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Back to "Community & Associations Newsletter - September 2016"

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Losing interest? Protection for your charitable trust income

Charities may find themselves the beneficiary of a very welcome gift under a Will, and for those charities with limited fundraising capacity, these gifts are life blood. The receipt of such a gift, however, may not be without its challenges, particularly when the gift is to be held for the charity on trust.

One such challenge is the diminution of capital through fees and charges when the charity is to receive only the income derived from an asset. Depending on the specific circumstances, this challenge may be resolved to allow the charity to benefit from the ongoing gift and avoid frustration of the testator’s charitable intentions.

Unlike most other types of trust, the law does not impose any limit upon the lifespan of a trust for a charitable purpose, which may otherwise exist in perpetuity. As a result, it is common for a charitable gift of “income forever” earned upon identified capital to be made within a Will, such as rent derived from certain land or interest earned on a certain amount of money.

There are, of course, costs associated with the management of this income producing asset, and in low-yield economic conditions these costs may easily outstrip the income produced. When this occurs, the shortfall is subtracted from the value of the asset. This reduces the income earning potential of the asset, and may require the asset to be sold either in whole or in part to meet the shortfall. If this imbalance persists, it is possible the income producing asset may be diminished entirely by the Trustee, depriving the charity of this precious income stream and frustrating the intentions of the testator.

In certain circumstances, there is a solution.

The law has long held that a sui juris (Latin: “of one’s own right”) beneficiary of a trust who is absolutely entitled to a vested interest in that trust can direct the trustee to transfer legal title to the beneficiary. This is known as the rule in Saunders v Vautier, as it was derived from a case of that name decided in England 1841, and it applies to gifts made upon trust to a charity. Subsequent cases tell us the court will allow ownership of the income producing asset to be transferred to the charitable beneficiary of its “income forever” unless the Will clearly expresses or intends that the beneficiary is not to take more than the income, intention being inferred from the presence of a “forfeiture” or “gift over” clause, amongst other things.

If successful, the charitable beneficiary would be no longer beholden to the consequences of uneconomic decision making by a Trustee, and would be free to apply this capital for their charitable purpose as the testator intended.

Please contact us if you would like to know more.

Nathan Gately, Solicitor

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