Charities in danger of missing out on legacies if they change their name
April 2009
Research published in March by thinktank The Smith Institute suggests that the value of charities' legacy income could fall by £200m this year as a result of falling property and share prices
Against this background, charities can ill afford to lose still more legacy income. However, it appears that a lacuna in the recently amended Charities Act 1993 might result in just that.
Tom Murdoch, a member of the Charity and Education Team at Stone King Sewell LLP explained the problem facing charities and will drafters to Caritas:
‘Section 75F of the Act provides that gifts to charities that have ceased to exist following a merger will take effect as gifts to the new, merged charity. Initially this amendment was warmly welcomed by charities because it allows them to secure legacies and dissolve old “shell” charities that have no other administrative purpose[1].
However, s.75 is not quite as watertight as it might appear. It provides that “Any gift which is expressed as a gift to the transferor, and takes effect on or after the date of registration of the merger, takes effect as a gift to the transferee….” But certain contingent gifts, in particular those with a precondition that the charity exists, will not take effect in this way. Instead they will fail under trust law.
This is because the wording of s.75F is not sufficiently strong to override the conditions of testators’ gifts requiring the ongoing existence of the charity. Wills containing strict survivorship clauses such as: “…No person or organisation shall take… unless they survive me by at least 30 days” will be affected. Gift clauses themselves may also contain a relevant condition, such as “…to [all/any] of the following charities as shall be in existence at the date of my death…”[2]. In these cases, gifts may fail completely or (almost as damaging for the charities involved) lengthy and expensive litigation may ensue. The Charity Commission’s own Operational Guidance confirms[3]: “In some cases, the terms under which a gift or legacy is left might affect whether the legacy will be payable to the transferee even if the merger is entered on the Register of Mergers.”
Clearly, there are drafting lessons here for private client lawyers. It may be, of course, that clients do not wish their gift to go to an amalgamated or merged fund. In other cases, however, it is likely that testators will not intend for their legacies to fail for these reasons. The law must be carefully explained to clients and gifts precisely drafted to reflect the client’s wishes.
There are lessons for charities too. In the current economic climate charities are increasingly looking to merge. In our experience, mergers have risen approximately six-fold in the last year.
Charities with significant legacy income cannot afford to ignore this problem. The Charity Commission itself recommends that “Charities that may receive significant legacy income and are considering merging with another charity are advised to take advice before deciding whether to transfer all their property to a transferee and to cease to exist.”
Presumably charities’ legacy teams will already be suggesting clauses that avoid these problems, but to the extent that charities cannot protect legacy income that way, they should consider retaining a shell charity as a safety net for such gifts, in spite of the good intentions of s.75F.’
A Cabinet Office spokesman told Third Sector that there were no plans to review charity law before 2011.
[1] 75F Effect of registering charity merger on gifts to transferor
(1) This section applies where a relevant charity merger is registered in the register of charity mergers.
(2) Any gift which —
(a) is expressed as a gift to the transferor, and
(b) takes effect on or after the date of registration of the merger,
takes effect as a gift to the transferee, unless it is an excluded gift.
(3) A gift is an “excluded gift” if —
(a) the transferor is a charity within section 75C(5), and
(b) the gift is intended to be held subject to the trusts on which the whole or part of the charity's permanent endowment is held.
(4) In this section —
'relevant charity merger' has the same meaning as in section 75C; and
'transferor' and 'transferee' have the same meanings as in section 75E.
[2] Other clauses with similar conditions are:
'…to X charity, provided that, if X has ceased to exist on the death of [the life tenant], then to Y charity.'
'…to [all/any] of the following charities but if at the date of my death any of those charities shall have ceased to exist or has amalgamated with another charity or has changed its name or for whatever other reason this gift should fail my Executors shall pay the share of my residuary estate which would otherwise have gone to that charity in equal shares to the remaining charities named in this clause.'
[3] Operational guidance - Register of Charity Mergers: sections 75CD, E and E of the charities act 1993 (as added by the charities act 2006) - technical background.
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