What to do (and not to do) if the terms of a restricted legacy can no longer be met

Legacy income is of fundamental importance to charities. According to Legacy Insight, legacy income across the sector during 2022 totalled around £4billion and is likely to remain at that level for the next couple of years before growing further.

Unrestricted v restricted legacies

Most legacies are made without specific instructions about how they are to be used. This is clearly preferable from the recipient charity's perspective as the trustees will be free to apply the legacy in any way that they see fit, provided that it falls within the objects of the charity (sometimes referred to as the charity's general purposes). Many charities work closely with potential donors to ensure that legacies are made free from restrictions, or at least that, if the donor does have a particular purpose in mind, it is expressed in such a way as not to be legally binding, perhaps by means of a letter of wishes made separately from the will or that the wording of the gift provides for an alternative use of the funds should circumstances change. After all, a legacy may be received some time after the will is made and there is no guarantee that the charity will be able to carry out the terms of the gift once it has been received, particularly if the focus of its activities has altered over the ensuing years.

However, legacies are not always made with the charity beneficiary's knowledge, and some testators are keen to ensure that, notwithstanding the fact that their chosen charity has purposes that are already in some way restricted, the legacy will be used to benefit the organisation in a more specific way, perhaps by funding a particular project or piece of research. Inevitably, some of these legacies risk failing on the grounds that the terms of the gift are, or may become, impossible or impracticable to carry out.

Legacies that fall at the first hurdle

Some charitable legacies fail at the outset. This may happen because the intended beneficiary has been misdescribed, has never existed or has ceased to exist between the date of the will and the testator's death. Other so-called 'initial failures' occur because, by the date of death, it has already become impossible for the charity to meet the conditions of the gift. In some cases and sometimes depending on how they are worded, such gifts can be saved for charity but, in others, they must be returned to the estate, and it will be for the personal representatives to determine how they should be distributed.

Legacies that fail later

But what about legacies that were made subject to terms that could be and were put into effect at the date of death but have since become impossible or impractical to perform? This might occur, for example, in respect of a legacy that was intended to be used to fund a particular service that the recipient charity has ceased to provide, or to support beneficiaries in an area in which there is no longer sufficient demand for the charity's services. These instances are sometimes referred to as 'subsequent failures'. In cases such as these, charities can end up sitting on potentially large sums of money that they can no longer spend in accordance with the testator's instructions. Situations such as these can be problematic for charities because, if the sums involved are significant, their trustees may not have power to use the funds for anything else.

The difficulty arises because, whenever a charity receives a legacy that is subject to binding conditions, a restricted fund is created. To all intents and purposes, a restricted fund is a charity in its own right, with objects that fall within but are by operation of law narrower than, the general purposes of the organisation as a whole. If any part of the fund is applied otherwise than in furtherance of those narrower purposes, a breach of trust occurs, whether or not the charity would have been able to apply the funds in that manner had the restrictions not existed. In short, the narrower purposes of a restricted fund do not fall away simply because they have become difficult or impossible to fulfil.

Potential consequences of a breach of trust

A breach of trust even if inadvertent, can be a serious matter for trustees because the Charity Commission will treat it as evidence of either mismanagement or misconduct within the charity. The Charities Act 2011 gives the Commission a wide range of powers to investigate and, if appropriate, tackle apparent mismanagement or misconduct, including the power to open a statutory inquiry which, as well as being a considerable drain on resources, can lead in the most serious cases to the disqualification of trustees and even the closure of a charity. It is therefore important that charities have controls in place to ensure that expenditure from restricted funds is limited to the purposes for which they were given.

Avoiding breaches of trust

Fortunately, where the terms of a restricted legacy have become impossible or impractical to fulfil, there are steps that trustees may be able to take to enable a wider application of the funds concerned. Depending on the size and nature of the fund, the trustees might be able to resolve under a provision of the Charities Act that its purposes should be changed to something less restrictive, thereby allowing it to be spent more effectively. Alternatively, they might be able to apply to the Charity Commission for a scheme, a legal document that can bring about changes to the purposes of a charity or one of its restricted funds in certain circumstances. In fact, under such circumstances it is likely that the trustees will have a statutory duty to make such an application. However, the appropriate course of action is not always clear, and the rules are different where the testator intended the gift itself to be retained indefinitely, with only the income being expendable on the recipient charity's purposes. Consequently, we would advise trustees to seek our advice before proceeding down any of these routes and certainly before spending any of the funds in question.