Drafting and construing charitable legacies

Apart from the confirmation of the reduced rate of inheritance tax where 10% is given to charity, the budget had little to excite private client practitioners. It is surprising how frequently issues arise about the dissolution of charities around the time of the ­testator’s death. To some extent these can be dealt with by careful standard drafting.

Berry and another v IBS-STL Ltd (in liquidation) looks at the relationship between section 75F of the Charities Act 1993 (now re-enacted as section 311 of the Charities Act 2011) and the wording of the will. It shows how crucial the precise wording of a gift can be.

Section 75F(2) provides in relation to merged charities: ‘Any gift which is expressed as a gift to the transferor, and takes effect on or after the date of registration of the merger, takes effect as a gift to the transferee.’

The gift in the will in Berry was as follows:

‘6.1 I GIVE the residue of my estate… to my TRUSTEES upon trust to divide in equal shares between such of the following charities as shall to the satisfaction of my trustees be in existence at the date of my death namely:
[Six named charities including International Bible Society UK (IBS)]
6.2 IF any charity or charitable organisation which I have named as a beneficiary in this will is found never to have existed or to have ceased to exist or to have become amalgamated with another organisation or to have changed its name before my death then the gift contained in this will for such charity or charitable organisation shall be transferred to whatever charitable institution or institutions and if more than one in whatever proportions as my trustees shall in their absolute discretion think fit; and
6.3 I EXPRESS THE WISH but without imposing any obligation on my trustees that the gift be given to such charitable institution or institutions whose purpose is as close as possible to those of the charity or charitable organisation named by me in this will.’

IBS was, at the date of the will, an unincorporated registered charity. With effect from 31 May 2007, it transferred the entirety of its assets to an incorporated registered charity. The merger was registered on 2 January 2008 and the register recorded that IBS ceased to exist on 5 February 2008, both dates preceding the death of the testatrix so prima facie section 75F applied. After the death of the testatrix, the incorporated charity went into insolvent liquidation and was wound up.

The issue for the executors was whether section 75F compelled them to pay to the registered merged charity, by then in liquidation, or whether they could use their discretion under clause 6.2 to pay the available funds to a similar charity. They very correctly asked the court for guidance.

The court’s decision was based on the wording of clause 6.1, which David Donaldson QC, sitting as a deputy High Court judge, held gave the property only to those organisations which were in existence at the date of the testatrix’s death. As the original charity had already ceased to exist as a result of the incorporation by that date, there was no gift to it and section 75F was not engaged.

This result is probably more in accord with the wishes of most testators than a payment to the liquidator would be, so use of this wording to achieve this result is desirable.

However, ‘being in existence’ is a ticklish concept and it is often ­surprisingly difficult to decide whether or not a charity meets the test at the relevant time. In Re ARMS (Multiple Sclerosis Research) Ltd [1997] 2 All ER 679, an incorporated charity went into liquidation. Several testators had left it legacies. The court decided that where the testator died after the date of the winding-up order but before formal dissolution was completed, the charity still existed at the date of the testator’s death. Therefore, the legacies had to be paid to the liquidator for the benefit of the creditors and could not be applied cy-pres because the charities still existed at the date of death. In the case of gifts to incorporated charities it is, therefore, worth giving the executors a discretion where a legatee is subject to a winding-up order at the date of death but not yet formally dissolved to allow them to apply the gift for charitable purposes.

There are however other problems that can exist in relation to ‘being in existence’. In Phillips v Royal Society for the Protection of Birds [2012] EWHC 618 (Ch) the New Forest Owl Sanctuary (NFOS), an incorporated charity, ran into difficulties as a result of which it was struck off the Register of Charities on the ground that it had ceased to operate in August 2006 and was finally dissolved in February 2007 a few days after the death of a testator who left the charity a share of residue.

The will contained an amalgamation clause providing that if ‘before my death (or after my death but before my trustees have given effect to the gift) any charitable or other body to which a gift is made by this will… has changed its name or amalgamated with any other body or transferred all its assets then my trustees shall give effect to the gift as if it were a gift to the body in its changed name or to the body which results from the amalgam.’

There was a charity which had received some of the assets of NFOS but Cooke J held that it had not received a sufficiently great proportion to bring it within the clause. He then had to decide whether the legacy could be applied cy-pres. Funds can be applied cy-pres in cases of initial impossibility provided there is a general charitable intention, and in cases of supervening impossibility irrespective of a general charitable intent. Here there was supervening failure.

The charity still existed at the date of death, thus impressing the funds with the charitable purpose intended. The dissolution meant that the gift could not be applied as intended but could be applied cy-pres, Cooke J held that it was appropriate to pass the legacy to the charity that had taken a proportion of the assets of NFOS.

Professor Lesley King, College of Law