Spooky but with treat not trick: deeds of variation

What’s more ghoulish than private client law. Death this, calamity that!

Sometimes private client law can work in spooky ways. One that allows the will of a dead person to be changed. Yes, you heard that right. And in doing so to save tax, support charity or hold an inheritance in a better and more appropriate way to suit a beneficiary and their family.

The trickery we speak of is a a deed of variation. But it is not really trickery and is something that is (or at least should be) considered regularly in estates. In some ways the ‘trickery’ is that the deed of variation legislation treats what is decided to happen post-death as legally having happened at date of death and as if that was in the deceased’s will. The rules also give some unique inheritance tax opportunities. A real treat and no trick.

What is a deed of variation?

A deed of variation is a document. The document must contain certain key requirements prescribed in the tax legislation. It must be completed within two years of a death.

But it is much more than just a document. It feels magical!

A deed of variation allows a beneficiary to re-write history (to cast a spell, if you will). You can be transported to the past to change the future (like a time-machine). To re-write a will as far that beneficiary’s entitlement is concerned. The re-writing allows the beneficiary to create a more appropriate way to hold their inheritance taking account of their own circumstances. It also allows the re-writing to be more tax efficient than under the will.

Not only are there immediate tax efficiencies, but a deed of variation can also set the platform for future tax advantages. The effect of a deed of variation is that the re-written history replaces the position as at date of death. That can provide some unique and valuable opportunities.

What are the benefits of a deed of variation?

The time-machine characteristic brings great opportunities and flexibility. Here are a few of them:-

• A deed of variation allows a beneficiary to re-direct an inheritance to another person or persons.

• It allows legacies to charity to be made post-death. Not only does this help good causes, but could also lead to less tax for the family beneficiaries.

• Varying a will can create a protective environment. Some situations (either because of the asset or individual(s) involved) mean it is better not to have an individual(s) owning an asset personally. It could be better held in trust with the asset protection and control qualities it offers.

• Due to the time-machine, re-directing an inheritance to another person or trust is treated as coming from the estate of the deceased. Not the person doing the re-directing. It means no need to survive seven years for the re-directed (gifted) value to be out of your estate for inheritance tax purposes. Indeed, no need to survive for any period of time. Most spookily, the person re-directing might even be dead when the re-direction is done (do ask me for more on that)!

• A variation to a trust can be of an unlimited amount. Trusts set up during a person’s lifetime are limited to £325,000 (unless reliefs apply). A trust set up with a deed of variation is not restricted by that and can hold any amount.

• The normal inheritance tax rule is that you cannot continue to benefit from something you have gifted. Not so with a deed of variation. A variation of an inheritance to a trust has the extra bonus of being outwith your estate AND that value can still be accessed and enjoyed by you.

• A deed of variation can minimise or avoid certain potential capital gains tax liabilities.

• As well as re-writing a will, a deed of variation can be used where there is no will. It can play a part in resolving difficult claims where a cohabitant dies without a will.

Deeds of variation are great, but not a reason to avoid reviewing a will!

The re-direction of an inheritance has been with us forever really. The inheritance tax benefits have been with us for decades. But the benefits could be taken away.

There have been at least two serous reviews of the ability to use a deed of variation. So, it is better to keep a will under review than rely on your beneficiaries being able to use a deed of variation to ‘sort’ any issues. Also a deed of variation reflects a beneficiary’s own circumstances, which you might not know (or they change). Your will is the opportunity to set out what is important to you. Indeed, your will can be an opportunity to avoid a beneficiary seeking to re-write certain things!

An up-to-date will can avoid beneficiary’s being spooked when they see the will and avoid them then needing to consider re-writing portions of it.

For help on estate planning and succession law, get in touch with Alan Eccles – alaneccles@bkf.co.uk / 07359001038.

“Alan is a caring and empathetic private client solicitor who is dedicated to providing the best outcomes for clients. He has the technical knowledge and professionalism to meet client needs.”

“Alan is a very articulate individual who is clearly an expert in his field.”

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Everyday is a succession law school day… even when it is a university day

It is great to make a return to in-person teaching at the University of Strathclyde. The succession law material students are turning their attention to for the first time makes you reflect on some of the fundamentals of the area. And reflect on key points that people should be thinking about (or aware of) in estate planning.

Here are some of those fundamental issues that have an impact on who succeeds, to what and on the basis of an inheritance.

Legal rights – automatic rights of spouses/civil partners and children

Scotland has a system of forced heirship. Or protection from disinheritance, whichever way you want to look at it. This matters as it can affect how an estate is to be inherited. A spouse/civil partner and children have a fixed ‘legal rights’ entitlement. This needs to be taken into account.

In some cases (where the plan is to limit or avoid e.g. a child’s inheritance) action needs to be taken during life to reduce (to nil?) a legal rights entitlement. A will alone cannot control the child’s inheritance. Attention might need to turn to making gifts, passing assets to trust (including where the person making the gift is able to benefit from the trust), entering into certain obligations and contractual arrangements as well as considering the balance of an estate between land/buildings and moveable assets (cash, investments etc).

Reducing a legal rights entitlement is not always about disinheritance. In some cases it is about asset protection. To have assets managed for a beneficiary in a robust and protective legal environment (a trust) rather than passing to be held by them in their own personal name.

An unmanaged legal rights situation can also create a less attractive tax outcomes. It can also put pressures on the estate to produce cash for someone taking their legal rights. Legal rights is a right to cash rather than a share of any of the assets in the estate. That can be positive in the sense that someone cannot claim e.g. a portion of a family business or share portfolio. Less positively, it means cash might need to be found and early. Early as legal rights work like a debt and need to be settled before distributing the remainder of the estate.

Legal rights applying to a spouse/civil partner also underlines that while that relationship subsists, legal rights exist. Unless the relationship has formally ended (divorce or dissolution) or there has been a separation agreement covering succession matters, an estranged spouse/civil partner will still have rights in your estate.

The laws of intestacy might deal bad cards

Having a will is invariably preferable to falling back on the laws of intestacy.

Intestacy brings extra process. You need to apply to the court to appoint an executor and an insurance contract (a ‘bond of caution’) is needed to cover the value of the estate.

As well as additional procedure, the laws of intestacy might not always give the expected result. Depending on the value and make-up of the estate, your assets might not simply pass to who you think is most obviously going to inherit. In some situations (and it does really happen!), the law prefers that a significant portion of your estate will pass to the sibling you don’t like rather than your spouse!

A will puts you in as much control as possible and creates as much certainty as possible. The laws of intestacy can deliver some unexpected, random and even unpalatable outcomes.

We talked about spouses and civil partners above. When it comes to intestacy, matters can be particularly unattractive for cohabiting, unmarried, partners. For cohabitants, a will is to be especially recommended.

Intestacy can be gamble.

It is not always humans that inherit

In many wills the main beneficiary(ies) will be human beings. But other ‘persons’ can inherit too.

Charities and non-charitable organisations can be beneficiaries.

That might be a standalone financial legacy, the gift of a thing or a share of the residue.

Bequests to charities are important income source for charities to carry on their important work.

A legacy to a cherished organisation, but that is not a charity is also a possibility. In those situations, there might be consideration of whether or not there is a route to support that does benefit from the charity exemption for inheritance tax. That takes us to the next matter.

You can ‘rewrite’ a will

It always worth remembering in estate planning the ability to enter into a deed of variation (or family arrangement) to alter the terms of will. A post-death planning step not to be missed. Either to secure a beneficial future estate planning outcome or to better implement support for an organisation (possibly via charity). For us, that latter situation has previously brought up one ‘out of this world’ example of doing this.

“I’m a survivor!”

Destiny’s Child song about succession law (ed: is that quite accurate?) is a good one to remember for many reasons.

It brings up issues around when you inherit. Is it enough to have not predeceased? Is it enough to survive? Does the will set out a required time period to survive? It also reminds us of issues around when someone does inherit but dies before receiving and enjoying an inheritance. There are matters to consider in such situations and also estate planning points.

Surviving also raises the topic of ‘survivorship’ destinations and provisions. Survivorship destinations sometimes crop up in title to houses. It means that the title deeds control who inherits rather than a will. In many situations it will be better to have the will control what happens and to avoid having or to remove the survivorship destination from the house title.

Survivorship destinations can appear in the title to other assets… including investments. Similar thoughts apply to the house title point.

And it is not always just about survivorship destinations in the title. There might be survivorship provisions in contracts (account terms and conditions, investment management agreements, platform terms) that operate to dictate how assets are to be inherited. These can also affect what happens with a legal rights entitlement. So, in some cases, understanding how ‘survivorship’ impacts on succession planning is critical.

Never forget the fundamentals

There are of course many other points to think about in estate planning. But remembering some of the fundamentals of succession law is important. These fundamental rules, if not actively considered, can (adversely) affect what somebody is trying to achieve in passing wealth to or for the benefit of their loved ones and chosen causes.

For help and advice on succession law issues, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

“Alan Eccles is an excellent lawyer with a brilliant manner with clients – he relaxes them and builds confidence,” while another comments: “He is diligent, makes the complex understandable and is very approachable.” Chambers High Net Worth 2021 directory

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