Legal rights. Legal wrongs? Automatic succession rights and disinheritance in Scotland

“So you get nothing! You lose! Good day, sir!” Willy Wonka

A recent case surrounding one James Harley’s estate provides a relatively rare opportunity for a court to examine the thorny topic of ‘legal rights’. ‘Legal rights’ are Scottish rules that provide automatic rights of succession to spouses/civil partners and children. These succession rights apply irrespective of the terms of a will. They provide what is sometimes described as a protection from disinheritance.

The case centred on issues of executry practice and the process around obtaining confirmation (aka probate), the approach to settling a legal rights entitlement and the valuation to be attached to a legal rights entitlement. The latter being important to the decision in this case and at the heart of any legal rights computation and negotiation.

The James Harley estate case

James Harley’s estate included a shareholding in a private company. For the purposes of obtaining confirmation, the executors completed forms for the court setting out that the shareholding was in the estate and a value to be attached to the shares. The valuation of the shares had been carried out ‘in-house’ by the company. A later valuation carried out by a firm of accountants arrived at a different value. Importantly, the later valuation included a significant discount to be applied due to the shareholding being a minority one. For the discussion to follow in this blog this meant that the value to be attached to the moveable estate would be less.

The deceased’s son was not a beneficiary under the will. Accordingly, the automatic rights of succession found in legal rights would be is only way to inherit from the estate. So, the value of the shares would be crucial for the son’s legal rights entitlement. There was argument that the value set out in the confirmation forms was the value for legal rights and could not readily be changed. There was discussion in the decision about cases where values go up or down following a death and the impact on the value for a legal rights entitlement. But in James Harley’s estate the actual value of the shares did not change post-death.

When reading the case at first, there was for us an overarching sense that: (1) surely the valuation entered into a confirmation is not the absolutely set in stone value and (2) the real question is what was the correct value for legal rights purposes. Therefore, the true issue in this estate (as with any estate) is one of valuation. The real issue should be about valuation and getting comfort that the executor has gone about the process of obtaining a valuation properly and used an appropriate methodology.

It turned out the decision concludes by arriving at a similar view. The heart of the matter is valuation and there are processes through which a beneficiary or person entitled to legal rights can embark upon to ensure the executors properly value and account for the estate in their charge. A process known as seeking an ‘accounting’.

The court did not accede to the son’s arguments. The true question was whether or not the appropriate valuation had been reached on the shareholding. If a party was unhappy with that, the correct approach was to seek an accounting. The case is specific to its circumstances but covers lots of good ground on the issues and importance of legal rights.

Inspired by James Harley’s estate, we now turn to an overview of legal rights.

Who is entitled to legal rights?

Legal rights are available to spouses/civil partners and children. They apply to the estate of a deceased who was domiciled in Scotland. We have looked at domicile recently.

What assets form a legal rights entitlement?

Legal rights relate to a share of the ‘moveable’ estate.

The moveable estate is broadly all assets in the deceased’s personal name apart from land and buildings. So, cash, investments, premium bonds and private company shareholdings are all examples of moveable assets.

Your home, commercial property or country estate are not moveable and not part of a legal rights entitlement. It should be noted that a property owned via a company becomes part of legal rights as the asset is the shareholding not the actual property. Property held in a partnership raises further points including ways to seek to avoid the effects of legal rights on that property.

What matters is the net moveable estate. That is the moveable estate after the settlement of applicable debts and other obligations. Debts might be clear. “Other obligations” opens up considerations to manage and reduce a legal rights entitlement. That is principally owing to the effect of contracts that are enforceable against the estate. Such contracts could form an agreement as to where an asset must go on death and trumps both legal rights and the will. Possible food for thought as we will return to later.

The entitlements: the shares of moveable estate under legal rights

A spouse/civil partner is entitled to one-third of the net moveable estate if there is a surviving child. Similarly, children, as a group, are entitled to one-third, if there is a surviving spouse. Where there is more than one child, they each get a proportionate share of the one-third.

If there was no surviving spouse/civil partner, then children, as a group, would be entitled to one-half of the net moveable estate. The same applies for a spouse/civil partner if no surviving children. 

Valuation is key

That was a key conclusion in James Harley’s estate.

After we have identified what is in the net moveable estate and the proportion of the estate affected by legal rights, a value for the legal rights entitlement needs to be worked out. That value will be based on the value of the net moveable estate.

Ascertaining the value involves, in most cases, attaching a value to the moveable assets as at date of death. It is the market value at that point. In some situations a value based on events after death will be appropriate.

There can be debates over the valuation and even the appropriate valuation methodology. That will be particularly the case when dealing with the valuation of private company shareholdings. As well as there being possible arguments over methodology, there can be information flow issues. That is the ability of the e.g. child entitled to legal rights being able to access information about the company to scrutinise the valuation. As the sheriff in the James Harley’s estate case noted, it might be that a court remedy of seeking an ‘accounting’ is required. That is a way of a beneficiary or person with a legal rights entitlement enlisting the court process to interrogate the values in the estate to obtain comfort that they have been arrived at correctly. Executors have duties to those with entitlements in the estate to value assets accurately. These sit alongside duties to report values properly to HMRC for tax purposes. 

“But I want to disinherit my son!”

If you want to disinherit a spouse/civil partner or child some thought is required.  We should say that not all attempts at disinheritance follow from a family feud. There may be situations where one wants to restrict what someone inherits in order to actually provide for a beneficiary but in a more appropriate way to their individual circumstances. Classic examples of this tend to relate to providing for disabled or incapable family members as well as younger children.

A will cannot limit legal rights in the estate of the person who made the will (we will return to this). Action must be taken during life to alter the net moveable estate. That will involve either changing moveable assets into land etc, funding wealth outwith the personal estate such as pensions, gifting assets, putting assets in trust, entering into certain contractual obligations and even creating debt.

The important point is these steps must be taken before death. At date of death, the legal rights entitlement crystallises. It is then an entitlement that needs to be settled before then distributing the estate under the terms of the will. Those entitled to legal rights take their entitlement in preference to the beneficiaries under the will. It is as if the legal rights is a debt to be settled. 

If Maslow had turned attention to estates where there is a will, the hierarchy would be as follows:-

Tax

Funeral expenses

Secured debts

Other debts 

Legal rights

Beneficiaries under the will

The right kind of will can reduce legal rights in another’s estate

We said we would return to the role of wills in reducing legal tights. We said a will cannot solve the legal rights problem for the estate of the person who made the will. However, the right kind of will can prevent the legal rights situation in someone else’s estate being made worse. If, for example, husband and wife wish to restrict the inheritance of a child, the right kind of will by the first spouse to pass away can help reduce or avoid the effects of legal rights in the surviving spouse’s estate.

For some, don’t make a will… shock news!

In some cases, by not making a will legal rights can be avoided. This applies where there is a surviving spouse/ civil partner. A surviving spouse/civil partner where there is no will (i.e. interests estate) has additional rights called prior rights. These relate to the house (up to £473,000), cash and furniture in the house. So, if there is no will, the spouse will take up to £50,000 cash and up to £29,000 in furniture before then turning to legal rights. Prior rights sit above legal rights in the hierarchy. But this only applies where there no will. The strategy of having no will depends on the value of the estate and the assets in the estate. If prior rights exhaust the estate, then great as far as knocking out the child’s legal rights! Get the values wrong with no will and there is a sting the tail. After prior rights there is legal rights and then the rest of the estate after that would be inherited by children. 

Care needs to be taken before embarking on the intestate/ no will strategy. 

Happy families… usually no legal rights are taken

When legal rights is an issue, it is a big issue. But for most estates it passes as an academic exercise. Children have legal rights but they do not accept them and the estate passes in terms of the will.

An aside on European succession and European versions of legal rights

Other countries have versions of legal rights. England does not (but has a court based system for some disappointed beneficiaries). 

For Scottish people, overseas legal rights issues are a possibility where that other country applies some form of legal rights to land and buildings situated in that country.

If e.g. the French equivalent of legal rights might cause your estate an issue because you own a French holiday villa and don’t want a child to inherit part of it, when making your will arrangements in Scotland and France, consideration should be given to the EU Succession Regulation. And that is still the case post-Brexit. You may be able to elect out of the the effects of the French rules. 

Key takeaways 

• Legal rights exist for Scottish estates

• They apply to spouses/civil partners and children 

• The value of the net moveable estate is critical

• One can manage or even avoid legal rights with action taken during life

• Not all about Scotland- consider any foreign versions of legal rights

For help and advice on succession matters (including legal rights, disinheritance and being a disappointed beneficiary), 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

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

Alan Eccles… a Legal Influencer for Private Client (UK) – Lexology Marketing Award

Alan Eccles is the Scottish contributor to the textbook, International Succession.

Tony’s advent calendar: a Christmas tale of the disappointed beneficiary

Tony’s Chocolonely advent calendar created a storm on 8 December. There was, deliberately, no chocolate in that door. It was apparently designed to highlight inequality in the chocolate industry. For now, we will leave others to discuss that. It also seemed to cause disappointment. On that we will pick up. And teleport to the world of the disappointed beneficiary and the contentious estate with help of what happened with that advent calendar.

The Tony’s Chocolonely advent calendar: the moment of opening 8 December and the aftermath

At the moment of opening that fateful advent door, the first thing that seemed to happen was shock.

“Where is the chocolate? I had expected a chocolate.”

Then there would have been the disappointment. Was expecting chocolate. Now not got chocolate. Sub-optimal.

The disappointment will then be infused with questions. How and why could this have happened… to me? There will be possibilities:

Mistake. It was never meant to be empty. If it was a mistake, there must be a way to fix the mistake… or blame someone. The chocolate was supposed to be there but there was a failure to fill that door? Are there ways to rectify what has happened?

Capacity. Is this indicative of a lack of capacity to make an advent calendar? The whole calendar might be invalid!

Undue influence and ‘facility and circumvention’. Somebody has interfered with the calendar production process and that has resulted in the missing chocolate. Indeed, has someone diverted that chocolate to themselves?!?

A failure to account. We were supposed to get 25 chocolates and appear to have only got 24. Those responsible for the calendar have duties and need to account for this and make good any shortfall. (*spoiler alert* the Tony’s calendar has a full complement of chocolates)

And after those questions will come a desire for justice. How do we sort this issue out? How do we get our chocolate back? There might or might not be grounds for it to be remedied.

The real answer in Tony’s was of course more shocking. It was a deliberate omission! You were not to get that chocolate… or at least not to get it on 8 December. Sometimes one is disappointed because someone else did not want them to get something. Or they have conditions and controls on that chocolate as to when and on what basis you are to receive that chocolate (like a trust!). It also highlights that someone can choose not to give you a chocolate and they don’t have to have a good reason. Or indeed any reason. And worse still, they can be capricious and spiteful! Tony’s position is they did have a good reason.

It seems that in some cases parents jumped to the rescue. They bought replacement chocolate. Seemingly on the basis that the opener of the advent door had some sort of fixed chocolate entitlement. Such parents stepping in with an alternative chocolate offering as a protection from disappointment. As if they were ‘legal rights’ in this story of succession disappointment. Legal rights being a fallback for certain family members in a Scottish estate.

So, as with empty advent calendars, succession can cause disappointment. There can be a variety of reasons behind the disappointment. Some of which can result in actions to unravel the disappointment and get back to where you wanted to be. In some cases there will not be a solution… bah humbug or maybe you were just on the naughty list.

Merry Christmas.

For help and advice on succession law issues (or eating chocolate), 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

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

Alan Eccles… a Legal Influencer for Private Client (UK) – Lexology Marketing Awards

Disinheritance: that’s not fair!

The British Columbia Supreme Court has decided that a father’s will should be varied to reflect his ‘moral obligation’ to his adult daughter when there was an unequal division of the estate between her and her brother.

Could that happen in Scotland? Can you disinherit a child under Scots law? What are the rights of a child or spouse/civil partner in an estate? What happens if you get less from an estate than hoped? All that, and may be more in this blog.

What happened in Canada?

The deceased left a will splitting the estate 50% to his son and dividing the other 50% equally among his daughter and her children. The daughter was disappointed by this division and sought under the law of British Columbia to ask the court to vary the will and the division of the estate. The variation was sought on the basis that the father had failed to discharge his moral obligations to his daughter. The relevant legislation allows a court to consider whether or not a deceased has made “proper maintenance and support for a spouse or child” and if they have not, the court may set out a division of the estate which it thinks is “adequate, just and equitable in the circumstances”.

The court weighted up a number of factors including provision made for the son outside of the estate, the relative financial positions of the son and daughter and also that the daughter is disabled. The son argued that making provision for the grandchildren was right and given the daughter’s apparent inability to manage money, this ensured the grandchildren would receive an inheritance.

The court decided that the father had not fulfilled his primary moral duty to support his children. It was irrelevant that the deceased had benefited both sides of the family equally. The court ordered, based on this moral duty and the children’s respective health and financial circumstances, that the estate should in fact be divided as follows: one-half to the daughter; one-third to the son and one-twelfth to each of the grandchildren.

Could this happen in Scotland?

The short is ‘no’. It is not possible in Scotland to ask the court to alter an estate on the basis that it was an unfair division. Yes, if there are allegations that, for example, the deceased did not have capacity or there was undue influence, a court challenge can be raised to strike down the will. But that is on the basis the will is invalid rather than it containing an unfair division. Of course, the reason to seek to challenge a will’s validity could be due to perceived unfairness.

So, spouses/civil partners and children are left ‘high and dry’ in Scotland?

The short is answer is ‘no’. Unlike jurisdictions such as British Columbia or England, Scotland has, like France, a system of ‘forced heirship’. Scottish forced heirship is known as ‘legal rights’. Legal rights creates automatic, fixed entitlements for spouses/civil partners and children. Legal rights apply irrespective of the terms of the will. Systems like England and British Columbia have court based discretionary processes to offer some protection from disinheritance.

What are the legal rights entitlements?

If a deceased is survived by a spouse/civil partner and children, the spouse/civil partner is entitled to one-third of the net moveable estate and the children, as a group, are similarly entitled to a one-third share.

If a deceased is survived by only a spouse/civil partner, then the spouse/civil partner is entitled to one-half of the net moveable estate.

If a deceased is survived by only children, then the surviving child/children is entitled to one-half of the net moveable estate.

It is also worth noting that a legal rights entitlement is one of cash. The positive is that avoids a force break-up or sharing of assets, but it might create a pressure to fund the cash requirement.

Those entitled can also take their time to decide what to do. If someone entitled legal rights felt they were receiving too little from the estate, they might simply prefer to cause a little nuisance. They can wait 20 years to make a decision(!) and all that time the estate needs to be ready to settle the entitlement should it be asserted.

The moveable estate is essentially all assets excluding land and buildings. Care should be taken with land that is held in a company as it will be treated as moveable. Partnership agreements should also be reviewed to confirm how land held in a partnership is to be treated for legal rights purposes. In some cases it will be important to not accidentally and unthinkingly enlarge the amounts that someone is entitled to under legal rights by restructuring land and buildings into a company.

But I want to prefer one child over another!

While a will would allow someone to say their entire estate is to pass to one particular child, that is still subject to legal rights entitlements. So, to pass more of an estate to one child, it may be necessary to take action during life to restructure their estate or alter how the preferred child inherits (part of) the estate. Because legal rights is based on the value of the moveable estate held in the deceased’s name immediately before death, moving assets out of their name or otherwise reducing the value of the net moveable estate will be key to minimising or avoiding a child’s legal rights entitlement. The use of pensions, trusts, policies and contracts can all be part of the planning to control legal rights. The impact (and advantages) associated with some tax rules also need considered with legal rights planning.

Those with assets such as large investment portfolios, cash or private business holdings should take particular care with legal rights.

I don’t like legal rights: I’ll emigrate to avoid it!

A potentially bold option. But as we have seen with Canada and noted in passing about England, most countries have some system to protect those you are (in whole or part) disinherited. Systems like British Columbia or England have the uncertainty of a discretionary court approach: everything is up for grabs and in the air. Scotland and others have more rigid entitlements, but at least you can try and plan around the rules in the knowledge that there is no British Columbia-esque legislation to unpick an estate.

As an aside, I am part of the writing team for the book, International Succession and it is notable that each chapter on each country covered in the book looks in detail at rules on disinheritance.

Protecting beneficiaries

One for another blog perhaps, but worth reflecting on the point raised that the Canadian case’s deceased apparently wanted to ensure some inheritance passed to his daughter’s children and also to recognise her issues with financial management. If protecting family wealth and holding it safely for (but away from the own hands of) a beneficiary is desired, then a mix of lifetime planning and the right will is required in Scotland. There can also be legal and even emotional value in preparing a letter of wishes to accompany a will and other steps in that situation. A letter of wishes can provide guidance on your aims and also help with any explanation of those aims.

Voluntary variation: deeds of variation

We have previously talked about the valuable ability to vary an entitlement in an estate following a death. This can have various succession and tax advantages. You can read a blog on that here.

For help and advice on succession issues including legal rights or being a disappointed beneficiary, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07359001038.

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory