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The Trouble with Children – Problems Defining Offspring for Inheritance

It’s very natural for parents to pass on all their worldly goods to their children, and for those who die without a will the probate rules will ensure that they are the first in line (along with any spouse) for the assets from your estate.    But although the definition of your child sounds simple, probate law draws some fine distinctions when it comes to determining who your children are.

 

  • Adopted children – formally adopting a child means that it can legitimately inherit a share of its adopted parent’s estate.  However, adoption means that it will not have any claim on the estate of its birth parents.
  • Step children- unless adopted, step children cannot claim part of their non biological parent’s estate.  However, step children can make a claim after the parent’s death for a share of the inheritance if they have been treated as a ‘child of the family’ or where they are financially dependent on the deceased step parent.
  • Illegitimate and Legitimate children – Children born to parents who are unmarried, or not in a civil partnership, are considered to be exactly the same as children of married parents, and so are entitled to their parental legacy.  Unmarried parents marrying changes nothing regarding their children’s inheritance.
  • Unborn children – a child that is conceived, but unborn, will be eligible to receive an inheritance from your estate.  A trust will normally be set up, to hold the assets inherited, until the child reaches a suitable age.
  • Children Conceived By Artificial Insemination or In Vitro Fertilisation  – the Human Fertilisation and Embryology Act 2008 is a complex piece of legislation that determines the recognised legal parents of a child, even though neither may be the biological parents.  As with adopted children above, a child has a right to a legacy from its recognised legal parents, but cannot claim a legacy from its biological parents.

It is always preferable to name children in a will, to ensure that they are very clearly distinguishable from other relatives (or anyone else).  However, some wills are drafted to include a phrase similar to ‘all of my children’ that is designed to cover the eventuality of any future births, after the will is signed.

It’s this catch all class of ‘children’ that makes the above definitions so vitally important in determining who will be considered your child, and who will not.

When Gifts Fail –Legacies That Don’t Turn Out Exactly as Expected

Wills are an extremely efficient way of passing on your estate, after death, to those who you loved and cared for in your lifetime.  Gifts (as the law calls them) can be money, personal property, land or businesses.  However, there are a number of traps for the unwary that might prevent your gifts from reaching the very people you intended to benefit.  Here are some of the most common problems:

Beneficiaries Dying Before You  There’s always the possibility of someone who you wish to leave property to dying before you.  If the gift was intended for your child who then predeceases you, it will automatically pass to their children in equal proportions.  However, if you leave a gift to someone other than your child and they predecease you, the gift will fail.  It will not pass to their children so you must nominate another person to receive the gift.

Divorce  Following a divorce (or the dissolution of a civil partnership), the law will automatically remove your former partner’s right to receive a gift from you (just in case you forget), unless there is explicit instructions in your will to prevent this from occurring

Ownership – To leave property in a will you must own it.  That seems pretty simple, but wills can be written some time before a person’s death and their fortunes may change (so it’s important to review your will after a specified time).

Witnesses  If a witness who signs your will is also nominated to receive a gift, then the gift will fail (but the will itself remains valid).

Uncertainty – When the will is finally read, after your death, it’s sometimes not possible to accurately identify who the gift is intended for or what the gift actually is.  The issue can be that an uncertain group of people have been identified as beneficiaries (e.g. a gift to ‘all of my friends’) or that a description of a person is vague (e.g. a gift to your ‘favourite son’, when you have five sons).  There can be similar problems in differentiating property.

These are just a few of the reasons why gifts fail, resulting in them being returned to the bulk of your estate, to be shared out amongst the residuary beneficiaries who receive what’s left after taxes, debts and those all important gifts.   The solution is to employ a competent professional to draft your will.  They’ll spend a great deal of time: clarifying your wishes, helping you to identify and value your property, asking plenty of ‘what if’ questions, working to minimise your tax exposure – and, knowing the pitfalls above,  they’ll make sure that gifts are placed directly into in the hands of the people who you care most about.

Last in Line – Why Beneficiaries Are the Last to Receive Property from a Will

When a friend or family member dies, the beneficiaries of a will are the last in line to receive any share of the estate.

The current publicity concerning the estate of the late Boris Berezovsky, the billionaire Russian oligarch who died in Ascot in 2013, highlights this important principle.  Once worth an estimated £1.9 billion, Berezovsky’s remaining estate is now thought to be worth around £100million.  A firm of UK lawyers has recently successfully requested that its £12million legal bill was paid, before the personal representatives (the professionals administering his estate) have identified all of Berezovsky’s assets and assessed what his family are entitled to.

The personal representatives’ first duty is to identify, collect and value the deceased’s estate.  They must then pay out in priority order:

  1. Inheritance Tax – The personal representatives must first estimate and then pay any inheritance tax due to HMRC.  The representatives have the power to sell assets and transfer money from the deceased’s bank account, if there is insufficient cash to pay the tax bill.
  2. Charges, Liabilities and Debts –Next, personal representatives pay any debts owed by the estate, which includes funeral expenses.  They have an obligation to search for creditors and assess any claim made by them.
  3. Gifts & Legacies – Finally, personal representatives can make specific legacies (gifts) and then distribute the remainder of the estate (the residue) to beneficiaries as detailed by the will.

Considering that the probate administration (the process of allocating the deceased’s estate) usually takes about a year, beneficiaries often wait a very long time for what’s left, after everyone else has taken their share.

The good news is that you can take some positive steps to protect the legacies you make and speed up probate.  Firstly, have a will drafted by a professional.  This will ensure your exposure to inheritance tax is assessed and, with careful planning, often reduced.  It will also require you to list your assets and debts, so your personal wealth can be valued.  It’s important to keep this list up to date, as it speeds up the process by which your assets can be collected, it also helps trace creditors and assess their claims.  Finally, it’s worth taking professional advice with regards to any debt you must retain, as there may be more effective ways to manage it, leaving more for the people you care about.

When Your Signature Is More Than Just a Formality – The Final Steps in Executing a Will

Considering all the time and expense that can go into creating a reliable will, it’s surprising that people still get the final steps wrong.  But failing to stick to these seemingly simple formalities can render your will totally invalid.

Firstly, the person who is the subject of the will (the testator) must sign the handwritten, typed or printed will, to show they intended to give effect to the document.  If the testator is blind, or cannot make an identifying mark, they can direct another person to sign the will, but it must be in their presence and under their direction.

Secondly, at least two people are required to witness the signature of the testator.   Most people can be witnesses, except those who will receive a legacy in the will (including the testator’s spouse or civil partner) or those lacking mental capacity.   Together, the witnesses must either see the signature being made or acknowledged by the testator.  Each witness then signs, or acknowledges, their signature in the presence of the testator, but not necessarily in the presence of the other witnesses.  As an added precaution some wills are initialled, by the testator and the witnesses, on each page.

Ideally, wills should not be altered once they have been signed and witnessed.  If an alteration is required, it’s preferable to complete a codicil, which is a separate amendment, requiring the same formalities (signing and witnessing) as the will itself.

Nobody may know, until the testator dies, if the formalities have been followed correctly.  When the will is submitted to the court to be approved before use (probate), it’s first checked for any irregularities.  Similarly, if a person wants to contest a will, they’ll begin by painstakingly examining every single element of the will, including the formalities.  In both cases, if things are not exactly right, the will is declared invalid and the rules of intestacy, usually applied when there’s no will, are used to determine how a testator’s property is divided.  This is probably not what the testator would have wanted, and it wastes the time and expense that went into creating a will.

So how can you avoid infringing the formalities?  With a DIY will, it’s all down to the testator to make sure the formalities are completed correctly.  Will writers, who construct your will for a fee, generally issue a set of instructions for completing formalities and check the executed will after execution.  An even better alternative, which prevents mistakes due to misinterpretation, is for the will writer to be present at the time of signing and witnessing, just to make sure that everything is exactly right.

The formalities seem simple enough, but as many cases in the courts and legal textbooks will bear out, it’s surprisingly easy to make a costly and irreversible mistake.

Keep Your Friends Close and Relatives Closer – The Risks of Disinheriting Your Dependants

Unusually for an inheritance dispute, the Ilott v Mitson case caught the attention of the media last week.  Whilst contested inheritance claims are not uncommon, the most recent decision by the Court of Appeal has attracted a high level of editorial interest for a number of reasons.

The case itself is straightforward enough.   Helen Ilott’s mother (Melita Jackson) died in 2004 leaving an estate worth £486,000 to three animal charities.  Helen, who had not been in contact with her mother for many years before her death, was left nothing.  Jackson’s will and supplementary instructions made it very clear that her daughter had been disinherited.   Ilott brought a claim under the Inheritance (Provision for Family and Dependants) Act 1975, which gives dependants the grounds to challenge a will, when the deceased has not made sufficient provision for them.   Ilott’s claim was based on her and her family’s very low income.

Following a long and tortuous journey through the courts, the most recent decision of the Court of Appeal was to award Ilott £164,000. The decision was unexpected for two reasons.

Firstly, although challenges to wills due to inadequate provision for dependants are relatively common, claimants usually have to show that they are directly dependent on the deceased and are typically unable to work.   However, in this case Ilott had had no contact with her mother for several years, received no financial support from her and was capable of working, although she was in receipt of state benefits at the time of her mother’s death.

Secondly, in their decision to award Ilott a third of her mother’s estate, the Appeal Court pointed out that Mrs Jackson had no direct connection with the three animal charities to which she left her estate.  Her intention was simply to give the legacy as a donation.  The court felt that there was no clearly demonstrated ‘expectation or need’ by the charities and so adjusted the distribution of the estate.

So what can be made of the Court of Appeal’s decision in relation to estate planning and the drafting of wills?   The decision to uphold an appeal, from an independent adult child, widens the net of potential claimants.  It serves as a reminder to professionals involved in drafting wills to advise clients of the substantial risks of disinheriting close relatives and dependants.  They may want to cut their nearest and dearest out of their will, but the courts may have other ideas and have the power to change the final allocation of the deceased’s estate.  Indeed many will writers require people making a will, who are intent on disinheriting their closest relatives, to sign a statement confirming that they understand the consequences of their actions.

In addition, legacies to charities may have to be considered in terms of the deceased’s contact with the charity, especially if there is the possibility that the will may be contested.   That said, the Appeal Court made its final judgement by balancing the needs of the charities against the needs of the claimant and still concluded that they should retain two thirds of the estate.

But this may not be the end of the matter as far as inheritance claims are concerned.  An appeal to the Supreme Court is being considered by the three charities, which may bring the whole issue to our attention once again.

Inheritance Tax – Good News But Not Quite Yet

On the 8th of July the chancellor announced the much heralded reduction in inheritance tax with these words:

‘The wish to pass something on to your children is about the most basic, human and natural aspiration there is. Inheritance tax was designed to be paid by the very rich.  Yet today there are more families pulled into the inheritance tax net than ever before – and the number is set to double over the next five years. It’s not fair and we will act…..’

Under current rules, no inheritance tax is paid on personal estates valued below £325,000 (the nil rate band or NRB), which will be frozen until 2021.  The government’s new measure is a ‘family home allowance’ which will be added to the basic NRB, starting at £100k in April 2017, increasing to £175k in 2020 (giving a total individual allowance of £500,000).  A married couple can then combine their allowances, to pass on their home worth £1 million, but that is 5 years from now.

But for some there’s little or no good news.  For those who are not home owners there will be no additional ‘family home allowance’.  Unmarried couples (and those not in civil partnerships) are still not able to combine their new ‘family home allowance’ NRB’s.  Furthermore, for those whose joint residential assets exceed £2 million there will be a tapering down of their main residence at the rate of £1 of NRB for every £2 of their main property.  Estates of over £2.7 million will be unaffected by these announcements.

So couples leaving a will, who die in 5 years from now with estates of up to £2 million pounds, can pass on the the full benefits of the chancellor’s tax reductions to their beneficiaries.   But in the meantime, and especially if property values grow at the same rate over the next five years as they have recently, there is still a need to engage in active estate planning, creatively using wills and trusts to minimise tax exposure.

One Dispute, Two Perspectives – Why Self Delusion Plays an Important Role in Resolving Conflict

It’s remarkable that in a dispute, when two people have experienced exactly the same set of events, their recollection of the part they played can be different.  Listen to what they say and neither did anything to cause an issue.  Daniel Pinker (Angels of Our Better Nature – 2011) suggests that the human mind is capable self deception when recalling a conflict, to the point where we come to believe our own distorted view of the facts.

Reviewing the work of other psychologists, Pinker believes that our minds are capable of holding two narratives, i.e. an accurate record of what happened, concealed in favour of a story which casts us in a much better light.  In other words, we hide the truth from ourselves. It’s thought that we do this to improve our chances in any negotiation following conflict.If we genuinely believe that we have done nothing wrong, we’ll be less likely to give away the negative aspects of our involvement.

So if two people have such contradictory views of a dispute, and will not agree on the facts, how can we ever find a resolution?   Pinker believes that self delusion needs to be punctured:

‘It may take ridicule, it may take argument, it may take time, it may take being distracted, but people have the means to recognise that they are not always right.’

And that’s why mediation and restorative approaches can prove so effective.   Both take time, both rely on honest and open discussion, both encourage sometimes painful reflection, both give people the opportunity to listen to themselves – powerfully combining to give disputants a unique opportunity to re-evaluate their ‘memory’ of past events.