Charities receiving legacy income may be asked to provide an indemnity before the legacy is released to the charity. Below, we explore the possible implications for your charity, and how you can respond.

What is an indemnity and why is it relevant to legacies?

An indemnity is a legally binding promise by one party to another to do something, such as make a payment to the first party, should a particular scenario or liability arise.

Where a charity is a beneficiary under a Will, sometimes the personal representatives administering the estate – who will usually be the executors – may request an indemnity from the charity before they are willing to distribute the legacy to it. This is usually done with the aim of protecting the executors from a liability that the executors are worried might arise for them in the context of the estate. An example would be where they have been put on notice that there might be a claim against the estate, or where beneficiaries are missing.

What should you think about if your charity is asked to give an indemnity?

Legacy related indemnities raise two main issues for charities.

First, agreeing to the indemnity will expose the charity to liability and put charity funds at risk.

Second, is it reasonable or right for the executor to request an indemnity in the first place?

There will always be questions about how appropriate it is for an executor to ask a charity for an indemnity before they distribute a legacy. Executors have a legal obligation to distribute the estate in accordance with the Will, and this obligation is not contingent on the executors receiving an indemnity. If the executors are nervous about a claim, there may be other ways in which they can be protected. For instance, where the executors give notice of their intention to distribute the estate in line with a prescribed process set out in section 27 of the Trustee Act 1925, they are generally afforded a degree of protection from claims they are not aware of. And claims from dependants under the Inheritance (Provision for Family and Dependants) Act 1975 are generally time barred once six months have elapsed since the grant of probate (or letters of administration) – although challenges to the Will on other grounds such as undue influence can be brought after that date.

It is difficult to justify a request for an indemnity where the legacy or Will is straightforward, and there is nothing to suggest a future claim. Executors can sometimes ask beneficiaries to agree to a wide indemnity included at the bottom of the estate accounts. This is almost always unlikely to be justified or appropriate.

Should you agree to an indemnity?

There is no legal obligation on a charity to give an indemnity to an executor.

However, our experience is that legitimate scenarios can arise – where executors are in a position of particular risk – where it can be reasonable to ask for an appropriately scoped indemnity.

There may also be practical reasons for a charity to consider giving an appropriate indemnity to unblock distribution of a legacy. It can encourage nervous executors to make a distribution. It may also avoid the executors using funds from the estate to take legal advice or apply to the court – which will reduce the value of a residuary legacy. In some cases – where an executor is inexperienced and where it would clearly benefit the charity to do so – we may even suggest proactively offering a limited indemnity even where it hasn’t been asked for, to encourage an executor to move forward with the administration of the estate.

The charity should weigh up whether the indemnity is in the best interests of the charity, on a case-by-case basis.

If you do give an indemnity, what should you bear in mind?

You’ll need to look at the terms of the indemnity and seek to limit its scope as far as possible. It will invariably be inappropriate to give a wide and unqualified indemnity. Similarly, indemnities requested from a group of beneficiaries on a “joint and several” basis – i.e. each of the beneficiaries can be made liable for the whole amount due under the indemnity – should be avoided.  A charity should only agree to take on its own “share” of any liability.

If a charity gives an indemnity to an executor, it should be:

  • limited to the value of the charity’s legacy or to the specific risk/liability of concern if this is lower than the value of the legacy;
  • tied to an appropriate time limit, after which it will extinguish (and can be removed from the charity’s register of indemnities – see below);
  • no wider in its application than is needed to address the specific risk/liability that is concerning the executors – i.e. in the case of a missing beneficiary, the indemnity should only cover the risk of them making a claim, not any other liabilities or claims in relation to the estate.

We’d generally recommend that an indemnity be run past the charity’s legal team or external advisors before agreeing to it.

Given the risk to charity funds which is created by giving an indemnity, charities should ensure that the delegated authorities for their legacy teams are clear and appropriate in scope, so that only those with sufficient expertise and experience are considering and making decisions about indemnities. It may also be sensible for charities to keep and monitor a central record of all “live indemnities”. This allows a charity to keep track of the indemnities which might be called on at any time.

If your organisation needs further advice on any of the points outlined in this article, please get in touch with Hugo Walford or Alice Faure Walker who would be happy to help.

The material in this article is provided for guidance and general information only and is not intended to constitute legal or other professional advice upon which you should rely. In particular, the information should not be used as a substitute for a full and proper consultation with a suitably qualified professional. Please do contact the Bates Wells team if you require further information.