Living legacies, taking the form of the charitable remainder trust (‘CRT’) and its mirror image, the charitable lead trust (‘CLT’), have long featured in the toolkit of philanthropic tax-planners in the USA.  Essentially, the CRT provides an income stream to the donor but at the same time identifies a charity as the capital beneficiary (of the asset generating income stream for the donor during the donor’s lifetime) upon the death of the donor.  Conversely, the CLT allocates the income generated by the relevant asset or assets to the chosen charity during the donor’s lifetime, the asset or assets passing to nominated, non-exempt beneficiaries on the donor’s death.  For the purposes of this commentary, I will be focusing on CRTs and the expression “living legacies” should be understood accordingly.

In 2011 I reviewed the prospects for the introduction of living legacies in the UK (then referred to as lifetime legacies) in the wake of the Philanthropy Review’s “A Call to Action”, published in June 2011.  Since that time the need for the UK to create opportunities that encourage the wealthy and the mass affluent to give more has grown as charities have increasingly felt the pinch of a recession that began in 2008 and appear, in terms of lack of meaningful growth, to be continuing indefinitely.  Living legacies could, if introduced into the UK by statute, leverage an additional £400m in assets and income each year for charity, a prediction based on careful research.

Living legacies enable those who own capital assets but depend upon the income they generate to make a valuable and substantial commitment to charity during their lifetimes.  That is why CRTs have overcome one of the most frequently cited barriers to encouraging the wealthy and mass affluent to give more: financial security.  Research suggests that an individual’s concern for financial security in later life can and does discourage many from giving more in their lifetime.  If, however, an individual had the option to make a substantial 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, the 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 nearly five decades, providing an annual benefit to charities of at least $7 billion ($4.5 billion in capital assets and $2.5 billion in income).

Living legacies are widely used in the USA, Canada and, to some degree, in Germany.  Under these vehicles a donor makes an irrevocable gift to a charity during his/her lifetime, while retaining a proportion of the investment income on the gift for the term of his/her 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.
• A more long lasting, fruitful and engaging relationship between the donor and the charity.
• For the charity a guaranteed gift of significant value and a secure basis for future planning.

Since 2011 the model template proposed for the UK has been revised and now features the following:

• The donor establishes a form of trust and makes an irrevocable settlement of cash or assets eligible for charitable income tax relief to that charity.
• A trustee or trustees are appointed, who could also be the charity or a regulated body, to control and manage the trust assets.  It is envisaged that donor advised funds (DAFs) authorised by the Charity Commission would be the prime candidates to administer CRTs on a fiduciary basis but recipient charities of a size and scale to be credible trustees might also seek authorisation from the Commission to do so.
• The CRT may pay to the donor, at least annually and for the rest of his/her life, or the defined term of the trust, an annual sum equal to no more than 5% of the total of the open market value of the assets at the end of the year.  This would be index linked, thereby dispensing with the need for valuations.  The donor would have the option to waive the income right in each year of the arrangement. 
• Upon the donor’s death or upon the expiration of the relevant term, the charity would receive the fund.
• The donor may specify if the fund is for the charity’s general purposes or for specific purposes.

The tax implications of this template are as follows:

• The gift into the CRT 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 calculation) 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 his or her tax liability, just as the value of quoted shares would be if they were given outright to the charity.
• Deductibility can be applied backwards for one year and can be applied forwards.
• The donor is liable for income tax on income he or she receives from the CRT.
• The charity receives the fund on the donor’s death or the termination of the CRT if earlier (free of tax).

Anticipated impact on levels of UK giving

The scope for expanding philanthropic giving in the UK through the statutory introduction of lifetime legacies is likely to be far greater than either the inheritance tax concessions for testators leaving at least 10% of their estate to charity or the Cultural Gifts Scheme, both of which are already on the statute book. As stated above, an additional £400m could be injected and that would only be at the start of the process. Logistically, this should be easy since analogous income tax reliefs already exist for gifts of quoted securities and land to charity; the existing legislation could simply be extended in a finance bill.

Treasury fears of an adverse impact on the fisc are ill-founded since the initial income tax relief will be heavily discounted and income tax will be charged on all the reserved income. At the same time private funds will be released to the charitable sector, supporting work that the state is no longer in a position to fund.