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Tag Archives: private client
Jointly owned assets, second spouses and Wills
Helen Freely, a partner in Druces LLP’s Private Client team, replies to a reader’s query in the Financial Times. The article highlights the problems that can be caused if a home-made Will is done without giving thought to the fact that assets are held jointly and pass outside the Will. It also explains what can be done to rectify the situation where the entire estate passes outside the Will to a second spouse, leaving the descendants with nothing.
People interested in Inheritance Tax planning, providing for grandchildren or disabled beneficiaries
Pilot Trusts can often be used for people who wish to undertake Inheritance Tax (IHT) planning. They are lifetime trusts set up with a nominal amount and which are ready to receive further funds and/or property at a later date or upon the death of the donor by way of a legacy in their Will. Until such time that the trust receives further funds, it can lie dormant.
What is a Pilot Trust?
Pilot trusts are normally drafted as discretionary trusts and are created with an initial trust fund of as little as £10. The Trustees could be the client and their spouse or whomever the client believes to be suitable for the role. Settling a nominal sum ensures that the trust has legal presence at the date of the trust deed but it is not until it receives more assets that it becomes an active trust. Transfers of nominal sums into trust often fall within the Settlor’s annual exemption. There will be no IHT charge on the creation of the pilot trust and the £10 transferred into it will not form part of the Settlor’s cumulative total of chargeable transfers. Pilot trusts can have assets added to it immediately or after a period of time and can be used for numerous purposes, for example:
• A property could be transferred into a trust and registered in the Trustees’ names
• A pilot trust could be formed to receive pension death benefits
• Pilot trusts can be used in conjunction with a Will where the trust is set up during the Settlor’s lifetime with nominal funds but further funds may be added only after the Settlor’s death via a specific legacy in the Will
• A series of pilot trusts could be created to take advantage of several nil rate bands which then enhances the IHT planning effect.
Pilot Trusts and Inheritance Tax Planning
Pilot trusts are primarily used for tax planning purposes, and the principal advantage is that each pilot trust is entitled to its own nil rate band. For this to take effect, the Settlor must have his full nil rate band available to him, in other words there must not have been any chargeable transfers made over the seven year period before setting up the trust. Currently each individual has a maximum nil rate band amount of £325,000 available to them (increasing to £329,000 as from 6th April 2013). Setting up a series of pilot trusts on consecutive days and transferring the funds into the trusts on the same day could enable you to minimise future IHT exposure on the trust assets in particular in relation to the on ten-year anniversaries (“periodic charges”) and when assets leave the trust (“the exit charges”).
For example, you wish to put £300,000 in a discretionary trust for your three grandchildren. In the past seven years you have not made any chargeable transfers and therefore you have the full nil rate band available. A single trust of this amount would not exceed the £325,000 nil rate band, and the excess (once over the nil rate band level within the trust) would be liable to IHT on ten year anniversaries (at the rate of 6%) and on “exit charges” (i.e. distribution of capital).
However to be more tax efficient, you could consider creating three separate trusts of £100,000. Each will still be within the nil rate band. The best solution therefore is to create three pilot trusts; these are usually made on separate days (due to the fact that we do not wish them to be “related” settlements) with nominal sums (£10). Subsequently, at a later date you can add £100,000 to each pilot trust. For IHT purposes each trust would have its charges calculated by reference to its own nil rate band, thereby allowing the assets to grow and in effect having 3 nil rate bands to utilise with the trusts themselves.
Pilot Trusts and Will Planning
Just as you can add to a pilot trust in your lifetime, you can also do so on death through your Will. A word of caution, however. Each transfer to a discretionary trust is a lifetime chargeable transfer for IHT purposes. So, it is best to make the transfers to the pilot trusts on the same day and then none for another 7 years.
Pilot Trusts in Practice
Pilot trusts are useful as they enable you to benefit different members of the family, future generations and/or children from previous marriage. The trusts may also offer security to your assets from creditors, divorce claims, future care costs etc. They can also be use as efficient tax planning vehicles for lump sums which are payable either under a pension scheme or under a company’s death in service shceme.
Pilot trusts can be set up easily and quickly, and can be formed at the same time as having your Will prepared. Until the trust starts receiving income or making chargeable gains there is no need to register with HMRC and there is no need for trust accounts. As a result, there are unlikely to be on-going administrative costs until property is transferred to the trust. The pilot trust documents can be stored together with your Will until such a time that it is required.
This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force in December 2012.
Bradbury -v- Taylor: Nephew wins appeal to keep late uncle’s farmhouse
The Court of Appeal has upheld the decision of Judge Jeremy Griggs in the case of Bradbury -v- Taylor to allow Roger Taylor to keep his late uncle’s £800,000 farmhouse, despite this going against the wishes of the deceased.
After an incident at the property William Taylor invited his nephew, Roger Taylor together with his partner and their two children to move from Sheffield and into his house. Roger Taylor and his family lived in the east wing of the property, while William Taylor stayed in the west wing. When the couple discovered that William Taylor’s latest will left most of the property to charity a bitter legal battle pursued. Roger Taylor claimed that William Taylor had promised to leave them the house. William Taylor “vehemently denied” this. Furthermore, shortly before William Taylor’s death he left a witness statement stating that “Roger would be the last person that I would leave the house to. There was never any intention of leaving my house to him, or anyone else.”
After William Taylor’s death the dispute continued between his executors and Roger Taylor. Last year His Honour Judge Jeremy Griggs, sitting as a deputy Circuit Judge in the Plymouth County Court, accepted that a deal had been struck between the uncle and nephew and that Roger Taylor and wife had acted in reliance on that to their detriment in moving in with William Tayor. On that basis he held that a proprietary estoppel had arisen, and that William Taylor thereafter held the property on trust for Roger Taylor and his wife. The effect of that was to render William Taylor’s attempt to leave the property elsewhere ineffective. Accordingly the property was left to Roger Taylor and his wife subject to inheritance tax.
This decision was challenged in the Court of Appeal, the grounds of appeal being, in summary, that His Honour Judge Griggs was not justified in finding that a proprietary estoppel had arisen on the basis of the facts of the case. However the Court of Appeal dismissed the appeal, holding that the Judge’s decision took into account all the relevant factual considerations and that he had been entitled to come to the conclusion that he came to on the basis of those facts.
This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force in October 2012.
Druces LLP were delighted to be asked to collaborate on a legal masterclass at the House of Commons for the beneficiaries of a charity, Heropreneurs, which helps ex-servicemen and women leaving the forces get into business. A broad variety of subjects were covered. Helen Freely spoke about wills, lasting powers of attorney, living wills and personal injury trusts. Susan Perry spoke about commercial considerations in the first three years of business. Charles Avens spoke about employment issues and James Rivett of Pump Court Tax Chambers spoke about getting the taxation matters right for your company.
The slides from the masterclass can be accessed here and are of use to any budding entrepreneurs, not just those leaving the services:
Herrmann v Withers LLP: negligence in the conduct of a property transaction
Summary: In the recent case of Herrmann and Another v Withers LLP  EWHC 1492 (Ch) the Court held that a firm of solicitors had wrongly advised their clients that the high value property they were purchasing had communal garden access rights. This advice was negligent and the solicitors were liable to their clients in damages.
Relevant to: Property owners, Legal practitioners
Spousal by-pass trusts
Spousal by-pass trusts are established to allow the lump sum death benefit of a pension to be paid by the scheme trustees to someone other than the deceased’s spouse or civil partner, while still giving them access to those funds. They offer certain inheritance tax benefits and are becoming increasingly popular. However changes in legislation relating to perpetuity periods (laws relating to how long it is permissible to tie up assets in a trust) have created a pitfall which in certain circumstances can invalidate the trust potentially resulting in an additional inheritance tax burden for spouses. Care needs to be taken to avoid this pitfall and Richard Monkcom, head of Druces LLP’s Private Client team explains how.
Wharton v Bancroft, death-bed Wills and Legal Costs
Summary: The recent court case of Wharton v Bancroft  EWHC 3250 (Ch) emphasises the need to be wary when challenging a Will. Although contentious probate claims will often be emotionally charged, this case illustrates that it is important for both clients and solicitors to put aside personal issues which might impact on their decision-making and to approach such cases dispassionately and proportionately. A failure to approach such cases appropriately can, as happened in this case, lead to significant cost liabilities for unsuccessful parties.
The case also serves as a reminder to practitioners who are involved in making a death-bed Will as to the requirements for ensuring the testator has the requisite mental capacity to make a Will, one of the so called “Golden Rules”.
Relevant to: Individuals who are seeking to challenge the terms of a Will and Legal Practitioners
Contested Wills: Wharton v Bancroft
A High Court Judge has awarded costs on an indemnity basis against three adult daughters who contested their late father’s death-bed will because he believed that their case was so factually and legally weak. Indemnity costs awards involve the paying party being ordered to pay all the receiving party’s reasonable legal costs as opposed to a proportion of them. Such awards are generally only made where the Court believes that the party against whom the award is made has acted unreasonably in initiating or conducting litigation. The award acts as a warning to litigants and practitioners not to initiate legal proceedings without ensuring that there is a proper basis for doing so and to conduct litigation in a proportionate and reasonable manner. For further information on costs awards speak to Julian Johnstone, Head of Druces’ Litigation & Dispute Resolution team.
In the substantive judgment on the same case, the High Court also described as misplaced criticism of the solicitor who prepared the death-bed will without obtaining medical advice confirming the testator’s mental capacity to make it. The High Court ruled that a medical attendant willing to advise on mental capacity could not always be found at short notice and went on to describe the steps that solicitors should take in ensuring that a testator’s mental capacity was established before completing a will in such circumstances. A full briefing note on this issue will be posted on our website shortly.
Druces LLP’s Private Client Newsletter Winter 2012
Welcome to Druces LLP’s Private Client Newsletter for Winter 2012.
You will find in this update recent case law and legislative changes relevant to the private individual and charities. Contact details for our Private Client Partners can be found on our website at Private Client Partners, if you would like further information on these issues. Please also take time to review our new website and, in particular, our Private Client service pages, for more information about our Private Client and related services.
Charitable Legacies – An Added Incentive
In an important development, a charitable legacy equivalent to 10% of your estate could soon reduce the amount at which inheritance tax is charged on your death by 4%. Gifts to charities already benefit from being exempt from inheritance tax which reduces the overall value of the estate chargeable to the tax on death. Under current proposals, there will be an added incentive; a charitable gift of 10% or more will lower the rate of inheritance tax to 36% on your estate, further reducing the actual cost of the gift to other beneficiaries. The draft legislation which will introduce this reduction was open for technical comment until 10 February 2012. It is anticipated that the changes will apply to all deaths from the new tax year onwards. For further information on the proposals, including a worked example of how the benefit will be applied, see our briefing note Charitable Legacies or speak to Richard Monkcom, head of Druces LLP’s Private Client team.
Do You Have An iWill?
Digital technology continues to develop a pace. However has your Will kept up with such changes? Until recently, it was common for photos, music and films to all exist in a physical format. Today such items are increasingly owned in an electronic form only and with moves towards Cloud storage technology, such files may not even be easily visible on a computer at home. In addition to questions about who inherits these items, there are also issues surrounding what happens to your online social networking profile or your email accounts when you die. Does someone know your passwords to access such material and is there anything which you would not like loved ones to stumble across? While certain providers have policies in place for deaths of account holders, these may not accord with your wishes. Increasingly, people are choosing to leave details of online accounts and passwords with their Will or trusted individuals together with instructions as to what they would like to happen to their Digital Estate when they die. A copy of Druces’ full Briefing Note on this subject can be found at iWill.
A Warning For Charities And Testators Following Ilott v Mitson 
The Inheritance (Provision for Family and Dependants) Act 1975 (“1975 Act”) was enacted to give dependants a chance of receiving “reasonable financial provision” from a deceased’s estate even if they were not named in the deceased’s Will. However disputes often arise out of cases brought under the 1975 Act, particularly where the person making a claim is an adult child who lives independently and is not in financial need. In the case of Ilott v Mitson  EWCA Civ 346, the Court ruled that the adult daughter of the deceased was to receive a share of her estate, despite a clear letter of wishes left with the Will explaining why her daughter had been excluded. For further details of this case, and the implications it has for anyone who is making a Will excluding an adult child or leaving a legacy to charity, see our briefing note Ilott v Mitson.
Severing A Joint Tenancy Correctly: Quigley v Masterson 
The case of Quigley v Masterson  EWHC 2529 (Ch) serves as a reminder of the importance of severing the joint tenancy of a property correctly. While all houses in joint ownership must be owned legally by joint tenants, the beneficial title may either be held by the owners as joint tenants or tenants in common. Under the latter, each co-owner has a notional share in the property which they are free to dispose of as they wish. This enables the co-owner’s share of their property to pass under their Will when they die. When the beneficial interest is held on a joint tenancy, the property passes on the death of one of the joint owners to the survivor/s. Severing a joint tenancy to create a tenancy in common has therefore signifciant implications with regard to how the property passes on death. The case of Quigley v Masterson illustrates the importance of getting this procedure right. For details of the case, and information on how Druces could help you with severing a joint tenancy, please see our briefing note Quigley v Masterson.
Charity Commission Not Appealing Public Benefit Ruling
It has been reported that the Charity Commission has decided not to appeal against the decision in the case of the Independent Schools Council v Charity Commission for England and Wales and others  UKUT 421 (TCC). The case, which was heard by the Upper Tribunal (Tax and Chancery Chamber), concerned guidance issued by the Charity Commission following the introduction of a public benefit test under the Charities Act 2006. The guidance, which suggested that many Independent Schools would not meet the test’s requirements, was challenged by the Independent Schools Council through Judicial Review. While overall the ruling did not provide the clarity hoped for in the area of public benefit, it offers an interesting insight into the charitable position of Independent Schools. For further information on this case, including some examples of when an Independent School would qualify as a charity, please see our briefing note Charity Commission and Independent Schools.
Proposed Statutory Test For Residence Postponed
In June last year, HM Treasury produced a consultation paper proposing new statutory tests for individuals. This was a response to the UK’s current residency rules which have been widely criticised. The Government wanted to produce a transparent, objective and simple test with the aim of providing certainty for individuals and businesses. However HM Treasury announced in December that the statutory residence test will take effect from April 2013, a year later than planned. It appears that the 12 week consultation raised a number of detailed issues which require careful consideration to ensure the legislation achieves its aim. The Government’s response to the consultation is expected to be made around the time of this year’s Budget. The reforms to the taxation of non-domiciled individuals announced in Budget 2011 will however be included in this year’s Finance Bill. These changes include the introduction of a higher £50,000 annual remittance charge, a new relief to encourage business investment and technical simplifications to some of the existing non-domicile rules. For a Briefing Note explaining the basic rules relating to domicile and residence and their impact on UK taxation, please see our briefing note Domicile and Residence.
Legacies: Too High A Price For Charities?
Many people choose to leave a cash legacy or even the entirety of their estate to a charity. Occasionally such legacies are challenged by disgruntled beneficiaries or individuals who have been excluded from the Will altogether. This challenge may involve argument as to the validity of the Will, or that the testator has failed to make reasonable financial provision for the claimant. This presents a problem for the charity; on the one hand, they have a duty of care to make sure that they receive the monies which are due to it. On the other, the costs of pursuing the legacy may be inhibitive. It is important to balance the merits of the claim against the prospects of success. However a Charity should not be afraid to assert their rights if a legacy has been legitimately left to them. For further information, please click Charities and Contested Legacies.
Administering an Estate
Administering an estate means ascertaining the assets and liabilities of a deceased person, confirming the authority of the executor or administrator, settling the tax position, and distributing the assets in accordance with the Will. Our briefing note Administering an Estate provides guidance as to these requirements.
Lasting Powers of Attorney
Lasting Powers of Attorney (LPAs) are an effective way of dealing with a person’s affairs should they suffer a major illness or become mentally ill or lose their capacity to deal with their own affairs. Our briefing note Lasting Powers of Attorney provides further details.
Strict approach to the rectification of wills: Marley v Rawlings & Anor 
A recent decision in Marley -v- Rawlings demonstrates the strict approach Courts take in respect of applications to rectify Wills. Mr Marley had been treated like a son by Mr and Mrs Rawlings. He was to inherit their entire estate under the terms of their Wills, which were signed at the same time. However, in error, Mr Rawlings signed Mrs Rawlings’ Will and Mrs Rawlings signed Mr Rawlings’ Will. This error was not noticed on the death of Mrs Rawlings. When Mr Rawlings died and the mistake came to light, his two sons challenged the validity of his Will.
Mr Marley applied for the Will to be rectified using a statutory procedure. The Court found that through signing his Wife’s Will instead of his own, Mr Rawlings had not intended to give effect to his own Will. Therefore, it lacked the requisite formality under the Wills Act to be valid. As the Will was not valid, it was not possible to rectify it. A full briefing note on this decision will be published shortly. In the meantime, please contact Richard Monkcom, Head of Druces’ Private Client team for more information