I have a client who wishes to leave his estate in his Will to a charitable Trust. He is elderly and does not wish to set this up in his lifetime. The purpose of the trust would be to benefit children and young people locally in need (ie not other charities).
I have looked as per a previous post at setting up a pilot trust but the previous post suggested that unless the pilot trust is registered with the Charity Commission there is not much point to this. The pilot trust would not meet the requisite for registration.
I am struggling to find a suitable precedent for inclusion in the Will. I am also concerned as to how IHT relief would work? If the charitable trust is in the Will, not registered etc - would relief be available?
I understand your premise of setting up a pilot trust so that you can set the trust up in your client’s lifetime, gain charitable status and then direct in your client’s Will the funds to that pilot Trust.
The charitable trust and CIO allow the client to feel a more personal approach to the charitable legacy.
I would, however, instead of setting up a charitable trust, set up a CIO, (CHARITABLE INCORPORATED ORGANISATION) now with a relatively small amount and direct the residue in the Will to the CIO on death.
This has several benefits and is a quicker and possibly a more flexible and favourable structure.
CIOs have all the tax advantages of any other charity, including the ability to claim Gift Aid.
Your client may also wish to consider leaving his estate to his local Community Foundation. The benefits of this include:-
The gift will be exempt for iHT purposes.
The CF will run the charitable fund for him and it will be run in his name as his legacy to the community.
The CF has everything already in place to administer the fund, so the fund can be managed more cost-effectively.
He can provide the CF with details of who he wishes to benefit (i.e. local charities and organisations that support children and young people).
The CF can discuss with him how and when the funds should be applied, and many other details.
We have close relationships with our local CFs, and clients who either do not know who they want to benefit or who simply do not want to have the hassle of setting up a charitable trust or burdening others with the running of the trust quite like the idea. Of course, this works for lifetime gifts too, but I understand your client is looking at a gift on death.
Hi Clive, do you know if there is much annual paperwork with this structure? My client is in his 80s and I am concerned about overburdening him with paperwork (he would want to be involved if during his lifetime).
I have set up a CIO recently and there is very little admin involved in setting it up. There is an application form for the Charities Commission which is straightforward. The only complexity is ensuring that the purposes are charitable. But there is plenty of guidance. Once set up there are annual reporting obligations.
I see a client tomorrow who wishes to leave a lasting charitable legacy for budding artists and musicians. He feels the big charities could be more impersonal and use the funds.
He would like the trustees to be able to help children with a passion for music and the arts. It may be children who want music, art lessons, musical instruments, etc.
The donor may desire the CIO to last many years, giving longevity to the CIO.
Charitable objects are the charity’s purposes and
must fall within those purposes established as ‘charitable’ in law. There are 13 prescribed purposes, which include, for example, the advancement of education.
The CIO can be set up, and the trustees can employ professionals to help with the paperwork and the running of the CIO.
For the inheritance tax reliefs to apply (assuming the estate exceeds the available nil rate bands), then the charity needs to be established and registered.
Along the lines of the community foundation suggested above, has the client considered approaching another local charity, with similar objects who are already registered and liaising with them as to his wishes? There could be a local area charity who could restrict his fund to the support of children and young people, or there may be a children and young people’s charity who could specifically support those individuals in his local area. He may be able to leave his estate to them, on specific trusts, that fit within their objects. The client’s fund would then be restricted to his wishes and he could work with them to name a fund, or take other steps to personalise his involvement in a similar way to setting up his own charitable trust.
I appreciate that this relies on there being a suitable charity already in existence, but there may well be one and this process could be more collaborative and less administratively burdensome than establishing his own.
Others may have direct experience (which I do not) but I am not sure that you would need to create a legacy to an existing registered charity - s23(6) includes “if it… is held on trust for charitable purposes only”. ihtm11112 quite rightly suggests that a legacy to an existing registered charity is easier to process, but a charitable will trust could still be reviewed/registered after death.
If the client does not want to establish a charity now you could either (a) include a charitable will trust in the will, with a few bells and whistles or (b) include a simple charitable will trust in the will with a view to establishing a more detailed charitable trust or CIO following the death and distributing the assets to it. The latter plan would of course involve a trusted body of persons taking on the mantle of establishing the new charity.
Thanks, Hugh, the person already has charities as beneficiaries but wishes for a more personalised approach.
He is keen on either a CIO now and then directing the residue via his Will or waiting and “(a) include a charitable will trust in the will, with a few bells and whistles or (b) include a simple charitable will trust in the will with a view to establishing a more detailed charitable trust or CIO following the death and distributing the assets to it. The latter plan would involve a trusted body of persons taking on the mantle of establishing the new charity.”
The client used to do the accounts for a large charity in his working life and is not retired and is looking to move away from leaving to a large charity in his Will.
I think this is the crux of my question. Whether the gift needs to be to a registered charity, or if this can be registered after the death and will allow the estate to qualify for relief.
The charity exemption in s23(1) IHTA 1984 does not define a “Charity” nor requires it to be registered. That definition and requirement are imposed by s1 and s30 Charities Act 2011. Unhelpfully IHTM does not mention this so it gives the incorrect impression that registration is something imposed just by HMRC.
Helpfully IHTM11113 says: "As a general rule the beneficiary needs to have charitable status at the date of transfer for the exemption to apply. But, a beneficiary who appears to be given charitable status after the date of transfer may qualify for exemption, if:
the charity was not previously registered with the Charity Commission but applied to register as a result of the legacy, or
the deceased’s will creates a charitable trust"
So a will trust which is expressed simply "exclusively for charitable purposes£ (no charity specifically named) may apply for registration after the death and secure IHT exemption. I was never a specialist charity practitioner (save as regards tax issues) though I have assisted pro bono those who have set up and registered detailed charitable trusts and companies. So I cannot say definitively whether registration of such a simple charitable trust is more or less difficult to secure in practice. No doubt the identity of the trustees will be important, see s35 and Part 9 of CA 2011, and there is a wealth of published guidance by the Charity Commission on its powers of administration and its expectations of due and proper management of charitable funds, including its practice on who can and cannot be a charity trustee.
Nor can I say whether such a simplistic trust without any express powers, so only those implied by statute and case law, is a good idea. I believe it is likely that the trustees would have implied power to set up a charity with any given permissible structure and governing document that any natural or legal person could choose (https://www.gov.uk/guidance/how-to-write-your-charitys-governing-document) but it might be advisable to expressly confer that power on the trustees.
Where, as in your case Victoria, you are instructed to write a Will (and so are not stuck with an existing one) I believe it would be a reasonable response to a client’s wishes to use the simplistic form of trust but adding the above express power and a good selection of admin powers appropriate to a charitable trust. Consider the Commission’s Model Trust Deed for guidance: https://assets.publishing.service.gov.uk/media/5a814ec1ed915d74e33fd7d7/GD2.pdf
The Executors could then seek to register the simple trust to obtain IHT exemption which, if granted, would then allow the trustees to disburse the available funds to specific charities. The costs of this are likely to be less than setting up a separate charitable vehicle even using an official model governing documenthttps://www.gov.uk/government/publications/setting-up-a-charity-model-governing-documents and costs are likely to be relevant if the available funds are modest. A brief letter of wishes could be helpful from the client indicating broadly what type of charities he or she favours.
Would something like CAF, the Charities Aid Foundation, be useful? You can specify charities etc and if they are no longer extant at time of death, a charity with similar aims would benefit.
For what it’s worth, I have been directly involved in setting up two CIOs, the last less than a year ago. I would make the following observations.
The structure is corporate, as its name suggests, and so with the CIO comes an obligation to file periodic Corporation Tax returns as requested by HMRC. Any trading activities by the charity will be liable to Corporation Tax, which does add complications.
In addition comes the obligation to have the accounts audited or alternatively examined by a Charitable Independent Examiner. There is a UK wide association https://acie.org.uk/ which has a register you can access.
The assets of the charity belong to the CIO, as opposed to the assets of a charitable association which belong to the trustees. Liabilities are therefore limited to the assets of the CIO, which may be desirable.
Finally, I would point out that the Charity Commission go very carefully through all applications and will readily turn down any application that has not been thought through properly. Don’t expect this to be completed in a hurry.