A renaissance in legacy giving

What do Elton John’s former producer, Charles Darwin and Mila Kunis all have in common? On the face of it, not much at all, but all of these individuals have either left, or intend to leave, a charitable legacy in their will. One of the most well-known philanthropists, John D Rockefeller, gave USD548 million in his lifetime and his legacy is still enduring through the Rockefeller Foundation.

Although legacy giving has grown over the years and has numerous benefits for donors and charities alike, it is still underutilised as a source of high-value giving and there is little discussion of it among professional advisors and their high-net-worth clients.[1] Yet, we are on the cusp of the greatest ever intergenerational wealth transfer, with demand for legacy giving having never been higher. In fact, according to Remember A Charity’s annual benchmarking study,[2] 24 per cent of wills handled by solicitors and professional will-writers now include a donation to charity, showing steady growth over the past decade, up from 16 per cent in 2014.

There remains significant scope for growth and more so when it comes to high-net-worth individuals (HNWIs). As the net worth of an individual goes up, so does the complexity of their assets and other wealth- and estate-planning considerations, including conversations about values and what someone could or might want to do with their wealth.

Despite increasing pressure to talk about the softer or more values-based aspects of wealth, some advisors still find it difficult to have these conversations. Given the growth in environmental, social and corporate governance (ESG) and sustainability-themed investments in Europe, regulations are increasingly being established, for wealth managers in particular, to ensure clients and their advisors are on the same page when making decisions on how to invest funds. These are all good opportunities to bring philanthropic endeavours into the conversation.

Solicitors now have a broadly accepted best practice of talking with clients about whether they would like to include a charitable bequest in their will, and this certainly opens up the conversation. It ensures clients are aware of all the options open to them and are able to access the generous tax incentives linked to giving through one’s will. Solicitors often report how conversations about the causes that clients care about can deepen their relationship and strengthen loyalty.

The impact of these conversations can be seen, as most well-known charities and hundreds of smaller and community-based organisations across the UK now rely on charitable legacies as an unrestricted source of income, accounting for between 10 to 60 per cent of their voluntary income.

Despite the huge impact that these gifts have on charities and the benefits legacy giving has for clients, currently, legacy giving is underutilised as a mechanism to support charities by HNWIs.

That said, it remains a powerful way to give that brings considerable and wide-ranging benefits for both charities and supporters, while also being appealing for HNWIs’ advisors who are looking to strengthen relationships with clients with values-based discussions and so support them in meeting their philanthropic goals. There are some valuable and beneficial considerations and mechanisms for one’s clients to be considering in making charitable bequests, which are considered further below.

Including a charitable bequest in a will is a simple way to give a significant donation to charity. One can leave any asset, cash, investments, property or even intellectual property to charity. Donations can work around gifts for loved ones. And while gifts can be a set sum or index-lined, many people choose to leave a percentage of their estate to charity, enabling them to distribute a proportion of their estate between loved ones and charities that they wish to support. Particularly among those who are child-free, some will choose to gift their entire estate and/or property to charity.

Charitable tax reliefs

The UK has one of the most generous fiscal frameworks to encourage legacy giving. In the UK, not only are charitable bequests to charity tax free, they can also serve to lower the overall tax threshold to all beneficiaries. In some circumstances, if someone leaves 10 per cent or more of their estate to charity, then their inheritance tax (IHT) rate reduces from the standard 40 to 36 per cent. This makes legacy giving particularly advantageous to those whose estates sit above the IHT threshold, which is currently GBP325,000 for an individual.

Further, there are increasingly sophisticated mechanisms by which to leave a charitable legacy beyond a will, such as by way of a deed of variation or through a donor-advised fund (DAF).

DAFs

As an alternative to setting up a charitable trust, DAFs are also increasingly being used by HNWIs for their broader philanthropy and can be integrated into longer-term giving plans. As a more convenient and efficient tool than a traditional charitable trust, there are several benefits to using a DAF alongside writing a will.

Ways to facilitate legacy giving include setting up the DAF in one’s lifetime and including an expression of wishes to facilitate longer-term impact and giving on death, or making a provision in one’s will to include a distribution to a DAF on death.

A legacy facilitated by a DAF can be anonymous. One can also use their expression of wishes to choose a successor for their DAF account so that they can pass on their philanthropic legacy. This is increasingly becoming popular with those who want to bring in an element of succession planning and ensure that their legacy continues with the next generation.

DAFs can also easily enable UK/US dual-qualified giving and facilitate cross-border grant making. This offers donors who are dual-qualified taxpayers the ability to claim both Gift Aid in the UK and a charitable tax deduction in the US. Once the charitable contribution is made, Gift Aid is filed in the UK. The donor is also given a charitable contribution receipt for use in the US.

For lifetime legacies, a DAF is a tax-effective vehicle for large gifts that qualify for lifetime higher-rate tax relief. For example, a client may automatically claim Gift Aid on cash gifts and accept tax-efficient gifts of property or shares that can later be distributed to charity beneficiaries.

Deeds of variation

In the right circumstances, i.e., when all beneficiaries are in agreement, a deed of variation may be used to alter the distribution of assets, add beneficiaries or otherwise make changes to a will. It can even be applicable to alter intestacy rules where there is no will. It must be completed within two years of the date of death and is a really simple way to include a charitable bequest in a will post-death and lower the tax threshold of the estate.

Further, a deed of variation could also be used alongside a DAF to redirect any funds into a DAF account to give a client time to choose which causes they would like to support.

Conclusion

Legacy giving, which was once the prerogative of the wealthy to fund institutions and support good causes, appears to be approaching a renaissance among HNWIs. It presents an increasingly attractive and simple option to plan effectively, work with the next generation and continue long-term support of causes HNWIs care about.