PRECAUTIONS TO TAKE BEFORE MAKING DISTRIBUTIONS FROM THE ESTATE FUNDS

Advertisements for creditors and claimants

Before distributing the assets of the estate amongst the beneficiaries, a personal representative who has not already done so should consider publishing the statutory advertisement for claimants and creditors referred to in the previous chapter and under ‘Debts and liabilities’ on page 92. for the reason given there.

Check identities and relationships

A personal representative who distributes assets or an incorrect sum might well be held personally responsible and unable to recover from the recipient. It is wise therefore to draw up a family tree supported by birth, marriage and death certificates where appropriate, rather than to rely upon hearsay to the effect that A and B were legally married or registered a Civil Partnership or that C died many years ago. If the sums are substantial and a point is not entirely clear, consider employing a professional genealogist. Unless the people involved are personally well known to the personal representative he always should ask for evidence of identity when distributing the estate.

Obtain an Inheritance Tax clearance certificate

It is wise to write to the Capital Taxes Office and request a formal inheritance tax clearance certificate, i.e. formal confirmation that no claim will be made by the Revenue for further inheritance tax, before distributing any assets to beneficiaries. A clearance certificate will protect the personal representative against future claims for inheritance tax in relation to the estate and give him the confidence of knowing that all the valuations have been accepted by the Revenue for inheritance tax purposes.

THE POSSIBILITY OF CLAIMS UNDER THE INHERITANCE (PROVISION FOR FAMILY AND DEPENDANTS) ACT 1975 AS AMENDED

The personal representative should also wait for six months from the date of the grant of representation being issued by the Registry before distributing any assets to beneficiaries because of the possibility of claims being made against the estate under the Inheritance (Provision for Family and Dependants) Act 1975 as amended. If a claim is made immediate assistance should be sought from a solicitor.

In broad terms the act permits claims to a reasonable share of the estate after death, even if the will leaves the claimant nothing. Claimants could be:

• a wife, husband or registered civil partner;
• a former wife, former husband or former registered civil partner who has not remarried or entered into a new civil partnership;
• children (adopted children claim against the estates of their adoptive parents, not the estates of their birth parents);

• any person who was treated as a child of any marriage or civil partnership to which the deceased has been a party;
• anyone who considers that he or she was maintained by the deceased to a material extent immediately before death.

Maintenance need not be for any minimum period or financial; it can be maintenance provided in kind e.g. by providing free food and lodgings.

A successful spouse or registered civil partner will be awarded what is reasonable whether or not it is required for the claimant’s maintenance; any other claimant will only receive maintenance.

What is reasonable depends upon all the circumstances of the case. The High Court put it rather well when it quoted with approval a Canadian court which ruled that reasonable maintenance was enough to enable the applicant (a child of the deceased who was an able bodied adult) to live ‘neither luxuriously, nor miserably but decently and comfortably’. Matters which are likely to be considered include the size of the estate, the behaviour of the parties and of the deceased, the length of time that the relationship existed, and the resources and needs (including those arising from mental or physical disabilities) of the parties. In assessing a claimant’s financial situation a court can hold it against a claimant that he has in the past invested in speculative investments or lived beyond his means.

A partner who was cohabiting with the deceased in the same household as if they were man and wife or civil partners for two years immediately prior to the death can claim without having to prove that he or she was maintained by the deceased.

What is meant by the word ‘immediately’ has to be construed in the light of all the surrounding circumstances and can have a wider meaning than might at first be thought. The case of Gully v Dix in re Dix deceased, which was decided by the Court of Appeal in January 2004, is a good example. The facts were that the claimant and the deceased lived together from 1974 until August 2001 when the claimant moved out because the deceased’s alcoholism caused her to fear for her safety (he threatened to kill her). In October 2001 the deceased died. Even though she had not returned before the death, as far as the claimant was concerned, the relationship was not over and the three months separation was unusual rather than the ‘settled situation’. The court decided that the important word was ‘household’ not ‘house’. To decide whether the claimant was being maintained by the deceased and whether she and the deceased were living together in the same household immediately before the death, it was necessary to look at the reason for her leaving and the entire period during which they had been living together, not just the last three months. In the light of their long standing relationship, in spite of the fact that she had been away from the house for the three months or so before the death, the court decided that the claimant could be considered to be living in the same household as the deceased immediately before his death and was therefore entitled to make a claim.

The High Court or a County Court exercising matrimonial jurisdiction can bar a spouse or civil partner from making a claim under the Act on or after successful proceedings for annulment of marriage, divorce, judicial separation or dissolution of civil partnership.

It should also be noted that section 9 (1) of the Act provides that if ‘a deceased person was immediately before his death beneficially entitled to a joint tenancy of any property ... the court... may order that the deceased’s severable share of that property ... be treated ... as part of the net estate of the deceased’.

Proceedings under the Act can be brought in the County Court or in The High Court, but they must be started within six months of the issue of a grant of representation to the estate unless the claimant can satisfy the court that there were exceptional reasons for the delay.

VARYING THE TERMS OF A WILL OR THE INHERITANCE RULES OF INTESTACY AFTER DEATH

It is common knowledge that a person can vary the provisions of a will during his lifetime, but it is not so well known that the provisions of a valid will or the normal laws of inheritance applicable on intestacy are sometimes, quite legally, changed by the beneficiaries after someone’s death. Also if a beneficiary of an estate inherits by surviving his benefactor’s death and then dies, his personal representatives can disclaim or vary his inheritance if they have the consent of those who benefit under his will or intestacy.

Types of variation

The changes may take place either:

• with the consent of all the beneficiaries affected (usually set out in a deed known as a deed of family arrangement, although the document need not be a deed and any form of writing will be sufficient); or
• with the consent of one or more beneficiaries (as when a surviving spouse or civil partner decides to exercise the right given to her by the law in the case of an intestacy to take a capital sum instead of income during the remainder of her life, or a beneficiary under a will disclaims the inheritance); or
• without the consent of the beneficiaries as a result of, say, a successful claim under the Inheritance (Provision for Family and Dependants) Act 1975 as amended.

Reasons to vary

The reasons for wishing to change the terms of a will are many and various, for example:

• Sometimes a will has not been updated for many years and the circumstances in which it was made may have completely changed by the date of death.
• Sometimes it is decided to settle claims made under the Inheritance (Provision for Family and Dependants) Act 1975 as amended by entering into an out-of-court settlement.
• Instead of settling the question by an expensive application to a court, executors and beneficiaries might wish to settle problems created by poor drafting or typing of the will by agreement and to record the agreement in writing rather than risk further disputes.
• It might be desired to give executors wider powers than are provided for in the will, e.g. to widen the executors’ powers in relation to the investment of bequests made to underage beneficiaries.
• The beneficiaries might wish to provide for someone considered to have been overlooked or wealthy people might wish to substitute bequests to their children or grandchildren for bequests to themselves.
• The most common reason of all is to alter the provisions of the will in such a way as to ensure that less tax is incurred, although alterations purely for the purpose of saving tax are open to challenge by the Inland Revenue.

The difference between a variation and a disclaimer

Some changes to the provisions of a will or to the devolution of an estate under the laws of intestacy can save very considerable amounts of tax if the estate is large, but others increase the amount of tax payable. The changes can affect not only inheritance tax, but also capital gains tax, income tax and means tested Social Security benefit payments, and may cost substantial sums in Stamp Duty and legal fees to implement, but in the right circumstances and if carefully and knowledgeably done, they can be very worthwhile. It is essential that advice should be taken from a solicitor or accountant who is knowledgeable about tax law before such a course of action is finally embarked upon. Suffice it to say here that if a change is to be made, the difference between disclaiming something to be inherited from a will or under the laws of intestacy and varying the provisions of a will or the laws of intestacy must be clearly understood.

To disclaim a benefit under a will or an entitlement under an intestacy is to refuse to accept it and although a disclaimer can be retracted, it can only be retracted if no other person has relied upon it to their detriment. A disclaimer can only be made if the person seeking to disclaim has not already benefited from the inheritance which it is sought to disclaim. The inherited benefit cannot be accepted as to part and refused as to part; it is all or nothing, although if more than one gift is made to the same beneficiary in a will or inherited on intestacy, one gift may be accepted and the other or others may be refused and disclaimed, provided they are clearly separate gifts.

On the other hand, to effect a variation one first accepts the gift and then varies it so that another or others benefit, either in addition to or to the exclusion of oneself. This point is very important because it necessarily follows that having accepted the inheritance in the case of a variation, one can decide its further devolution and decide who is to benefit from it, but having refused the inheritance in the case of a disclaimer one has no further control over it, and it must devolve according to the other provisions of the will or the laws of intestacy or otherwise, as the case may be. It should be noted that it necessarily follows that although it is possible to effect a variation of the devolution of jointly owned property which is inherited as the result of being a surviving joint tenant, it is not possible to disclaim survivorship rights.

It follows that different inheritance, capital gains and income tax consequences result from the difference in the nature of a disclaimer and a variation, and as stated above, before making a decision, it is essential that specialist tax advice be sought.

Conditions for tax-effective variations and disclaimers

If the Revenue is to consider the change as having been made by the deceased and there is to be a saving of inheritance and/or capital gains tax, the following conditions must be complied with:

• The change must be made in writing and in the case of a variation all the parties affected must be parties to the document to show they consent to the changes. However, in the case of a disclaimer, only the person making the disclaimer is a party to the document.
• The disclaimer or variation must be made within two years of the death.
• The document which makes a variation must contain a statement which must be made by all parties to it to the effect that it is to have effect for the purposes of Inheritance Tax and /or Capital Gains Tax.

If the variation results in more tax becoming payable, the Personal Representatives must be parties to the document unless, in that capacity, they hold no or insufficient funds to pay the additional tax. If additional tax is payable a fine can be imposed upon all parties to the document unless a copy of the document and a note of the additional tax payable is supplied to the Revenue within six months of the date of the document.

There is no necessity for a disclaimer to state that it is intended to take effect from the date of death; it does so automatically.

To consent to the change a party must be of full age and have full legal capacity. If this is a problem, for example if a person is under the age of 18, or not of sound mind or if a benefit which it is desired to change has been given to a person who has not yet been born, a court can be asked to consent on that person’s behalf, but a court will only give consent if it considers that the transaction is for that person’s benefit. Moreover, an application to a court is expensive. The fact that court proceedings are not quick can also make it difficult to comply with the time limit which will not usually be extended.

It is not possible to disclaim an inheritance which is expected from the estate of someone who has not yet died.

Suffice it to repeat that these matters are not for a layman, and if it is thought that circumstances exist in which they might be of assistance, prompt professional assistance should be sought.

INTEREST ON LEGACIES

It is necessary to differentiate between specific legacies i.e. legacies of specific things e.g. ‘the balance standing to the credit of my account with Barclays Bank Pic’ and general legacies e.g. ‘the sum of one hundred pounds’. The legatee of a specific legacy is entitled to the income it produces from the date of death. Unless the will states to the contrary, interest is payable on general legacies at 4 per cent per annum from the date from which they are properly payable, and in the absence of any specific provision in the will that is one year from the date of death even if the will states that they are to be paid as soon as possible. Interest on a general legacy is treated as gross income in the hands of the beneficiary who must pay tax on it. The interest can be deducted when calculating the income of the estate during the administration period for income tax purposes. Legacies can be paid earlier than one year from the date of death, if convenient, but should not be paid less than six months from the date of the issue of the grant of representation in case a successful claim is made under the Inheritance (Provision for Family and Dependants) Act 1975 as amended.