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FEATURES Living legacies

Gifts that keep on giving


iving legacies, in the form of charitable remainder trusts (CRT) and their mirror image, charitable lead trusts (CLT), have long featured in US philanthropic tax planning. Essentially, the CRT provides income to the donor but identifies a charity as the capital beneficiary (of the asset-generating income stream for the donor during the donor’s life) on the death of the donor. Conversely, the CLT allocates the income generated by the assets to the charity during the donor’s lifetime, and the asset or assets pass to nominated, non-exempt beneficiaries on the donor’s death. This article focuses on CRTs, and the expression ‘living legacies’ should be understood accordingly.

Greater need than ever In 2011 I reviewed the prospects for living legacies in the UK (then called lifetime legacies) in the wake of Philanthropy Review’s ‘A Call to Action’ (June 2011). Since then, the need for the UK to encourage the wealthy and the mass affluent to give more has grown as charities have felt the pinch of a recession that began in 2008 and appears to be continuing indefinitely. Living legacies could, if introduced into the UK by statute, mean anadditionalGBP400million in assetsand income each year for charity – a prediction based on careful research. Living legacies enable those who

own capital assets but depend on the income they generate to make a valuable

commitment to charity during their lives. This lets CRTs overcome one of the most frequently cited barriers to encouraging the wealthy and mass affluent to give more: financial security. Research by Barclays Wealth (Philanthropy: Barriers to giving, 2010) shows that concern for financial security in later life discourages many from giving more during their life. If, however, an individual had the option to make a tax-effective gift in their lifetime and this individual were to receive a regular but modest income from this gift for the remainder of their life, wealthy and mass affluent donors would be likely to give significantly more to charity. The US experience is informative: living legacies have been in place there for four decades, providing an annual benefit to charities ofUSD7billion (USD4.5 billion in capital assets and USD2.5 billion in income). Living legacies are widely used in the

US, Canada and, to some degree, Germany. Under these vehicles a donor makes an irrevocable gift to a charity during their lifetime, while retaining a proportion of the investment income on the gift for the rest of their life. In this way living legacies offer: • For the donor, certainty over future income and the gratification of making significant gifts to a good cause.

• Amore long-lasting, fruitful and engaging relationship between donor and charity.

• For the charity, a significant, guaranteed gift and a secure basis for future planning.

Since 2011 the proposals for the UK have been revised, and now feature:

Anticipated impact on levels of UK giving

Potential income from living legacies in 2017 Total target group in UK (UK higher-rate and additional-rate taxpayers) Average trust value (a quarter of US average trust value) Number of living legacies by 2017 (0.1% anticipated take-up) Total trust value by 2017

Total asset value from new donors by 2017 (80% of donations from new donors, as opposed to those who would already have given in their will)

Total increase to charity by 2017 (in both income and assets) 3.3 million

GBP145,000 3,340

GBP484 million GBP387 million GBP398 million



• The donor establishes a form of trust and makes an irrevocable settlement of cash or assets eligible for charitable income tax relief of a minimum value of GBP50,000.

• Atrustee or trustees are appointed, who could also be the charity or a regulated body, to control and manage the trust assets.

• The trustmay pay the donor, at least annually and for the rest of their life or the term of the trust, up to 4 per cent of the open-market value of the assets at year-end. This would be index-linked, dispensing with the need for valuations. The donor could waive the income right in each year.

• On the donor’s death or the expiration of the term, the charity would receive the fund.

• The donor may specify if the fund is for general purposes or specific purposes.

The tax implications of this are: • The gift into the trust would be treated as a gift to charity for the purposes of capital gains tax and inheritance tax.

• The present value of the charity’s future receipt (based on standard actuarial calculations) is used to calculate the donor’s income tax relief on making the gift. In essence, that value is deductible against the donor’s income before calculating their tax liability, just as the value of quoted shares would be if given to the charity outright.

• Deductibility can be applied backwards for one year and can be applied forwards.

• The donor is liable for income tax on income received from the trust.

• The charity receives the fund on the donor’s death or, if earlier, the termination of the trust (free of tax).

The scope for expanding UK giving by introducing lifetime legacies is likely to be greater than either the inheritance tax concessions for testators leaving at least 10 per cent of their estate to charity or the Cultural Gifts Scheme, both of which are already in statute. Let us hope that this will encourage the government to introduce them before the next General Election.

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