Shell charities and legacy income in England and Wales: Register of mergers - not all it's cracked up to be?

Legacy income for charities in the UK is worth over £4bn.  Just one significant legacy can make a huge difference to a charity's financial health.

What happens if your benefactor executed their Will leaving a legacy to Charity A but Charity A subsequently merged with Charity B to form Charity C?  Charity A is then wound up.  The benefactor passes away having not updated their Will.  Is Charity C entitled to that legacy?

A consequence of the desire to save legacies has often meant the maintenance of shell charities on the register of charities.  That is an administrative burden which the register of mergers is intended to alleviate. 

Are there however circumstances in which the register does not resolve all the consequential problems?

Shell charities and the register of mergers

One solution to secure that legacy is for Charity C to retain both Charity A and Charity B as 'shell charities'.  A shell charity is where an existing charity is kept in existence for the purpose of receiving legacies but does not carry out any operational activities.

Any legacies to A or B should still be paid to them as they still exist, and they can then pay these funds to C in turn.

However, this gives rise to logistical issues.  Shell charities involve ongoing compliance requirements.  They need trustees in place, accounts prepared, annual returns filed, and other administrative actions fulfilled, all of which cost money and absorb resource.  Some of this burden can be alleviated by linking the charities for registration and accounting purposes with the Charity Commission but there will still be ongoing issues that absorb charities' time and incur costs. 

The register of mergers was established by the Charities Act 2006 with the aim of discouraging shell charities.  The intention was that if the merger of Charity A and Charity B was recorded in the register this would provide certainty that the legacy would still take effect and be paid to Charity C.

Thus, a legacy in favour of Charity A is saved.

However, charitable legacies are commonly conditional on the recipient being in existence at the date of death.  

Charities Act 2022 – solving the problem?

Section 33(4) of the Charities Act 2022 introduced a new provision designed to improve the effectiveness of the register of mergers whilst respecting the principle of testamentary freedom.

The effect of Section 33(4) is that, where the charitable legacy is conditional on the charity being in existence at the time of the gift, if that charity has merged with another and is properly registered on the register of mergers, the legacy takes effect as if the charity was in existence at the time of the gift.

Thus, even if the legacy in favour of Charity A was conditional on it still existing at the date of your benefactor's death, the legacy would still take effect and be paid to Charity C.

The principle of testamentary freedom is observed because it is possible (albeit it seems unlikely) the person making the Will can exclude that statutory provision being effective for the purpose of their own Will.

This is good news for charities in that it means fewer legacies are at risk of failing because the original recipient charity is deemed to continue to exist.  That reduces the incentive to keep shell charities.

But is that the problem solved?

Drafting of bequests

Many Wills provide that, where the charity no longer exists or has changed its name, the executors under that Will have a discretion as to which charity should take the benefit.

By way of example the influential Society of Trust and Estate Practitioners has model provisions which it encourages Will drafters to incorporate wholesale.

Provision 4.16.2 of the STEP Standard Provisions Third Edition (published October 2023) states: 

'If any [charity] ceases to exist, changes its name, or enters into insolvent liquidation… the gift shall instead be paid to such [charity] as the [executors] decide having regard to the objects that were intended to benefit.'

This clause, or variations of it, is prevalent.  It sets out three different instances where the executors (defined as a trustees) are given discretion.  One of these is a change of name.

Changes of name invariably accompany a charity merger.  

Therefore, even if the merger of Charity A and of Charity B to form Charity C has been registered on the register of mergers, if the name of Charity C is different the executors have a discretion to gift the legacy to a different charity.

Why is a change of name provision problematic?

An executor's discretion must be exercised in good faith.  In the vast majority of instances, executors want to respect and implement the wishes of the testator.  

But it is not unusual for executors to disapprove of a charity's policy decisions and determine that your deceased benefactor would likewise have disapproved.

As your legacy teams will attest, there is a proportion of the executor cohort (often professional) which jibs at any sense of accountability to charities.  This can stem from any number of reasons not least irritation (in the case of family executors) that charities have benefitted rather than family.

Establishing bad faith can be problematic.  Whilst your legacy team may be able to persuade executors that they should pay Charity A's legacy to Charity C it may use up resource – and lead to compromise over other concerns over the administration.  Charity C may even need to bring onboard external solicitors to a secure that legacy. 

The upshot is that there is a risk, if Charity A and Charity B have not been maintained as shell charities, for legacies to end up with another charity rather than Charity C.  And inevitably there is a risk of cost and resource being absorbed.

Conclusion

Undoubtedly the intention behind Section 33(4) Charities Act 2022 is positive and it will help in some cases.  But it does not give the anticipated certainty that, in winding up shell charities that may still be expecting legacies, legacy income will flow to the new charity as intended.

The choice for charities remains whether to keep shell charities with associated costs and the compliance burden or remove them to save costs and rely on the register but risk legacies being at best disputed and in some circumstances potentially failing.

Charity C's trustees have to engage in a careful cost benefit analysis before winding up Charity A and Charity B entirely.