Can legacy income be brought forward?
27 May 2020 5 minute read
Legacies are a major source of charitable income, but what if this money could be brought forward and used now? At NPC, we’ve been testing the feasibility of an idea developed by Anthony Bolton, Paul Spencer and Tom Skwarek, with advice from specialist lawyers Bates Wells, to make legacy donations available for charities today through an accelerated legacy plan. In this guest blog, Anthony Bolton shares what motivated him to pursue this idea.
My working life has been in finance as a fund manager for a leading Global Fund Management company. I also have an interest in philanthropy. Over ten years ago we started a family Trust to help those less fortunate than ourselves. A question I have been pondering for many years is ‘is there a way to discount legacy income for a charity so that the charity can receive income today rather than waiting for the donor’s death?’ I was very aware that in many other areas of life future promises of payment get discounted and have a value today. Could this also apply to legacies?
Of course, what makes legacies difficult to discount is the fact that the donor can change their mind during their lifetime, or the will might be challenged after the donor’s death. I wondered whether there was a way to write a legacy or give a similar commitment that made them irrevocable and therefore able to be discounted. I took this question to a partner at Bates Wells, the lawyers specialising in charity matters. They said that there was a way and outlined an alternative structure. That is how the concept of accelerated legacies was born.
The charity sector needs new sources of money because our prediction is that nonlegacy giving will have halved over the next 20 years.
How an accelerated legacy works
An accelerated legacy plan involves three parties: the donor, a charity and a funder who does the discounting of the commitment by the donor. The donor commits to give an amount on or just before their death to the funder. The funder then advances the discounted value of that amount to the donor today based on the donor’s age and interest rates, and the donor then donates that amount to the charity of their choice. If applicable, the donor and the charity can receive gift aid on the discounted amount (which charities don’t receive on legacies).
The appeal of a legacy to a donor is often that they are making a future donation to a charity, but their gift is not impacting their standard of living or assets today. The accelerated legacy plan is similar in that it involves no immediate cash outlay by the donor. However, unlike a legacy, the charity receives the money today.
Along the way, I mentioned the idea to a long-standing friend of mine, Paul Spencer, who has had a long and successful career in finance. He was enthusiastic about the potential of the idea as well as mentioning it to a friend of his, Tom Skwarek, who also had a successful career in banking. The three of us met up to discuss the best way to take this idea forward.
Paul and Tom have been very helpful in working through the details. We agreed that the challenge was finding a funder. We then had meetings with several institutions whom we thought might be interested in taking on this role. One idea we had was that if a large number of these commitments could be put together then the total could be securitised. We had expected some of the private banks we met to be interested but found that they are not really in the business of making these types of long-dated loans (often a donor would still live for many years after making the commitment).
Some of the people we met with suggested that one way to find a funder was to write a position paper on the idea and to circulate it among people interested in supporting philanthropy. Over the years I’ve had a number of dealings with New Philanthropy Capital, including at one stage several years back acting as an outside advisor to their research papers on individual charities. It occurred to me that NPC would be the ideal organisation to work with charities, philanthropists and potential funders to produce a feasibility study. I put the idea to them at an initial meeting in the Autumn of 2019 and they agreed that they would be interested in doing such a study. They have now produced an excellent report which I believe will help us to bring together charities, donors and funders that share an interest in broadening and accelerating the funding needed by our country’s charities.
A scheme like this would help encourage donations as it shows an inspiring example of people taking action before death, and you can pin exciting developments to this person’s actions.
When NPC started to test the feasibility of this idea, none of us had any idea that we would find ourselves in the situation we are in today. The pandemic has put huge pressure on the finances of many charities. I think accelerated legacies could be one mechanism to help some of them through the crisis, as cash today has become much more urgent than the promise of money many years from now. Accelerated legacies would give charities an extra way of raising money when discussing legacies or other types of gifts with donors.
As well as providing much needed cash to a charity today rather than having to wait for the donor’s death, the hope is that these accelerated legacies could grow the total amount of funding to charities, as donors can see the impact their gift is having in their lifetime.
Our feasibility study of the accelerated legacy plan is available at thinkNPC.org/resource-hub/accelerated-legacies. We welcome your thoughts and we are particularly interested to hear from charities, philanthropists, advisers and funders who would like to explore being involved in a pilot scheme. Do get in touch with Plum Lomax at NPC (Plum.Lomax@thinkNPC.org).