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27 October 2020

Charities defending legacies against claims

This article was first published by Charities Management.

Kate Parkinson and Lucinda Brown of law firm BDB Pitmans looks at when and how charities should be defending legacies left to them when claims are made against estates.

Every year in the UK, around £2 billion is raised for charities through legacies in wills, but like various types of other charity income, this vital source has been threatened by the coronavirus crisis. It is hard to predict with any certainty what impact the crisis will have on legacy income in the long term, but in the short term it is expected that legacy income will decrease significantly as the overall economic downturn impacts upon share values and house prices, which in turn will drive down the values of legacies. Where the legacy derives from an estate against which there are claims, the threat to the legacy is even higher. Legacies to charities are just as vulnerable as ordinary legacies in contested estates. This article looks at the main types of claims against estates, some practicalities around defending such claims, as well as trustees’ duties and responsibilities when considering what is in the best interests of their charity.

Claims against estates

Claims disputing the validity of wills, claims for rectification of wills and claims pursuant to the Inheritance (Provision for Family and Dependants) Act 1975, can all give rise to the possibility that the legacy to the testator’s nominated charity will be eroded or even wiped out altogether. The following should be borne in mind by charities in contested situations:

  • disputed will claims are ‘all or nothing claims’: either the will is valid or it is not, and the charitable legacy will stand or fall accordingly;
  • claims for rectification of wills often arise out of negligent drafting where a common argument is that the testator did not intend to benefit a charity, either in full or in part; and
  • claimants under I(PFD)A 1975 will argue that all or part of a charitable legacy should be made available to satisfy their claim for reasonable financial provision.

In estates where any of these claims are brought forward, the trustees of the charity must balance their duties to ensure that the charity receives the monies that are due to it against the time, resources and costs that will be incurred in litigating to protect the legacy. Adverse publicity can also act as a deterrent to charities who are considering defending claims as they seek to avoid the perception that their defence has caused the case to go to trial and that the costs involved are not a good use of charitable funds.

Defending a claim

As such, there are a number of factors to take into account when considering whether defending a claim is the right course of action.

Fairly early on in the claim, following the service of proceedings, the charity will be asked to elect whether it will actively defend the claim or whether it will not do so and will simply allow the claimant and other defendants to fight it out or settle the matter through an Alternative Dispute Resolution procedure, such as mediation. If electing to actively defend, the time limits for indicating this and also preparing the charity’s evidence in response are short and usually not longer than 21 days, so the charity needs to be prepared to act swiftly.

So how far should charities go in response to such claims? Consideration of the following factors will be important.

What is the value of the legacy? Plainly how much is at stake will be the primary consideration. Trustees may wish to conduct an early cost-benefit analysis of the likelihood that the legacy could be returned to the charity in full if the claim which threatens it is entirely unsuccessful, against the costs, time and resources that would be incurred in defending the claim.

Gather all available evidence as to the associations the testator had with your charity – it is not a requirement, but the court is less likely to make an order disrupting the legacy if there is a long history of close association or a good reason why your charity was chosen as a beneficiary.

Be prepared to analyse and summarise in a witness statement why this legacy income is of value to your charity and what projects it will help you to complete in particular.

Agree to mediate the claim wherever possible. Mediation can often be arranged at short notice of a few weeks and offers a cost-effective alternative to costly court proceedings. This method is likely to secure only a proportion of the legacy, but the costs of mediation are significantly lower than the costs of going to trial.

Team up with other charity legatees to share the costs and burden. Elect a lead beneficiary to run the situation.

Consider what funding options might be available to your charity to enable you to pursue the claim if you have insufficient funds to be able to do so but the legacy is significant enough that it is not an option for the trustees to take no steps to protect it.

Carefully document the trustees’ reasons for deciding to defend the claim or not. For example, if trustees are minded not to defend the claim, they would be giving up an asset of the charity and so should be satisfied they have good reasons to do so. Thus they should record those reasons for their own protection in case they are asked to justify the decision.

Trustees’ obligations

All of the above considerations must be carefully balanced to ensure that the charity’s assets (including its reputation) are preserved, in pursuit of the charity’s objects. The Charity Commission guidance in this area is clear, in that trustees have a duty to act in the best interests of their charity which, where necessary, means there is a duty to protect assets belonging to it.

Assets will include the pledged legacy, even if this has not yet been realised from the assets of an estate. As such, if a claim is rightly defended, and the cost/benefit of doing so is proportionate, then trustees have a duty to seek that the last wishes of the testator are observed.

The Charity Commission expects trustees to consider legal action only after they have explored and, where appropriate, ruled out any other ways of resolving the issue in dispute, such as mediation, but charities should not be afraid to assert their rights to legacies.

Legacies form an important part of the income stream available to charities and a decision to actively defend a claim does not necessarily carry with it adverse cost consequences providing the charity acts reasonably in its defence.

A cost/benefit analysis will always be essential but charities should be comforted by the fact that the Civil Procedure Rules allow the charity to take a diplomatic approach to help avoid any perception that the charity has forced the matter to go to court.

If a charity files a neutral defence asserting the intentions of the testator in relation to the legacy and then proposes mediation at an early stage, this will limit costs and, if successful, achieve a negotiated solution and ensure maximum recovery of the charity’s costs from the estate.

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