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.

Where 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 and kicking:

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.

Married before 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.

Example:
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 intestacy.

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 and
(c) the Prior and legal Rights of a surviving spouse or registered civil partner.*

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 in others.

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. £388,000 of his estate however is taxable at 40% - £155,200 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 (£624,000) - £276,000 would be taxed at 40% - £110,400 of tax payable. The survivorship clause has resulted in an additional £44,800 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
• ingathering 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 provision 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.