A plan granting access to legacy funds during donors' lifetime could unlock new money for charities but needs further investigation, a feasibility study has found.
“Accelerated” legacies would allow charities to benefit from legacy gifts as soon as they are pledged. Donors would also be able to see the impact of donations on beneficiaries during their lifetime.
Anthony Bolton, a retired investment fund manager, put forward the idea and think tank New Philanthropy Capital (NPC) conducted a feasibility study. The study concluded that while the idea is “attractive”, it raises financial, cultural and regulatory questions that “need further investigation”.
He said: “I have been pondering for many years whether there’s a way to discount legacy income so charities can receive the money today rather than waiting for the donor’s death. We can do it in many other areas of finance, so why not for legacies?
“The pandemic has put existential pressure on many charities. I think accelerated legacies could be one way to help some of them through, as cash today is now much more urgent than the promise of money many years from now.”
Accelerated legacies would function thanks to a funder (such as a trust or a corporate) acting as intermediary.
The donor pledges a legacy gift to a charity, borrows the equivalent amount from the funder through a loan agreement, and gives a “discounted” part of it to the charity right away. The donor then pays the loan back at the time of their death (or before).
NPC’s study, which is based on interviews with 27 sector experts, found that the plan has both benefits and risks for all stakeholders.
Charities would be able to claim Gift Aid on the donations. They would get access to money earlier and be able to forecast legacy income more easily.
However, with an accelerated legacy, charities would also risk getting less money than with a standard legacy.
This is because the funder would retain part of the original gift, to account for lending costs and for the fact that money loses value over time. This “discount” would be calculated based on the donor’s life expectancy – but if the donor were to die earlier than expected, the charity could miss out.
Charities would also face potential reputational risks if the scheme were to be seen as a way of encouraging donors to go into debt.
Donors would be able to see the impact of their gifts during their lifetime while still retaining their assets. But they would also have less flexibility – once the gift has been given, terms could not be changed by simply amending the will.
Finally, funders would be able to achieve social impact while generating returns, but would also be facing reputational and financial risks if they cannot recover the funds.
Limited to high-end donors
Some of the risks can be contained through the design of the scheme, NPC says.
It recommends pooling donors with similar characteristics, so that risk is spread across many loans. It also suggests that donors should be aged over 70 and willing to provide a minimum £50,000 donation, which would need to represent less than 5% of their total assets. This also means that the plan could only be applied to a limited number of donors, at least at the beginning.
Similar proposals have been made before. Last month a report from Charities Aid Foundation listed “living legacies” among the ideas that government should support to free up £1bn for charities during the crisis.
Living legacies would allow people to bring forward charitable gifts they plan to leave in their wills, while still receiving personal income from that asset for a set period of time. However, unlike accelerated legacies, they require legislative change, and could thus be harder to implement.
NPC’s study concludes that while “the accelerated legacy plan has the potential to push forward legacy giving in the UK”, it will have to “overcome a range of barriers”.
The study also says that this is “an example of a much-needed fundraising innovation”. It says that while the research was conducted before the Covid-19 crisis, charities now require funding more than ever, and innovation could help the legacy sector to grow.
As next steps, NPC recommends getting in touch with more stakeholders, trialling the plan through a pilot scheme and launching a marketing campaign.
Plum Lomax, impact investing principal at NPC, said: “The accelerated legacy plan is an innovative and much-needed idea. The concept of charities benefiting from legacies during a donor’s lifetime is attractive, but our research uncovered financial, cultural and regulatory concerns that we think need further investigation.
“We’re keen to hear from anyone interested in taking part in a pilot scheme.”