often asked what size of training budget is appropriate for a legacy administrator. We would recommend at the least that any administrator attend the following skills courses and forums: The Charity Legacy Officers Meeting (CLOM) in May of each year One or two of the specialist training courses for charity legacy administrators provided at low cost by solicitors Two or three of the specialist courses provided by ILM (Details can be found under Training on the ILM website The approximate costs of the above would be 600 in a year. The ILM Certificate in Charity Legacy Administration is now the standard qualification looked for by charities recruiting legacy administration staff and is, in effect, the next step on from this manual. Details of this distance-learning course can be found on the ILM website under Training. The Certificate is open to ILM members only and is an assessment-based course, as opposed to exam-based. The cost is currently 750. Using a legacy administration consultant There are a small number of very experienced legacy officers available to work for a number of charities. This may be on a one- or two- day-a-week basis, or to fill in during holiday periods or, for instance, maternity leave. They can also take on the charity s legacy administration role working from their own offices for an agreed number of hours per month. Although the costs per hour or day may appear to be higher than appointing in-house staff, consultants can very quickly appraise action needing to be taken and where systems and savings can be improved particularly in maximising benefit from estates. A list of legacy administration consultants can be obtained from ILM, or you may contact Legacy Link, one of ILM s Corporate Partners, via their logo on our homepage (see contact details in Section 11 at the end). 16

18 ILM Starter Manual Page SORP THE STATEMENT OF RECOMMENDED PRACTICE IN CHARITY ACCOUNTING The legal framework for charity accounting was introduced by Part 1V of the Charities Act Section 41 requires charity trustees to: Ensure that accounting records are kept in respect of a charity which are sufficient to show and explain all the charity s transactions, and which are such as to: disclose at any time, with reasonable accuracy, the financial position of the charity; and enable the trustees to ensure that, where any statements of accounts are prepared under Section 42(1), those statements of accounts comply with the requirements of regulations under that provision. The accounting records shall in particular contain: entries showing from day to day all sums of money received and expended by the charity and the matters in respect of which the receipt and expenditure takes place; and a record of the assets and liabilities of the charity. The SORP recognises the difficulties in complying with this in respect of legacy income. Its overriding principle is stated in paragraph 97 under the heading - Recognition of Incoming Resources. All incoming resources becoming available to the charity during the year should be recognised in the Statement of Financial Activities. A legacy does not become available to a charity until it is either paid in the course of administration or the administration has been completed and the estate is ready for distribution. Paragraph 98 of the SORP continues: The value of all resources both income and capital accruing to the charity should be recorded in the Statement of Financial Activities as soon as it is prudent and practicable to do so. In all cases resources should not be recognised until the conditions for receipt have been met and there is a reasonable assurance of receipt. This will usually be when the resource is receivable or the charity s entitlement to it becomes legally enforceable. Against this background, accounting for legacy income under the SORP should be in accordance with the following guidelines: Legacies should be included in the charity s accounts on the earlier of receipt of the legacy or approval of the final estate accounts. Very substantial legacies which are incapable of financial measurement at the year-end should be included in notes to the accounts on the earlier of receipt of the legacy or the estate accounts, with an estimate of their value, but should not be included in the accounts themselves until their value is capable of measurement. Such legacies should be included in the notes each year until they can be included in the accounts. Trustees may also, although not specifically advised to do so by SORP, include in the notes to the accounts any very substantial legacies, which are not yet received or included in the final estate accounts. One practical way of achieving this would be to accrue at the year-end for legacy income where the estate accounts have been approved by the charity prior to the year-end, but the income is received after the year-end. Under these circumstances, there is no doubt about measurement of the legacy income whereas, on any other measurement, there may be difficulties in confirming the charity s entitlement. 17

19 ILM Starter Manual Page 18 Restricted funds Occasionally, you will find that a will includes a legacy to your charity with a condition on the use of the funds. An example would be 500 to XYZ Charity, to be used for the provision of equipment in the Gloucester area. Under SORP, the charity is obliged to account separately for such gifts provided that they are also material that is, of significant size. Your charity s accountants should be able to assist in advising what procedures you should follow. Most charities will not wish to encourage restricted legacies a will written now may include a condition quite irrelevant to the activities of the charity in Yet at the same time, charities will want to give concrete examples of what legacies have funded, to increase the appeal of this form of giving. One solution is to ensure that in any promotional material, it is clear that the charity has chosen to apply legacy funds to this or that project (as opposed to the benefactor). 18

20 ILM Starter Manual Page OFFICE ADMINISTRATION SYSTEMS Paper vs computer Because a legacy officer will need to keep tabs on each case as matters progress, it is important to set up a filing system by legacy case. If your charity receives a small handful of legacies a year, you may want simply to use paper and file cards as indexes. If, however, your charity is likely to receive more than about 30 legacies a year, you may want to use a simple computer spreadsheet or database system to record and cross-refer details. If the number is more than about 50 a year, you may prefer to consider one of the commercially-available packages - these help not only keep records but help you to manage the caseload. Whatever method you choose, it is very helpful to record at least the following information for each legacy case, both for legacy administration and marketing purposes: i Full name of deceased, address (incl. postcode), age at death (if known), date of will, date of last codicil, date of death, if the benefactor was a past supporter, type of legacy or legacies left, name, address and reference of executor/administrator for correspondence. You will also need a unique reference number to differentiate cases with the same name such as John Smith. If you are using a paper-only system, it is helpful to have an index by the surname of the deceased to track quickly whether a case is open or closed, and, optionally, what money has been received and the current state of play. i Date and reason for next review - a daily/weekly index or diary is useful here. i Income received from this legacy by date and case name and reference. Very occasionally you will need to expend funds (e.g. legal fees) and it would be helpful to have an index of expenditure by date and case name/reference, including the reason for the expenditure. i As the legacies come in, you will find that you are building up a useful list of solicitors useful because an index of the firms can be used for marketing purposes* and because a firm that is being tardy over one case may be have a similar problem with others. But do note, in relation to marketing, that a proportion of firms merge, separate or close each year and the list may quickly become out of date. * Please note the provisions of the Data Protection Act such marketing, if undertaken, should be to the firm, not an identifiable individual. Computerised systems If your charity has a fundraising database system, then you may well want your legacy administration system to be a fully integrated part of it. Many charities use off-the-shelf fundraising systems if the organisation is already using the Visual ALMS system or CARE, both of these have a form of integral legacy administration modules, for example. Some charities have bespoke systems and if this is the case for you, you may be able to ensure that your needs are incorporated into plans for upgrades. The majority of charities, however, need to consider a stand-alone system, but hopefully one that can be programmed to link to whatever fundraising database they use. As we ve mentioned above, if you have up to about 50 legacy cases a year, then a spreadsheet or simple database system might well suffice. For higher levels, a commercially-available program might well be cost-effective; the best-known of the commercially-available programs is FirstClass, used by the majority of the top 30 legacy-earning charities. This system is now available also as a reducedprice, web-based package, meaning that no installation is required at the charity s office. Many Charity Legacy Officers will be happy to talk about the benefits of the systems they use and even to demonstrate them. 19

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