For some charities in the environment and animal welfare sector, legacies represent over 50% of their annual income; and even for those where it doesn’t, legacy income can have a significant impact on funding their strategic plan. However, the pandemic has put pressure on legacy income in several ways:
Delays in the collection of amounts due under wills create a number of issues, with the main one being cash flows. Many charities model their cash flows on the basis of past experience or assurance from advisers; however, the pandemic has introduced obstacles that make forecasting more challenging.
Even in the best of times, the technical aspects of settling an estate can delay distributions to beneficiaries. With the work required often involving many parties, delays have become more frequent both in the administration of the will and in seeking agreement between parties.
One of the challenges to beneficiaries and executors alike is deciding upon the right strategy for an estate that is comprised of assets that are suffering volatility during the pandemic, particularly property and listed investments. Trustees are often called upon to make difficult decisions regarding cash versus distribution in specie, as well as determining the timing of any disposal of property or investments and what to do when there are several charities sharing an estate with property assets. Therefore, trustees need to consider not only cash flow needs but also how to maximise value, manage risk and minimise reputational consequences of the decisions taken.
For the larger charities that have a legacy team, it is worth considering how the normal processes have been impacted by the pandemic. These processes include:
Maintaining a database pipeline for all notified legacies and all pledges to be named in a supporter’s will
Tracking legacies is crucial in the current climate as it: acts as a budget and forecast; highlights empirical evidence of past lead times; shows the results of dialogues with third parties and the issues and challenges faced; and identifies legacies that appear without any prior notice. The more information the better, and it is beneficial to review the past six months to see how the pandemic has affected the processes, and furthermore the forecasts.
Planned proactive dialogue with the administrators and fellow legatees
Things never happen as quickly as we would like when it comes to such matters as income from legacies. The key cog in a legacy wheel is invariably the party that ensures that all other parts are working as efficiently as possible. During the lockdown, attention has been refocused to seemingly more urgent matters, however the consequences of a delayed legacy receipt can be significant.
Clear accounting policy
The accounting treatment for legacies is set out in the Charities SORP and FRS 102, and is based on three criteria:
- Legal entitlement: the conditions for this include being named in the will, probate being granted, and there is no indication of legal challenge to the will that could affect the amount received.
- Reasonable estimate of the likely value: this is based on a clear will, a confirmed schedule of assets, and confirmation of estate liabilities.
- Reasonable knowledge of the timing of receipt of the legacy: the further out the expectation generally indicates risks or issues that could affect the valuation.
There is a reluctance to accrue a legacy in the financial statements as it can inflate reserves. However, in the current climate where there are enhanced pressures to demonstrate going concern, more reserves are preferred. Being consistent with the application of the accounting policy for legacies and taking advice where necessary will ensure that you stay on the right side of the auditors and present an appropriate financial position to stakeholders.
Only the largest of charities will have the resource to be able to have some of the above processes in place; smaller charities should look to see how they can adopt the essence of the policies.
Legacies are by nature lumpy and in many cases substantial, so trustees and management should focus on avoiding the above pitfalls to expedite distributions and bolster reserves, which are vital for providing confidence to stakeholders on going concern in the trustee’s report and accounts.
Adam Halsey is a partner and leads the environment and animal welfare charities unit at haysmacintyre