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Lawyers and the bequest business

06 October 2017 - By Geoff Adlam

New Zealanders give around $2.8 billion annually to charitable and community causes. Over half of that is from individuals, according to the Giving New Zealand report published at the end of 2015.

We’re among the most generous in the world. The English-based Charities Aid Foundation’s World Giving Index 2016 ranked New Zealand fourth in the world out of 140 countries, behind Myanmar, the United States and Australia.

general illustration of a sunrise

Charities and not for profits are an important sector in the economy. There are about 28,000 charities registered with Charity Services, reporting annual gross income of over $22 billion. There are also a large number of not for profit organisations which are not registered as charities.

The number of registered charities has grown by almost 8% since 2011. All need funding to carry out their purposes. Earlier this year Canterbury Medical Research Foundation chief executive Kate Russell was widely reported as saying there was a lot of duplication in the charity sector.

Charitable bequest increase wanted

Information from reports for 2015 showed registered charities received around $192 million from bequests in wills. This indicates that about 7% of the money charities receive comes from bequests. Philanthropy New Zealand estimated that 6.5% of registered charities received a bequest in 2014.

New Zealand’s charities want to increase the amount left to them in wills. This month, from 16 to 22 October, is Include a Charity Week, which seeks to heighten awareness of making charitable bequests or gifts in wills. The campaign is now run by the Fundraising Institute of New Zealand (FINZ), and funded from the membership fees charities pay to join FINZ. Over 50 charities are participating.

Lawyers are obviously an important ingredient in success. The Include a Charity Week organisers target lawyers, with a free will information pack and client leaflet explaining the benefits and logistics of leaving a gift in a will to a charity (on the includeacharity.org.nz website).

The information stresses the key role lawyers can play, with the suggestion that a growth in bequests will mean that more people will be asking for legal advice. A more active involvement by lawyers in promoting bequests to clients raises a number of issues, beginning with what will motivate donors.

Why do people give?

There has been a lot of research into the motivations behind giving to charity or for philanthropic purposes. In the United States not for profits such as Planned Parenthood and the American Civil Liberties Union have reported a noticeable increase in donations as some Americans attempt to counter their concerns at the political situation.

Giving USA’s 2017 report found, perhaps not surprisingly, that “people tend to give more money when they make more of it”. One study has found that the S&P 500’s performance influences nearly 40% of the variation in annual charitable giving.

Signals from friends, relatives and other networks are important influencers. People do respond to requests to give and direct their gifts to causes and issues in which they believe they can have an impact. There has also been a noticeable recent shift in giving to groups focused on animal welfare, environmental issues and international affairs: “these categories were so small that we couldn’t track them until 1987”, says Giving USA.

Giving by bequest

The US Health and Retirement Study, which tracks about 30,000 people aged over 50, has found that once people put charity in their will, their giving goes up significantly – doubling from an average of $4,210 a year for the eight years before making a bequest in their will, to $8,500 two years after the will had changed to include charity.

“Getting in the will early tends to increase current giving and may help increase the size of the estate gift,” says Texan charitable bequests expert Russell James. He says the Health and Retirement Study has found that most charitable plans were added within five years of death. Getting the charitable bequest into the will earlier means more money for the charity.

In the will bequest field there may also be changing tensions and expectations on how testators deal with their assets. Your children may be more convinced that charity begins at home.

A survey of 1,000 Australians commissioned by Slater and Gordon Lawyers showed that 26% of Gen Y Australians (16-34 years old) said they had, or would need to, rely on an inheritance windfall to purchase a home.

This compared to 8% of baby boomers (55+ years old) who said they had, or would need, an inheritance to purchase a home. In the middle were the GenX people (35-54 years old), with 16%. Charities may be facing increasing competition from children when it comes to disposition of assets by will.

In New Zealand, Project Periscope Project Director and FINZ worker Jim Datson says fewer than 10% of people think about leaving a gift in their will to charity, but research has shown many more take to the idea when it is suggested to them as an option.

Client care considerations

There is obviously a difference between suggesting to a client that they might care to consider a bequest, and actively promoting a particular charity.

New Zealand Law Society Senior Solicitor Regulatory, Charlotte Walker, says chapter 5 of the Rules of Conduct and Client Care is relevant. A lawyer must be independent and free from any compromising influences or loyalties in providing services.

“Rule 5.4.1 says a lawyer must disclose an interest that touches on a client matter, irrespective of whether there is a conflict. So in practical safety terms, it would be prudent to disclose any interest or association with a charity and to provide clients with a cross section of charities,” she says.

Ms Walker says it’s also important that lawyers are clear with the client and understand themselves why they are suggesting charitable bequests as an option “given that the retainer is to provide competent legal advice” and not to overreach the scope of the retainer.

“And if a testator has dependents, the lawyer would need to be careful not to overemphasise a charitable bequest at the expense of providing competent legal advice about the potential for a family protection claim.”

How could you start?

Jim Datson suggests asking a client to list all the groups they want included in their will. He says it can then be useful to explore whether the client has considered also leaving a gift to one or more charities. “Posing the question at that early stage can allow the client time to think through what that might mean for them if they had not previously considered the option.”

Auckland Foundation board of trustees chairman Geoff Clews says he has noticed that many lawyers are quite reluctant to talk about philanthropy with their clients “and if they do talk about it, they don’t want to be in a position where they are steering somebody to a particular organisation or a particular opportunity.”

Mind your language

The terms “bequest” or “legacy” tend to be interpreted as something someone who is wealthy does, Mr Datson says. He says the phrase “leaving a gift in your will to charity” could remove that perception.

Russell James says establishing a social norm around gifts in wills can be successful.

“We suggest saying something like: ‘Many people like to leave a gift in their will or many people like to leave a gift to support an organisation that’s been important in their lives’. By saying this is a normal thing to do and lots of people like them have chosen to do this, social norms can be quite influential,” he says.

An English study between 2014 and 2016 collected data from 31 solicitors and over 2,600 client interactions. It found that solicitors and clients were comfortable with references to charities and legacy giving during the will writing process.

The study found two types of language that are most effective in discussing bequests. Social norm framing involved telling people that charitable bequests is something other people do, and is the most effective message. Emotional framing asked clients to think about charities that they or their families care about or have benefited from. This was the only type of messaging which increased donations from clients both with and without children.

Which charity?

New Zealand’s registered charities and not for profits have a wide variety of names. Many national charities are structured along regional lines and the regions may operate with a high degree of autonomy (in June the SPCA decided to form one national organisation from its current 45 independent centres).

“One piece of advice is to advocate that the will specifies the Charities Services registration number for the organisation, particularly if the chosen charity tends to be of a federated nature,” says Mr Datson.

“That way, as organisational names, boundaries or overall configurations change, so the original intention of a donor can better be preserved. Being very clear about exactly which organisation is to be the beneficiary is sensible.”

Charities come and go – for example, there are currently 12 registered breast cancer charities. Each has both a different name and charities registration number to help minimise confusion, but several, including the Breast Cancer Network (NZ), have been deregistered.

“It’s not rare for charities to disappear over time. In fact, since the inception of the Charities Register in 2008, more than 6,500 charities have deregistered. So, making some provision for flexibility to allow for the potential demise of a chosen charity could also help avoid legal problems in the years to come,” says Mr Datson.

Most of the larger charities produce brochures on bequests and are happy to provide them to lawyers.

There is widespread agreement that anyone who wants to specify a service, activity or other requirement for how a charity should use their money needs to discuss this with the intended recipient charity. This is to ensure that the charity will be able to comply.

“The cost of an error here can be great and a pragmatic approach will serve all parties well,” Mr Datson says.

Are there tax advantages?

It may be more tax effective to give money to charity while still alive.

“An individual who makes cash donations to charity is entitled to a tax credit equal to the lesser of one-third of the total cash donations made during the income year and one-third of their taxable income for that income year (sections LD 1 to LD 3 of the Income Tax Act 2007),” says Tomlinson Law partner Stephen Tomlinson, a member of the NZLS Tax Committee.

“As such, an individual who gives an amount equal to their annual taxable income to charity will end up receiving more in terms of the charitable tax credit than the amount of income tax they pay on their annual taxable income (as the effective tax rate for individuals cannot exceed 33%).”

In contrast, Mr Tomlinson says, trustees of a trust – which, for income tax purposes includes the administrator or executor of an estate – are not eligible for a charitable tax credit pursuant to section LD 2(f) of the Income Tax Act 2007.

“While income derived by an estate on assets that have been left to charity will be exempt from income tax (section CW 43), there are often practical issues in applying this tax exemption.”

Alternatives to registered charities

A growing number of lawyers are involved with community foundations (see the article which follows this). Geoff Clews describes it as an opportunity for people who want to create a bequest or long-term endowment to plug in to an existing structure but on a basis where they can retain as much involvement or control on how the funds they provide are ultimately dealt with.

“Our organisation is not about telling donors what to do; it’s about listening to donors and what moves them and then being able to provide them the right structure,” he says.

“My experience is that even those organisations that say they’ll honour a bequest aren’t in a position to really say, with changes in personnel and so forth, that that’s going to be the case in 10 years from now. The point of the relationship that is developed between a fiduciary intermediary such as our foundation is that it’s our job to reflect the interests of the donor in the way in which the donor’s philanthropic aspirations are met and because not all the money goes across to the charity there’s an inevitable discipline in maintaining the relationship and making sure that the continuing benefit to that organisation is treated and honoured and respected.”

Trustee company, Perpetual Guardian, says it has “over 140,000 will relationships”. Its Foundation was launched in 2015 and has a general fund which focuses on a wide range of community needs, and sub-funds which focus on specific purposes. Donors may start their own legacy fund with a minimum contribution of $50,000. A will which leaves a bequest to the Foundation does not have to be written by Perpetual Guardian.

The company has also started a legacy gift plan “to enable individuals who wish to be philanthropic the opportunity to do so without outlaying a large amount of money up front,” says Manager, Philanthropy Services, Kirsten Taylor.

“Instead they can pay the premium on an insurance policy and nominate their favourite charity as the beneficiary of the proceeds of the policy. After their passing, the proceeds of the policy flow into the Perpetual Guardian Foundation, where a fund is established to support their nominated charity, whether that is to keep good things going or to act in the capacity as an endowment-style fund to support the organisation in perpetuity, or as long as required,” she says.

“We aim to do what no single charity can do alone: make legacy giving a social norm and ensure that every New Zealander is protected by a will.”

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Last updated on the 6th October 2017