Charity legacies and challenges to wills
Legacies are an important income stream for many charities. A recent English decision serves as a reminder that charities should be mindful of the circumstances in which a legacy can be reduced by a successful claim from a disappointed beneficiary.
There has already been much ink spilt over the recent decision in the case of Ilott v Mitson, where a daughter sued her mother’s estate and successfully secured an award of over £163,000 despite having been disinherited in her late mother’s will. The result of the court decision is that three charities named in the will receive less than Mrs Ilott’s mother had intended.
Whilst the case was decided under English law it must be remembered that charity trustees in Scotland may well be left a legacy from an English donor whose estate is being administered under English law and vice versa. As such, the underlying principle in question – that there are legal limits on what testators are free to do with their estates – applies both north and south of the border.
Legal rights
In Scotland the principle arises through the operation of "legal rights". The concept of legal rights has been with us for centuries in one form or another - the current Scottish rules are a combination of common law and the Succession (Scotland) Act 1964. The English law, which is 40 years old this year, is governed by the Inheritance (Provision for Family and Dependants) Act 1975.
Legal rights are claims which apply in two main situations. A surviving spouse or civil partner can make a claim for legal rights against the estate of their predeceasing partner; and a surviving child can make a claim for legal rights against the estate of a predeceasing parent. In each case, the amount which can be claimed is either one third or one half of the moveable estate (that is, everything except land and buildings), depending on the relatives left behind by the deceased.
The principle of testamentary freedom is therefore qualified in Scotland by a potential claim for legal rights where a person dies leaving behind a surviving spouse, civil partner or children.
The English position under the 1975 Act also provides for a qualified form of testamentary freedom. In the Ilott case, the relevant part of the 1975 Act is for a child to make a claim for “reasonable financial provision” to be made for him or her from a parent’s estate. The reasonable financial provision is limited to the amount which the claimant ought reasonably to receive for his or her maintenance.
What should charities make of all this? The practical effect of these rules is that a charity (or anyone else, for that matter) named as a residuary beneficiary in a will may not receive the amount they anticipate. Claims may be made which will redirect assets to otherwise disinherited family members of the deceased, reducing the amount of residue available at the end of the day.
Successfully challenged
The Ilott case is certainly a reminder that there are circumstances in which a will can be successfully challenged by surviving relatives. But a practical point also arises. In the Ilott case, much was made of the fact that Mrs Ilott had been estranged from her mother for 26 years and her mother had little connection with the three charities named in her will during her lifetime. Mrs Ilott knew that she would be disinherited, so there was no expectation of benefit on her part.
By the same token, the three charities named in the will equally had no expectation of inheritance, since they were not aware in advance of the contents of the will and had no note of Mrs Ilott’s mother within their databases of donors. Indeed, Arden LJ, commented in paragraph 51 (iii) of her judgement:
“ 51 (iii) Lack of expectation of benefit: Ms Stevenson-Hoare submits that the appellant should not be penalised for lack of expectation of benefit from her mother’s estate. It would be contrary to public policy if claimants had to prove expectation as this might encourage some undesirable conduct by prospective claimants. For my part, I do not think that this fact has much weight in this case. The only beneficiaries are the Charities, who can have had no expectation either: the deceased had no connection with the Charities. The appellant, on the other hand, was the only child of the deceased, and she was deprived of any expectation primarily because Mrs Jackson had acted in an unreasonable, capricious and harsh way towards her only child.”
Lady Justice Arden takes the view that for the charities, any inheritance from Mrs Ilott’s was an unexpected windfall. However, many charities invest significant sums in promoting legacy campaigns and have at the very least an expectation that they will receive some return on their investment. So is it really an “unexpected windfall”? Charities would find it difficult to justify the costs related to legacy campaigning if the starting point was that they had “no expectation of benefit”.
Would the case have been decided differently if there had been a relationship with the charities during the mother’s lifetime? Some commentators seem to think so. The advice which is being tendered to charities is to maintain regular contact with donors in order to build up an understanding of each donor’s family circumstances.
That must however be balanced against the outcome of the newly published reviews of the Institute of Fundraising Code, Fundraising Self Regulation, led by Sir Stuart Etherington, CEO of NCVO and the informal review carried out in parallel by the SCVO. No matter where operating, it is clear that charities will need to monitor the position and ensure that they strive to meet the highest standards in order to protect their reputation and maintain the confidence of not only existing donors but the public in general.
Trustee duties
Where amongst all of this do the duties of charity trustees play a part? The duties of charity trustees in Scotland whether under the Charities and Trustee Investment (Scotland) Act 2005, company law or the common law reach far and wide and it can often be challenging for charity trustees to balance those duties and come to an informed decision.
For Scottish charity trustees, applying those duties to an “Ilott” scenario is not straightforward. There is an absolute duty on charity trustees under the common law to control, protect and maximise the assets of the charity.
The duty to control, protect and maximise the assets of the charity is augmented by the standard of care imposed on charity trustees under section 66 (1)(b) of the 2005 Act, namely that they must “act with the care and diligence that it is reasonable to expect of a person looking after the affairs of another person” which is seen as a higher standard than a person looking after his or her own affairs.
To what extent does it apply to the “expectation of benefit” in the form of legacies from donors? As mentioned previously, many charities make a significant investment in legacy campaigns and it is right that they should do so. Surely it follows that they must then take steps to monitor any return, and where it is known that a donor has left the charity a legacy in his or her will, protect that return by keeping in touch with the donor.
Dim view
But will a dim view be taken of charities which write to donors regularly? The outcome of the review of fundraising should be considered with care to ensure that any contact cannot be construed in such a way as it might give rise to any adverse publicity and cause reputational damage to the charity.
Charity trustees in England and Wales can make "ex gratia payments" in certain circumstances. Generally, these are where the charity trustees believe that they are under a moral obligation to make the payment. But the charity trustees are not under any legal obligation to make the payment; and the charity trustees cannot justify the payment as being in the interests of the charity.
Charities should be mindful that there is no such provision under Scottish law which is unfortunate since there is often strong evidence to suggest that a payment might well be appropriate. However, in Scotland, in certain circumstances, it may be possible for charity trustees to make payments to claimants. That should not be done without first taking legal advice.
Finally, the Succession (Scotland) Bill will potentially have an effect on charities. It is a result of a Scottish Government consultation in Summer 2014 and covers matters such as, rectification of wills, the effect of divorce and dissolution of a civil partnership on a will, survivorship destination, the rights of cohabitants on death and gifts. Charities with Scottish donors should be aware that there are also proposals to extend legal rights claims to include land and buildings which may well significantly increase the amount of any legal rights claim.
Increasing claims
Ultimately, charities must understand that claims can arise which may affect their entitlements under wills and that the situations in which those claims arise may be increasing. Their charity trustees should be mindful of the options available to them and exercise their duties with the required standard of care when following a course of action.
