THE CONTINUING IMPORTANCE OF MAKING A WILL
We could be forgiven for thinking that the Chancellor in his pre-budget
speech has rendered wills and estate planning for married couples
unnecessary; and that it is safe to sit back in the “knowledge” that
the Chancellor has made planning unnecessary by “increasing” the
threshold for married couples.
It is fair to say that for those married couples who had not taken
appropriate advice previously on how to save Inheritance Tax by
utilising both nil rate bands, this recent news will be of some
assistance- however, it is by no means the whole story.
Whatever your status, careful consideration should be
given to how you wish your estate to be distributed on your death.
there is no valid will, the law will determine who will benefit
and to what extent - often with surprising results.
Despite the changes brought about by the Finance Act 2006 and
the Chancellor’s proposals for the tax threshold as it applies
to married couples and registered civil partners, wills and trusts
still remain an important estate planning mechanism for us all.
1. Nil rate band planning is still alive
Second families - When Willpeople draft
Wills, it is necessary to look at a client’s
whole circumstances and their history to advise on what might
be the best way forward. There may be more
than one family to consider and it might be the client’s
wish to make provision for the children from a previous relationship
whilst balancing that with the needs and expectations of a second
partner or spouse. Even if there is apparent agreement between
the parties at this time that they will make provision for their
partner’s children, as well as any children they have together,
there is no guarantee of this, as anyone can change their will
at any time. Clients need to be aware of this and take such steps
as may be appropriate.
and widowed - Where the client(s) has been married
before and widowed, there can be up to FOUR nil rate bands to consider.
Each spouse has their own nil rate band plus either the full or
the unused part of the nil rate band of their now deceased spouse.
HOWEVER the first to die of the couple we are now considering must
use the nil rate band or lose it.
Mr and Mrs A live happily together until Mrs A’s death in
1988. At this time Mr A inherits Mrs A’s entire estate. Mr
A later meets and marries Mrs B who is widowed but inherited her
husbands estate when he died.
Mr A and Mrs B have between them 4 nil rate bands, 2 of which
will be wasted if they do not undertake estate planning- this is
because, if they marry, then on second death, the maximum nil rate
band available to the second spouse to die in this relationship
is only twice the current nil rate band- Section 8A (5) of the
IHT Act. If they fail to plan, 2 nil rate bands have been wasted.
2. Protection for Young Beneficiaries - In Scotland
the law provides that a beneficiary can receive their inheritance
outright at age
16- to do with as they please. If a client considers this is too
young, trust provisions can ensure that both the young person and
the value of the inheritance are protected until a more appropriate
age and stage - with further provisions built in so that the beneficiary
can receive advances at the discretion of the trustees to meet
their educational needs and for their general maintenance and benefit.
The Finance Act 2006 changed the special tax treatment for these
accumulation and maintenance trusts. We now have Bereaved Minors
Trusts and 18-25 trusts which are afforded some special treatment,
albeit in a restricted form. Trusts set up by grandparents for
their grandchildren and remoter descendants no longer fall into
this special category, but grandparents may choose to make use
of full discretionary trusts which offer greater flexibility
3. Disabled Beneficiaries - Trust provisions should be considered
in all circumstances where there is a wish to provide for a person
who is disabled, whether a child or an adult - or where there is
even a remote possibility of a disabled beneficiary inheriting.
A bequest in a will may be made with good intentions but in some
circumstances, and without careful planning, a payment to a disabled
beneficiary can unwittingly jeopardise benefits on which the beneficiary
relies and which could be lost forever. A trust in a will could
allow the disabled beneficiary to benefit from the estate without
affecting the benefit payment or care provision from the local
authority. The will should be drafted in such a way as to allow
trustees to make advances to a number of potential beneficiaries,
including the disabled person. It can make provision for costs
to be met in the provision of or modification to accommodation
for the person, for special equipment to be purchased and to allow
payment to be made direst to third parties for the provision of
services to the individual concerned. The will can be supported
by a “memo of wishes” which although not binding upon
the trustees can be useful in spelling out the testator’s
hopes and expectations.
It is very important to involve the wider family and even friends
of the disabled person in discussions, as anything which the testator
does to protect the benefits and interests of the disabled person
could be undermined by others who do not take the same care in
the drafting of their will, or who, by not making a will at all
allow the disabled person to inherit directly under the laws of
4. Second marriages - As above, where an individual has children
from a previous marriage or relationship, he/she may wish to make
provision for those children whilst ensuring that the second spouse
or partner is adequately provided for. Trusts can be used to help
balance the different needs and interests of the beneficiaries.
A trust can be used to protect assets for future generations in
the event of the surviving spouse remarrying or wishing to leave
their estate to someone other than the children.
5. Business Property Relief - Provided certain criteria are met,
business property relief operates to reduce the value transferred
by either 100% or 50 %. Clients with business assets which may
qualify should consider making a will to make the best possible
use of this relief to mitigate Inheritance Tax. A similar relief
is available for Agricultural property whether the client is actively
involved in the farming activity or lets the land which is farmed
by another person. (different periods of ownership apply)
Not all businesses qualify for relief, but broadly speaking, the
relief is available for qualifying shares or an interest in a business
with no upper limit provided the business is trading and the shares/interest
has been held for a minimum of 2 years.
As transfers between spouses and registered Civil Partners are
exempt anyway, to make the best possible use of the relief, the
property could be left outright to a beneficiary who is not so
exempt e.g a child of the testator. Alternatively, the business
assets could pass into a discretionary trust, allowing the surviving
spouse to benefit but without the underlying property being treated
as part of his/her estate for either Inheritance Tax purposes or
being taken into account in the assessment for long term care costs.
In some circumstances, without good advice or sound planning, valuable
Business property relief can be lost. For example, if there is
a binding contract for sale of the business assets at the date
of the transfer for Inheritance tax purposes, HMRC will not allow
the relief. Partnership agreements should be checked to ensure
that their terms do not offend against this principle. If the terms
of the agreement are such that the share of the business should
be sold to the surviving partners, this will constitute a contract
for sale and relief will be denied. The agreement should instead
be drafted to provide for a “cross option”
6. The Chancellor’s statement made no difference
to the Inheritance Tax position of single people, siblings, divorcees,
unmarried parents or co-habiting couples.
Single people - should make their will to ensure that their estate
passes in accordance with their wishes, otherwise the estate will
pass according to the rules of intestacy. Careful consideration
should be given to whether it is prudent to leave assets to parents,
rather than to younger members of a family, such as siblings, nephews
and nieces. This is of particular relevance where older members
of the family are already financially secure, as any assets passing “backwards” could
simply add to the tax burden of their estate or be included in
an assessment for long term care costs.
Separated – Each party retains rights in the estate of the
other until divorced or a separation agreement is entered into
by which each party may agree to waive rights to the estate of
the other on death. If parties separate it can take some time to
negotiate the terms of any separation agreement. In the meantime,
a will can limit the amount of the estate passing to the other
party. In such circumstances, provision can instead be made for
children and/ or other family members and friends. The terms of
any title deeds should be checked. If they contain a “survivorship” clause,
the effect of this can be to transfer the title to the survivor
without further process.
Co-Habiting Couples - In terms of the Family Law (Scotland) Act
2006 - Section 29 - a surviving “co-habitee” can apply
to court for a share of the estate of the deceased co-habitee if
the deceased died intestate. Unlike a spouse or registered civil
partner, a co-habitee does not have any legal rights. The applicant
can only succeed in a claim if the parties had been living together
until the first party died. There is no minimum period of co-habitation
before which the co-habitant acquires the right to apply to court
for an order. The applicant must however make a claim within six
months beginning with the day the deceased died. The court can
make an order for (1) a capital sum to the applicant out of the
deceased’s net intestate estate and (2) for heritable or
moveable property to be transferred to the applicant out of the
deceased’s net intestate estate.
“Net Intestate Estate” is defined as being so much
of the intestate estate as remains after the satisfaction of:
(a) Inheritance Tax
(b) other liabilities of the estate having priority over the Prior
Rights and Legal Rights of a spouse or Registered Civil Partner
(c) the Prior and legal Rights of a surviving spouse or registered
The last point means in effect that the claim of a co-habitant
may turn out to be of no value as the Prior and Legal Rights may
be sufficient to exhaust the entire estate of the deceased.
Further, the court could decide not to make an order at all in
the applicant’s favour. The court may not be satisfied that
the applicant was indeed a co-habitant for the purposes of making
an order. The question of whether a couple can be said to be “co-habiting” will
in many situations be relatively easy to determine, but more difficult
It makes sense therefore for clients who are co-habiting to make
a will to ENSURE that someone they regard as a co-habitee will
benefit from their estate if that is their wish, without that
person having to resort to court action to make a claim. There
is no guarantee that any court application will succeed and there
is all the stress and expense involved in the process to consider.
One should not lose sight of the fact that the client might NOT want to make provision for someone who could conceivably claim
to be a co-habitee. Once more, the only safe course of action is
to make a will. At present the applicant can only apply to court
in the event of an intestacy.
7. Survivorship (Commorientes) clauses in wills and review - Many
wills for married couples (as well as others) contain clauses which
provide that the surviving spouse will inherit the estate of the
first to die providing they survive a specified period of time,
commonly 28, 30 or 60 days (but could be up to 6 months in some
cases). Whilst this may in part have been to save tax, the converse
may now be true if it is accepted that the nil rate band is transferable
between spouses or registered civil partners. Take the example
of Husband and Wife whose combined estates amount to £900,000,
but individually are £700,000 and £200,000 respectively.
Husband’s will provides that his estate should pass to Wife
but that she is required to survive a period of 30 days for this
to take effect - otherwise the estate will pass to their three
children equally. There is an accident involving both spouses in
which the Husband is killed and his wife survives only 7 days.
The husband’s estate passes to the children and his nil
rate band is fully utilised. £375,000 of his estate however
is taxable at 40% - £150,000 of tax payable
The wife’s estate likewise passes to the children, but her
nil rate band is only partially utilised as her estate comprises
only those assets which had formed part of her estate from the
outset ie £200,000.
Had there been no survivorship clause, the Husband’s estate
would have passed to the wife and been exempt at that stage. The
wife’s estate would then amount to a total of £900,000
but would have two nil rate bands set against this (£650,000)
- £250,000 would be taxed at 40% - £100,000 of tax
payable. The survivorship clause has resulted in an additional £50,000
of tax due.
8. Legal Rights - This is an area which may change in future as
a consequence of discussion by the Scottish law Commission on the
subject of succession generally. At present however, clients need
to be aware of the impact that legal rights of a surviving spouse
and children can have on their estate. Legal rights subsist for
20 years and children of the deceased parent may not wish to make
a decision straight away as to whether they will enforce their
rights. A claim to legal rights affects the proportion of the nil
rate band of the first spouse which can be transferred to the second
spouse, and affects the tax position generally.
Many people, particularly in second relationships are unaware
of the effect of a legal rights claim on the estate of their partner
who has children from a previous relationship. They may not be
aware for example that the life cover they have earmarked to pay
off the mortgage on the house they have bought together is moveable
within the estate (and that there is unlikely to be any apportionment
these days between heritable and moveable because lenders do not
require, and in many cases would not accept even if offered, an
assignation in security of the debt).
Irrespective of a client’s status and tax issues
aside, the Will has other useful functions, for example:
Appointment of executors and trustees - In the absence of a will,
an application needs to be made to court for an executor to be
appointed. The role of executor is an onerous one. Clients might
consider that they are bestowing an honour upon a member of their
family or a friend in making such an appointment, or allowing the
court to do so, but in many cases, there is a great deal of time
and effort required to properly administer the estate of a deceased
person. This is especially true when there are Inheritance tax
issues or possible legal rights claims by children or remoter descendants
which need to be taken into account. It may be prudent to appoint
a PROFESSIONAL EXECUTOR to act either solely or alongside family
members to ensure the proper administration of the estate.
Administration of executry estates involves:
- dealing with
all correspondence with relevant bodies and institutions
the various assets and ensuring payment of bills due by the estate
- dealing with any Inheritance tax payable
- completing forms
for confirmation from the court
- distributing the estate in accordance
with the will (or rules of intestacy) taking account of any
Legal Rights which can be claimed
Appointment of Guardians:
This provision should
go beyond a simple statement of appointment.
This clause in a Will can be as detailed as the individual requires.
It can ensure for example that the Guardian receives adequate financial
for the cost of maintaining the child or children in order that they do not
have to fund this from their own resources. In some situations it might be
necessary for the Guardian to extend their own accommodation or move home.
Such an appointment should be carefully considered and may take
account of the views of the child or children depending on their
age and level of understanding.