Update on the Rules of Intestacy
Inheritance and Trustees’ Powers Act 2014 simplifies the rules of intestacy in England and Wales whilst also updating some restrictive trustee powers.
Where a person dies without making a Will
In this situation the distribution of their estate will become subject to the statutory rules of intestacy which can lead to some unexpected and unfortunate consequences. The people the deceased wanted to benefit from their estate may be disinherited or left with a substantially smaller proportion of the estate than intended.
Making a Will is the only way to indicate whom you want to benefit from your estate.
Failure to take action could compromise the long term financial security of the family. It is also the cornerstone for inheritance tax and estate planning. Yet a recent study suggested that as many as 57% of UK adults have not made a Will (Unbiased.co.uk ‘Write a Will week’ August 2014). This inertia could be due to the perceived expense of making a Will, an unwillingness to accept that we are all mortal or a misunderstanding of the law in this area.
A common misconception might be that writing a Will is unnecessary as everything will pass to the spouse or civil partner on death.
While this might be true, where the size of an estate is relatively modest, or property is held as joint tenants, it will not always be the case. And where a Will has been made, it’s important to regularly review it to take account of changing circumstances.
Unmarried partners have no right to inherit under the intestacy rules, nor do step-children who haven’t been legally adopted by their step-parent.
Given today’s complicated and changing family arrangements, Wills are often the only means of ensuring legacies for children of earlier relationships.
Recent changes to the intestacy rules covering England and Wales which became effective on 1 October 2014
These aim to simplify the distribution of an estate and could mean a surviving spouse or civil partner receives a larger inheritance than under the previous rules. Further references to ‘spouse’ throughout the article apply equally to ‘civil partner’.
EXAMPLE 1 – MARRIED OR CIVIL PARTNER – NO CHILDREN
Phil dies in November 2014 without having made a Will, leaving an estate valued at £750,000. Under the new provisions, his widow, Ann, inherits his entire estate.
Had Phil died after 31 January 2009 and before the above legislation came into force the estate would have been shared as follows:
• The first £450,000 plus personal chattels to Ann
• The next £150,000, half the remainder, to Ann
• The remaining £150,000 to Phil’s parents if alive, otherwise to any brothers, sisters, nephews or nieces and if none to Ann
Where the deceased left an estate valued at more than £250,000 and also left children or their issue, the position is also improved for the surviving spouse:
EXAMPLE 2 – MARRIED OR CIVIL PARTNER – WITH CHILDREN
Tom dies intestate leaving an estate valued at £750,000. He is survived by his wife, Mary and two children Sarah and Max. The main asset, the family home, together with his other assets were held in Tom’s sole name. Although Mary had expected to receive Tom’s estate in full, the distribution of his estate was as follows:
Mary Sarah and Max
– All Tom’s personal belongings £250,000 split equally between them*
– £500,000 (first £250,000 plus half remainder)
(*If Sarah and Max are minors, their share of the inheritance is held under a statutory trust until they attain age 18.)
Had Tom died before 1 October 2014, Mary would still have received the first £250,000 plus personal belongings, but she would only have held a lifetime interest in half of the remaining amount (£250,000) with the capital element passing to the children on Mary’s death. In the meantime, she would have been entitled to any income from this share or to occupy a property if relevant, but could not have accessed the capital.
In the above example the situation could have been made worse where the share of estate passing to the children exceeded Tom’s available nil rate band – currently £325,000 less the value of any non-exempt gifts made in the previous seven years – as inheritance tax would have been payable.
Although it would be possible to alter the distribution of Tom’s estate by executing a deed of variation, this would only be possible where all of the beneficiaries consented. And if the children were minors, this would require an application to the court with the associated costs and delays.
The fact that the family home was held solely in Tom’s name isn’t a problem – Mary can ask the personal representatives to appropriate the matrimonial home in or towards satisfying her entitlement under the intestacy.
INTESTACY IN NORTHERN IRELAND
The intestacy rules in Northern Ireland are contained in the Administration of Estates Act (Northern Ireland) 1955 and are broadly similar to those applying to England and Wales before 1 October 2014 except where the deceased was survived by a spouse and children in which case the surviving spouse’s entitlement is:
• The first £250,000 of the estate plus personal items
• An absolute entitlement to one half of the remaining estate where one child survives, or where there are no surviving children, but the issue of just one child of the intestate survives
INTESTACY IN SCOTLAND
The intestacy rules in Scotland are contained in the Succession (Scotland) Act 1964. These state that certain rights must be satisfied before the balance of the estate can be distributed. Legal rights can also be claimed by any surviving spouse, civil partner, child or grandchild even where the deceased left a valid Will.
The surviving spouse is entitled to:
• The deceased’s interest in the family home. The value of this interest increased to £473,000 from its previous level of £300,000 on 1 February 2012 to reflect the increase in property values since it was last increased in 2005. Where the value of the property exceeds this figure, the surviving spouse is entitled to a lump sum of £473,000 in place of the property.
• The right to furniture and moveable household goods up to £29,000 (£24,000 before 1 February 2012).
• A legacy of either £50,000 where there are surviving children or £89,000 otherwise (£42,000 and £75,000 previously).
The surviving spouse is entitled to a share of the deceased’s remaining moveable estate – for example cash, shares and jewellery, after any prior rights and creditors have been paid:
• One third of the moveable estate where there are surviving children
• One half of the moveable estate where the deceased left no surviving
AMENDMENTS TO TRUSTEE POWERS
Inheritance and Trustees’ Powers Act 2014 also amends and modernises sections 31 and 32 of the Trustee Act 1925. These sections create statutory trust provisions that apply by default to beneficiaries who are not yet absolutely entitled to their share of a trust fund. This could be because they are still a minor or they haven’t reached the age – such as 21 or 25 – at which their entitlement vests.
The provisions are almost always modified when trusts are being drafted to provide the trustees with greater flexibility when providing for the beneficiary’s financial needs. However, sections 31 and 32 of Trustee Act 1925 always apply to the statutory trusts created for minors when someone dies intestate.
This enables trustees to apply income for the maintenance, education or benefit of a beneficiary. The proviso that the trustees must consider certain requirements including the age of the beneficiary and any other sources of income before making payment is removed by the amended legislation. Instead the trustees are free to use their discretion to make payment as they see fit. This will affect trusts created or arising on or after 1 October 2014 but could also apply to trusts created before that date where a trust interest is created by exercising a power, after the above date.
Source: Scottish Widows