Over the past ten decades, British charities have enjoyed a boom in income, thanks to the money donated in supporters’ wills. However, since the recession many large charities have seen this legacy income fall. Coinciding with declining investment returns and a drop in public donations, this has meant a triple whammy, threatening the delivery of essential services. But it’s not all doom and gloom. Looking further ahead, charitable gifts in wills are set to recover, thanks to the baby boomers. Meeting the needs of this demanding generation of legators will prove challenging for charities and advisors alike.

Gifts in wills are a vital source of income to today’s charities. In the UK last year, just under GBP2 billion was left to charity. Some of Britain’s best-known charities rely on legacy income to underpin their operations. For example, the Royal National Lifeboat Institution (RNLI) derives over half its income from bequests (the largest ones are fondly known as ‘floating headstones’); while Cancer Research UK receives around GBP3 million a week in legacies.

Britain’s legacy ‘industry’ has been growing strongly for over 30 years now. Between 1988 and 2008 alone the money donated through wills quadrupled in value. There are several factors behind this growth. Firstly, thanks to awareness-raising by charities and by organisations like STEP, the number of people writing charitable wills is on the up. According to legacy market analysts Smee & Ford, over 35,000 charitable wills were read at probate in 2008, compared to just 30,000 in 1998, an increase of 18 per cent over ten years. Those wills included over 100,000 gifts to charity, comprising a mixture of ‘pecuniary’ bequests (where the value of the gift is specified) and ‘residual’ bequests (where a charity receives a share of the final estate).

Legacy Foresight’s analysis of the legacy market shows that while pecuniary gifts are more common, residual bequests are considerably more lucrative. Last year, the average pecuniary gift was worth GBP3,500; while the average residual bequest was worth GBP51,300! (Of course, this average includes a small number of very large bequests, which skew the figure upwards – a more ‘typical’ residual bequest would be GBP15-20,000). Overall, 85 per cent of our clients’ legacy income comes from residual bequests; and indeed half their income is derived from just 6 per cent of all gifts – those worth over GBP100,000 each. So it’s little wonder that to most legacy fundraisers, the ‘holy grail’ is to attract wealthy residual legators to your cause. Of course, in an increasingly competitive environment, this common quest for residual benefactors can backfire. One recent will involved 80 charities sharing a relatively small estate, each receiving a few thousand pounds – a very generous gesture, but a nightmare for executors to administer!

However, while the number of gifts in wills has been slowly growing, it’s the value of those gifts which has fuelled the boom in legacy incomes. Fundamentally, all estates are portfolios of property and investment assets. So, with plummeting house prices and jittery stock markets, it’s no surprise that the value of charitable legacies has taken a pounding in the last two years.

The impact of the recession is clearly reflected in the performance of charities. In the mid-noughties, the charities in the Legacy Monitor Consortium were seeing their combined legacy income grow by almost 6 per cent a year. In spring 2008, when the credit crunch bit, incomes stalled, and have been slowly declining ever since. The decline has been led by those lucrative residual bequests, which have fallen in value by 7.5 per cent from the market peak of spring 2008. Overall, we estimate that GBP66 million in legacy income has been lost to the charity sector in the past year.

Looking ahead, prospects for the next two years are likely to remain subdued. Whatever the UK political party in power, the outlook is for slow economic growth in the UK, while government, business and consumers struggle to pay off the enormous public debt Britain has accumulated. Notwithstanding the recent bounce-back in the property market, we expect house prices to fall somewhat, as more houses are put up for sale. Likewise, in the wake of the election, share prices may well fall back, as investors develop a more realistic long-term view of the global economy. All these factors will have a dampening effect on those vital residual legacy values. We believe that it will be at least 2012 before legacy income returns to pre-recession levels.

However, over the horizon, the longer-term outlook is positive once again. And this time it will be demographics, rather than economics, driving the growth. Recovery in the legacy market will be due to the large and affluent ‘baby boomer’ population, born in the aftermath of the second world war. In Britain today, there are 10.2 million people born between 1946 and 1957, now aged between 53 and 64. Over the next decade, this generation will start to die in significant numbers. The sheer scale of the boomer population, and its considerable accumulated resources (notwithstanding the recent recession), means that the legacy market will grow steadily from 2020 onwards.

Attitudinally, British baby boomers are individualistic, liberal and largely secular. They are ‘youthful’ in outlook, expecting personalised service and needing to feel in control. To aid their choices they want hard facts, and they appreciate straight-talking and humour. They are more willing to challenge conventions about who their money should go to, favouring friends and trusted brands over distant relatives. Given the era they grew up in, they support international development, environmental and human rights organisations over more traditional domestic and religious causes. To communicate effectively with boomer legators, charities will need to find a new tone of voice, and a new set of messages; the ‘old rules’ will not apply.

Until now, British boomers have lived through a period of unprecedented peace and prosperity. They have enjoyed increasing levels of home ownership, and seen house prices rocket. Many have accumulated index-linked pension assets, be it through occupational or personal schemes.

Of course, not all boomers benefitted equally from the booming economy: as a group they have polarised into haves and have-nots. Today the richest one third of boomers hold 78 per cent of the wealth, while the poorest third hold just 4 per cent. This is largely good news for the legacy market, since legacy giving has traditionally been prevalent among more affluent households.

At the very top of the scale, the top 5 per cent of boomers account for one third of all assets. Evidence suggests that these rich people have different attitudes to past rich people, in particular they want to give their money now, rather than waiting until they die. They want to be involved in engaged philanthropy, being actively involved in the management and monitoring of the causes they support, rather than taking an arms-length approach. As wealth continues to polarise, we are likely to see more ‘super-rich’ people managing their estates through trusts, rather than ordinary wills. Thus, the opinion of lawyers, private bankers and other financial advisors will become ever more important in the legacy market. Stereotypical ‘spinster’ donors will also be replaced by a new breed of ‘voluntarily’ childless women, born into the age of women’s liberation. Often well-educated and highly-paid, these women will have considerable assets of their own, and will have strong views about how they wish to distribute them after their death.

Despite the recession, recent analysis suggests that the boomers’ collective wealth, although seriously dented in the short term, will be restored long before their death. However, the impact of the recession on the boomers’ mindset is harder to fathom. Maybe, simply because many have lived such a ‘teflon’ existence until now, the downturn will hit their confidence extra hard. Previous research has picked up on their fears for their children and grandchildren’s security. Will the boomer’s desire to protect their family mean they have nothing left to leave to charity?