Welcome to our latest departmental newsletter. The focus this month is on our Private Client team.
Laura Johnson – a solicitor in our Private Client department – explains Deeds of Variation.
What Are They?
If a deceased person left a Will, their estate must be distributed in accordance with their Will. If the deceased person didn’t leave a Will, the law (intestacy rules) decides who inherits the estate. There might be reasons why a beneficiary of a deceased’s person’s estate would prefer to change what they will inherit under the Will or the intestacy rules. A Deed of Variation is a legal document that allows one or more of the beneficiaries to change or give up their entitlement under the deceased’s Will or the intestacy rules in favour of other people. If you are dealing with the administration of a deceased person’s estate with or without a solicitor then it is always worth speaking to a solicitor to consider your options.
Why do a Deed of Variation?
You might be wondering why a beneficiary would choose to give up their inheritance and redirect it to someone else. For example, a Will might leave a house to a child and the beneficiary may prefer for the house to pass to a grandchild, or the intestacy rules might leave everything to the deceased’s elderly siblings and it might be better for the money to pass to the deceased’s younger nieces/nephews. There are a number of reasons to do a Deed of Variation:
- Save inheritance tax. If a deceased person’s estate exceeds the inheritance tax threshold then the sum in excess will be taxed at 40%. If the deceased left everything to non-exempt beneficiaries (anyone other than spouse and charity) then the beneficiaries might redirect some of the estate to pass to exempt beneficiaries (a spouse or a charity) to bring the estate below the inheritance tax threshold or reduce the rate to 36% instead of 40%.
- Redirecting assets that qualify for an inheritance tax relief to a non-exempt beneficiary so that the relief is not wasted. For example, agricultural and business assets may be 100% exempt from inheritance tax. It would not be tax efficient to leave these assets to a spouse because they will already be exempt under spouse exemption. It might be better to redirect assets qualifying for a relief to a non-exempt beneficiary (anyone other than spouse of charity).
- One of the beneficiaries may not need the money. They may have sufficient funds to meet their need or feel that other friends or relatives of the deceased are in greater need of the money to spend on a house deposit, new car, school fees, etc.
- Provide for someone who was left out of the Will or who doesn’t inherit under the intestacy rules.
Why have they been in the News?
At the beginning of this year, the Miliband brothers were accused of using a Deed of Variation to avoid inheritance tax by redirecting property that had belonged to their deceased father. The Chancellor has since announced he will review the use of a Deed of Variation for tax purposes and review the results in the autumn. Whatever the position going forward, Deeds of Variation have been part of the inheritance tax system for a long time and are regularly used to avoid a negative inheritance tax outcome. There are many ways to legitimately save or mitigate tax and Deeds of Variation (for the moment at least) are entirely legitimate. In our experience, they are often used where there isn’t any inheritance tax to pay and it is simply a way for everyone involved to agree to how the estate will be distributed.
Why doesn’t the Original Beneficiary just inherit the money and then give it away?
Families sometimes have separate agreements about what to do with the money/assets after it has been distributed in accordance with the Will or the intestacy rules. The problem with this is that the original beneficiary would then be deemed to be making a gift out of their own estate and that could have detrimental inheritance tax consequences for themselves.
If the original beneficiary agrees to a Deed of Variation within two years of the deceased’s person’s death then the variation will be deemed to be made by the original Will or intestacy rules and it will circumvent the original beneficiary’s estate completely. The original beneficiary will still have to agree to the variation and be happy with the new beneficiary receiving the money/assets instead.
Why Do A Will?
Having read this article, you might be thinking about why to even do a Will if the Will or intestacy rules can be varied after death. The intestacy rules are strictly applied and more often than not you would not be happy with how the estate would be distributed if you died without a Will. It might include distant or estranged relatives and it would completely exclude any friends or charities. You would also be giving the same relatives the control to decide about how to redistribute. The result might be that a distant or estranged relative will inherit and then be involved in deciding, which could cause fall outs and tensions.
If is vital to understand that a Deed of Variation cannot rewrite a Will or redraft the intestacy rules. The original beneficiary under the Will or intestacy rules will have the choice about redirecting and who to. It is therefore better to choose the people you do want to inherit and perhaps substantiate that with a Letter of Wishes to set our your reasons for leaving the estate in the way you have should anyone think about doing a Deed of Variation.
When you instruct us to do your Will then we will give you specific advice about ways to mitigate inheritance tax during your lifetime. You can be more creative and flexible in doing this rather than your family having to redirect a lump sum of the money to a charity to save inheritance tax that perhaps you could have given to them in their life time without there being inheritance tax consequences and you could have seen them enjoy that money.
DeBrieF INTERESTING CASE
Charlotte Fielding – a solicitor in our Dispute Resolution team – discusses what to do if you’ve been left out of a Will.
Where there’s a Will there may be another way!
The Inheritance (Provisions for Family and Dependants Act) 1975 (the “Act”) enables certain people to make a claim against an estate provided they can show that they were financially dependent on the deceased and the deceased did not make adequate provision for them in the Will.
Why can someone make a claim against someone’s estate if they haven’t been left anything in the Will? Shouldn’t the Will take precedence?
Often there can be many years between a person making a Will and their death. At the time of their death a person’s Will might not reflect their personal circumstances or the Will may be out of date (e.g. if an asset has been sold during the person’s life).
Who can bring a claim under the Act?
There are various categories of persons who can make a claim under the Act.
A current spouse or civil partner of the deceased has the strongest claim if they haven’t been adequately provided for. However, it is also possible for a former spouse or civil partner to bring a claim provided they have not remarried and did not receive a final financial settlement following the breakdown of the marriage. A person who has been cohabiting with the deceased in the two years prior to the death of the deceased may also make a claim.
The Act also allows any child of the deceased to bring a claim. The term child includes adult children whether or not they have left home. The Act also allows those who were treated like children: for example, foster children or step-children to bring a claim.
Finally, anyone being “maintained” (wholly or partly) by the deceased up to the point of their death is also entitled to make a claim under the Act. This doesn’t have to be someone who falls into one of the above categories and can be someone with no family ties provided they were financial maintained.
Under what circumstances can I make a claim under the Act to an estate?
The first question to consider when assessing whether you can make a claim under the Act is:
“Has the deceased’s Will made reasonable financial provision for your type of potential applicant?”
When answering this question it is important to consider the category of person that you fall into.
Spouses and civil partners (or someone treated as such) are not assessed on a maintenance basis (i.e. what they need) unlike other types of applicants. Instead they are assessed on what would be reasonably expected for them to receive financially, whether required for maintenance or not.
For other categories of person, claims are assessed based on the financial provision that would be reasonable for the applicant to receive for their maintenance.
If reasonable financial provision has not been made then the next question to consider is:
“What provision should be awarded?”
When deciding what constitutes a reasonable standard of maintenance the courts have interpreted it is a reasonable standard to expect the claimant to live on at a neither luxurious nor poverty stricken level.
The court has a discretion when deciding what amount to award. An award made to a spouse or civil partner will not be limited to an amount required for maintenance, however, other applicants will be so restricted.
The court will consider various factors when determining the amount to award including (e.g.) the financial resources and needs the applicant has or is likely to have for the foreseeable future and the standard of living enjoyed by the applicant at the time of the deceased death.
When making an award the court may award a lump sum, a regular income or a deferred payment.
Is there a time limit for which I can claim?
A claim to an estate under the Act must be made within six months of the issue of the Grant of Probate. This is obviously a short period of time and urgent action is often needed.
If you think you might be entitled to make a claim or want to amend your Will to prevent the need for someone to make a claim please contact us.
DeBrieF CASE STUDY
Karen Witter – a partner in our Private Client team – discusses Life Interest Trusts.
My clients Jane and Robert have recently married. They’ve both been married before and Jane has children for her previous marriage.
They have assets worth £350,000 and £300,000 in their respective names and they own their home as tenants in common.
Jane wants her assets to go to her children, but her share of the assets includes her share of the matrimonial home. She doesn’t want to leave Robert without enough to live on, but she doesn’t want him to have the cash and the house because she’s worried that, if Robert re-married, he wouldn’t leave her assets to her children.
She also doesn’t want to pay IHT if it can be avoided.
We have recommended a Life Interest Trust Will. Jane will leave her estate to Robert but only for his lifetime. This means he’ll be entitled to the income from Jane’s estate, for his life, and will have the right to occupy Jane’s share of the house (as well as his own). There won’t be any IHT because the estate goes to a spouse, so there is 100% spouse exemption.
When Robert dies, Jane’s estate will pass to her children. There will only be IHT on Robert’s death if the value of his estate when added to the value of the “Life Interest Trust Property” adds up to more than the inheritance tax threshold at the time.
Following last week’s budget, now is a really good time to review your current Wills and inheritance tax planning arrangements.
From 2017, the government will introduce an additional IHT nil rate band (ANRB) when a residence is passed on death to direct descendants. The ANRB will be in addition to the existing nil rate band of £325,000 and any unused ANRB will be transferable to a surviving spouse or civil partner where the second death is on or after 6 April 2017.
It makes sense to review your existing arrangements in anticipation of these changes coming into effect.
If you have any queries or require any further information, please do not hesitate to contact our team of specialist solicitors on 0161 832 3304.