Charitable legacies: Should you leave one?

Posted on July 19th, 2019 | Categories - News

As you think about who you’d like to benefit from your estate when you pass away, it’s probably family and friends that first spring to mind. However, as you seriously start to consider how you’ll distribute wealth, the thought of leaving a charitable legacy may be attractive. It’s a decision that can positively impact your chosen organisation, as well as potentially having tax benefits.

What is a charitable legacy?

A charitable legacy is essentially leaving assets to a charity in your will. It may be the biggest donation you’ve ever made and can have a considerable impact on the cause you want to support.

If you’re interested in leaving a charitable legacy, it’s essential you write a will. This should be carefully worded to ensure it reflects your exact wishes on how your estate will be distributed among beneficiaries, including charitable organisations. As with when you’re leaving assets to individuals, there are different options when making a charitable donation in your will. Among the different options to consider are:

  • Leaving a defined lump sum of money is known as a pecuniary bequest
  • A specific bequest is where you state a certain item you want to pass on
  • Leaving a portion of your estate is a residuary bequest

Depending on how complex your wishes and estate are, using a solicitor can be beneficial. Mistakes in a will can prove costly if they need to be rectified or could mean your wishes aren’t carried out.

Why leave a charitable legacy?

Of course, the top reason here is to support a charitable cause. A charitable legacy is often seen as an opportunity to have an impact on a cause that’s close to your heart. It’s a chance to have a positive impact on something you care about and may have affected you at some point during your life.

According to research from the Third Sector, animal charities are most likely to receive legacy gifts from existing supports after taking the top four spots, followed by Cancer Research UK.

On top of the charitable impact, leaving a charitable legacy can also help you reduce potential Inheritance Tax (IHT) liabilities, allowing you to pass more on to your loved ones whilst supporting causes.

If the value of your entire estate, which included all assets, exceeds £325,000, IHT may be due (Tax year 2018/2019). If you’re leaving your main home to children or grandchildren, the residence nil-rate band means the threshold can be increased by a further £150,000 (rising to £175,000 in 2020/21). The portion of your estate that exceeds these thresholds may be liable for IHT at a standard rate of 40%. This can significantly decrease the value of assets that you leave behind for loved ones.

So, how does leaving a charitable legacy help to reduce this potential bill? If you leave 10% or more of the value of your estate to charities, the rate of IHT is reduced to 36%. Depending on the size of your estate, this reduction may mean you’re able to leave more to loved ones whilst supporting good causes.

Understanding the impact of your decision

Before you proceed with writing a charitable legacy into your will, there are two things to understand. First, how your wealth may change over time, affecting what you leave behind. Secondly, how a charitable legacy will affect the inheritance of other beneficiaries.

  • Changes to your wealth

Over time, your wealth is likely to change. From day-to-day living costs of retirement through to one-off big-ticket purchases, your lifestyle may affect the size of your estate when you pass away. It’s important to consider how changes in your wealth will affect your wishes. For example, if you plan to leave a pecuniary bequest to a charitable organisation, the portion of your estate this makes up may increase over time as assets are depleted. As a result, you may choose an alternative way to divide your estate or to review the defined amount frequently in light of this.

  • Impact on other beneficiaries

For many people planning how to pass on their estate and what they leave behind for loved ones is important. Financial planning can help you see how a charitable legacy will affect what friends and family inherit. It’s a step that can give you peace of mind and confidence in the decision you’ve made.

As with any decision written in a will, it’s important to review charitable legacies regularly. Over time, your wishes and financial situation may mean amendments need to be made. It’s advised that you review your will every five years and following big life events, such as getting married, divorced, or after the addition of a new family member.

If you’re thinking about using your will to leave a charitable legacy and want to understand the financial implications, please contact us. We can work with you to understand how your wealth may change over time and how the decision will affect other beneficiaries.

Please note: The Financial Conduct Authority does not regulate Estate Planning

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