Legacy income is a vital and desirable source of income for charities. Covid-19 has only served to heighten the reliance upon and need for legacy income as charities have struggled to generate income through other avenues due to the restrictions imposed by the Government.
The introduction to Strengthening Charities’ Resilience with Legacies, a joint report from Remember A Charity, Legacy Foresight, the Institute of Legacy Management and Smee & Ford, is well worth a read. It paints a picture of a world without legacies: ‘One where 6 in 10 lifeboat launches didn’t happen, hospices, homeless shelters and rescue services ceased, foodbanks and helplines closed. And one where supporters didn’t have the opportunity to contribute so positively to the causes they have cared passionately about during their lifetime’.
Legacy income is set to double in real terms by 2050 and yet this income source is notoriously unpredictable and unstable. One of the reasons for this is that legacies, unlike many other sources of charitable income, are more open to challenge. Challenges to legacy income have the potential to, at best, delay income reaching the cause about which the testator has cared passionately during their lifetime and, at the very worst, cost the charity more than the legacy is worth.
In short, the law allows all legacies to be challenged. A question which naturally follows is, why bother stating testamentary intentions in a will if intentions can be challenged? Again, in short (and from a charity legacy perspective), people bother because there is no alternative option if you wish to make a gift on death to a charity. Further, the minimal cost of making a valid will and clearly stipulating your intentions will be adhered to in the vast majority of cases. However, for an array of socio-economic reasons, challenges to wills are reportedly on the increase.
Challenges to an estate can be made in a number of ways but the principal methods are by challenging the validity of the deceased’s will or, if its validity is accepted, that the will fails to make reasonable financial provision for a specific individual (usually a family member or other dependant) under the Inheritance (Provision for Family and Dependants) Act 1975 (the 1975 Act).
Charities provided for under a challenged will or one subject to a 1975 Act claim stand to lose a great deal, particularly if they are due to receive a share of the deceased’s residuary estate.
Where significant sums are left to charities in wills, potential claimants often feel more confident in making claims against the estate, as they believe that charities - particularly large ones - will be less invested, both emotionally and financially, in protecting their interest in the estate than an ordinary individual.
To some extent, this may be true. After all, the largest charities receive many millions of pounds in donations and legacies each year. In 1975 Act claims, the needs of all beneficiaries of a will are taken into account by the court and charities have difficulty in arguing a ‘need’ for any particular legacy.
However, there are a number of flaws to this line of thought. Firstly, smaller charities often do have a ‘need’ for legacies, particularly if they are substantial. Such legacies can make or break struggling charities. Secondly, regardless of the size of the charity, as a result of the Supreme Court case of Ilott v Mitson in 2017, charitable beneficiaries do not have to defend their position on the basis of need. The Supreme Court also recognised in that case that respect should be given to the wishes of the deceased as communicated in their will and that there is substantial public interest in charitable donations.
In addition to these factors, charities also have a duty to protect their assets. This includes legacies left to them in wills and they should defend proceedings if it is in the best interests of the charity to do so.
In certain circumstances, charities may be able to deal with small disputes in-house. However, in the majority of cases, charities should instruct a firm of solicitors to represent them in any will challenge. If there are multiple charitable beneficiaries in the same will, they may choose (in the absence of any conflict) to instruct the same firm as this can provide significant costs savings.
In most cases, it will be in the best interests of the charity to defend the claim, at least at first. This position may change over time. If the value of the legacy begins to outweigh the legal costs of defending it, the trustees of the charity may take the view that it is no longer in the best interests of the charity to defend the proceedings. However, charities should not feel under pressure to settle claims for the sake of it and, if the legacy is sufficiently large and there are good merits to the defence, it may be appropriate to defend the proceedings all the way to trial.
Charities must also consider alternative methods of settling a claim along the way. For example, if the trustees consider that the claimant has a reasonable moral claim or they negotiate a satisfactory settlement, they may wish to make an ex-gratia payment to the claimant with the blessing of the Charity Commission.
There are also other factors to consider. There can be grave public relations consequences to defending a claim made by, for example, a destitute family member of the deceased. Charities will want to avoid jeopardising their future income by pursuing a legacy in proceedings which may taint their public perception.
The joint report referred to above makes a number of recommendations to charities to strengthen their legacy fundraising. One important recommendation, particularly in relation to will challenges, is stewarding supporter relationships.
From a financial perspective, this is incredibly important to ensure the future flow of legacies into the charity. After all, taking steps to increase future legacies will reduce a charity’s reliance on those legacies which may be challenged. In addition, ensuring that appropriate contact is kept with potential testators may also prove important in defending any potential legal proceedings which may arise.
Past communication between charities and potential testators is often used as evidence of a testator’s intentions if a will challenge or 1975 Act claim is brought against their estate.
The General Data Protection Regulation (GDPR) has made many charities more circumspect about retaining this sort of information.
Article 5(1)(e) of the GDPR states that personal data should be retained for no longer than is necessary for the purpose for which it is processed. While this may make some charities nervous about keeping old data about potential testators and, indeed, means that they should avoid keeping all the information they hold about such individuals, it does not mean that charities should simply destroy such data as soon as they are not actively dealing with it or if the testator ceases communicating with the charity.
Retention of data which may be relevant to future legal proceedings can be justified for the purposes of GDPR and the Information Commissioner’s Office (ICO) has confirmed that organisations can retain information to defend possible future legal claims.
As will disputes look set to rise, charities may find themselves increasingly defending legacies. It is recommended that charities look carefully at how they adopt the GDPR especially in relation to pledger data as that data may prove pivotal in demonstrating the relationship between a deceased person and the charity.
Penningtons Manches Cooper is experienced in acting for charities on all contentious matters that relate to legacy income including the types of claims discussed in this article. The firm also has experience in advising charity clients on how to navigate implementation of the GDPR.