LEVEL 6 UNIT 21 PROBATE PRACTICE SUGGESTED ANSWERS JANUARY 2015

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1 Note to Candidates and Tutors: LEVEL 6 UNIT 21 PROBATE PRACTICE SUGGESTED ANSWERS JANUARY 2015 The purpose of the suggested answers is to provide students and tutors with guidance as to the key points students should have included in their answers to the January 2015 examinations. The suggested answers set out a response that a good (merit/distinction) candidate would have provided. The suggested answers do not for all questions set out all the points which students may have included in their responses to the questions. Students will have received credit, where applicable, for other points not addressed by the suggested answers. Students and tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners reports which provide feedback on student performance in the examination. Memo to Anita Zaman Question 1(a)(i) The facts state that the first named executor in the Will has predeceased and the surviving executor is renouncing probate due to family commitments. The consequence of this is that there is a will but no executors to take out the grant. A grant of Letters of Administration with the Will is therefore required. Entitlement to take out the grant is set out in rule 20 of the Non Contentious Probate Rules. The order of priority follows the entitlement under the Will. In the absence of executors and trustees (paragraphs (a) and (b)), under paragraph (c) the residuary beneficiaries are entitled, including one for life. As the Will creates a life interest and there are minor beneficiaries, two administrators are required. Elizabeth, Fiona and Richard are entitled, though practically it may be better to have Elizabeth and Fiona appointed, as Richard is away a lot, and Fiona has relevant professional experience. Question 1(a)(ii) The gross free estate passing through the hands of the personal representatives is as follows: Personal items Sole bank account Cash in house Sole building society account Share portfolio Car MG 10, , , , , , , Page 1 of 8

2 Less debts: Credit Card Funeral Net free estate 2,800 4,500 7, , The house and joint bank account pass by survivorship and are not included in the free estate. The holiday house was given away and is only treated as a gift with a reservation of benefit (GROB) for inheritance tax purposes. Question 1(a)(iii) The value of the taxable estate is as follows: Half value of family home Personal items Half joint bank account Sole bank Cash Shares Car MG House in Staithes Gross estate before exemptions Deduct debts: 375, , , , , , , , , (no discount as married) GROB as donor continued to use up to death Credit Card 2,800 Funeral 4,500 7, Net estate before exemptions 913, Spouse exemption will apply to all of the above except the holiday house in Staithes and the value of the legacies under the will. Section 18 IHTA 1984 still applies where property passes to a spouse under a life interest. After deduction of debts and spouse exemption the value of the taxable estate would be below the inheritance tax threshold. However, because of the gift with a reservation of benefit it will be necessary to complete the IHT 400. Question 1(a)(iv) Generally a will speaks from death as regards the estate comprised in the will unless a contrary intention is shown by the wording of the will. Use of the word my with a specific gift creates such a contrary intention and the will is construed as referring to the item in existence at the date the will is made. If this item no longer exists the gift fails. This is the case with the MG motor car. The facts state that the MG referred to in the deceased s Will was sold and replaced with a different MG. The beneficiary is not entitled to take this in substitution. Page 2 of 8

3 However here, the beneficiary has also been given a pecuniary legacy of 10,000. Under s41 Administration of Estates Act 1925 the personal representatives could appropriate the MG in part satisfaction of the legacy. The value will be taken as at the date of appropriation. The beneficiary would need to consent and would be entitled to receive the balance of the legacy in cash. Question 1(b) Page 3 of 8

4 Question 2(a) Under s32 Trustee Act 1925 trustees of a life interest settlement may at any time pay or apply capital for the advancement or benefit of those beneficiaries who are entitled to capital on the death of the life tenant, Elizabeth Maitland, that is Fiona Bishop and Richard Maitland. The Inheritance and Trustees Powers Act 2014 allows the whole sum to be advanced. (Note to students credit was given for stating the position under the Trustee Act 1925.) Any monies advanced must be brought into account on the death of Elizabeth. The prior consent of the Elizabeth is required because the consequence of advancing the capital in the trust fund will be to reduce the income generated by the fund and available for the life tenant. Provided the money is considered to be for the advancement or benefit of Fiona and, or, Richard and Elizabeth is agreeable (which she appears to be) this would be possible. Assistance with a house purchase would qualify. There will be some tax implications for the trust and for Elizabeth which need to be considered. It will not be possible to advance any money from the trust to or for the benefit of Elizabeth s grandchildren as they are not named as beneficiaries of Jonathan s Will. Question 2(b) The inheritance tax consequence of any payments out of the trust to the remainder beneficiaries would be that these would be treated as potentially exempt transfers ( PETs ) by the life tenant, Elizabeth. There would be no charge to inheritance tax at the time of the transfers but the payments would be brought into account in the event Elizabeth died within 7 years of the transfers. It may be possible to reduce the value of the transfers brought into account by use of the annual exemptions of the life tenant if these had not already been used up. The total net value of any transfers brought into account would reduce the amount of Elizabeth s nil rate band on her death, that is the amount of her estate that is taxed at 0%. If assets from the trust were sold to fund any payments then the trustees would be liable for capital gains tax on any gains over the trust annual exemption at the trust rate of 28%. No capital gains tax is payable if cash funds from the trust are used. It is not possible to hold over any capital gain to a future disposal because there is no simultaneous charge to inheritance tax at the time of the transfers, these being PETS. Question 2(c) The beneficiaries, Elizabeth, Fiona and Richard, could effect a deed of variation of Jonathan Maitland s will. An election needs to be made under s142 Inheritance Tax Act This needs to be done within two years of the date of death so there is still potential to do this. The beneficiaries can decide how to share the capital absolutely between them or provide for some of the capital to go to the grandchildren. Funds could also be put into a trust for the grandchildren, although there are no additional tax advantages to this, as this would not qualify as a trust for bereaved minors. Page 4 of 8

5 The varied dispositions would be treated as coming from the deceased direct and the estate taxed accordingly. Any funds directed away from Elizabeth would no longer be spouse exempt and above the balance of Jonathan s nil rate band would be taxable at 40%. This could give rise to a tax bill for the estate and the original personal representatives would need to join in the election to vary the terms of the will. The family could arrange the variation to avoid or minimise exposure to IHT by restricting the amount passing to non exempt beneficiaries to within the balance of Mr Maitland s nil rate band. Any capital passing absolutely to Elizabeth will remain spouse exempt. Elizabeth could carry out further tax planning with any funds she receives absolutely by making use of her annual exemption and making PETS. A similar election can be made for capital gains tax purposes, whereby the dispositions are written back to the will of the deceased, Jonathan. In this case there is no capital gains tax as there is no charge on death. An election needs to be made under s62 Taxation of Chargeable Gains Act Question 3(a) Suggested contents of memorandum to Anita Zaman There are risk management and professional conduct issues to be considered here. For a will to be valid the testator needs to have testamentary capacity and intention (knowledge and approval) and there should be no duress. Sections 1-3 of The Mental Capacity Act 2005 define testamentary capacity. For making a will, old case law is still relevant. The test in Banks v Goodfellow (1870) should be applied. The testator must understand the nature of the act, the extent of her property and the claims to which she ought to have regard. We are dealing with an elderly client here who appears to have testamentary capacity but this based on what the client s son is saying. We have not met the client before. There is some suggestion the client is forgetful, which should be explored, but this does not necessarily mean a lack of capacity. Questions should be asked of the client to establish testamentary capacity exists at the time instructions are given. If you are in any doubt you should seek the client s permission to get a medical report. The testator must also have the intention to make this particular will. In light of the telephone call there may be elements of duress and undue influence here from the client son. We should follow the golden rule: The client should be seen alone to establish what her intentions are. Clear case notes should be taken in the event the will is challenged and you should record your view of the client s demeanour and reason given for the change to the will. Page 5 of 8

6 Although intention is presumed if will is rational on face of it, and it is for the propounder (which here would be sister) to prove lack of intention, the firm s notes could be required as evidence. Larke v Nugus (2000). Also you should advise the client on potential claims under the Inheritance (Provision for Family and Dependants) Act 1975 on the ground reasonable financial provision has not been made by the will if a child of the testator is excluded in some way. Question 3(b) Suggested contents of memorandum to supervisor At execution you should again check for testamentary capacity though, provided this exists at the time of giving instructions and the client knows this is the will for which gave she gave instructions, this is sufficient under the case of Parker v Felgate (1883). Because of the client s sight issues no presumption of intention/knowledge and approval can be taken from the face of the will. The will needs to be read over to the testator to confirm knowledge and approval. The attestation clause should reflect this. Two witnesses are required. The witnesses must not be beneficiaries so must not be the client s son or daughter. One of the witnesses could be the client s doctor who should make a note confirming capacity. The relevant test above should be explained. It would be preferable for you to be the other witness and again a clear file note should be taken setting out the circumstances and how execution is effected. Question 4(a) Suggested contents of letter to Max Sherman. The duty of the executor is to collect in the estate, discharge all debts and pay the beneficiaries. Although there are considerable debts the estate is solvent as there are sufficient assets to cover these together with the funeral, testamentary and administration expenses. It is irrelevant whether the legacies can be paid in full. On the basis of the information you have given to me the debts amount to 40,400 and the assets you have identified amount to 75,400. After payment of all debts there is only 35,000 left over which is not enough to pay the cash legacies in full. There is a statutory order for payment of debts in this case, therefore the money set aside for the legacies to your sister and yourself will have to be used. As you were to receive equal sums the legacies will in effect be reduced proportionately and you will receive whatever is left between you. Because there is sufficient in the cash legacies to cover the debts your mother will be able to keep her legacy of the personal items in full as this type of legacy takes priority over money legacies. In terms of protecting yourself against unknown creditors, under a statutory provision, s27 Trustee Act 1925, executors may give notice of their intention to distribute the estate requiring any person interested as a beneficiary or creditor Page 6 of 8

7 to send particulars to the executor within a stated time which must not be less than two months from the date of the notice. The advert should be placed in the London Gazette and in a paper circulating in the area where David s business was situated. Once the time limit has expired you are free to distribute the estate having regard only to claims of which you have notice and you will not be personally liable to any claimant who subsequently appears of whom you had no knowledge. However, a Creditor can still seek to recover unpaid debts from a beneficiary. Notice should be given as soon as possible and a bankruptcy search will also need to be carried out against David s name. You also need to wait for 6 months from the date of the Grant of Probate before distributing the estate to ensure that there are no claims against the estate under the Inheritance (Provision for Family and Dependants) Act Question 4(b)(i) Suggested contents of memorandum to Anita Zaman. Section 21 Wills Act 1837 provides that alterations to a will are invalid if made after execution. There is a rebuttable presumption that alterations are made after execution and there is nothing to suggest otherwise in this case. As the alteration to Max and Naomi s legacies are invalid, and because the original wording is apparent, the original gift will take effect so Max and Naomi will each receive a third share. However, the fact that the reference to Judith s share of residue has been completely obliterated is an exception to the rule under s21 except so far as the words before such alteration shall not be apparent. This is in effect a revocation of this part of the will and, provided David had the intention to remove Judith s bequest, this will be effective. The residue is expressed as distinct shares and as there is no saving provision for failed shares one third of the residue will pass on partial intestacy of David s estate. As David now has a child the child will take this one third share on the statutory trusts, i.e. contingent on attaining age 18 or marrying earlier. Question 4(b)(ii) Suggested Contents of memorandum to Anita Zaman. Under the Inheritance (Provision for Family and Dependants) Act 1975 application may be made for an order that the disposition of the deceased s estate under his will or intestacy does not make reasonable financial provision for the applicant. Page 7 of 8

8 Claims must be made within 6 months of the issue of the grant of representation which protects the personal representative if the estate is distributed after this time. Claimants must fall within one of the categories of the Act. Judith was not married to David and also does not fall within the category of cohabitant who has been living during the whole period of two years ending immediately before the deceased s death as the wife of the deceased. Judith does not appear to have been maintained by the deceased immediately before the death of the deceased as she appeared to own the property in which they had been living. Further details would need to be obtained to see if David had been paying Judith anything towards her living expenses up to his death. A child of the deceased is an eligible applicant so a claim could be made on behalf of David s child. The court needs to decide if reasonable financial provision has been made under the deceased s will or intestacy. Reasonable provision is what is reasonable in all of the circumstances for maintenance. In deciding whether reasonable financial provision has been made the courts is directed to consider common guidelines applicable to all applicants: The financial needs and resources of the applicant and any other applicant or beneficiary. The deceased s moral obligations. The size and nature of the estate. Physical and mental disability of any applicant or beneficiary. Any other matter, for example, the conduct of the applicant; and special guidelines, in this case the manner in which David s child might expect to be educated. In terms of resources the one third share of the estate passing under the partial intestacy will provide a fairly substantial capital sum. This will be held on trust until the child is 18 but s31 Trustee Act 1925 allows for maintenance and s32 allows for capital sums to be advanced for maintenance or benefit. In terms of resources from the child s other parent, this will depend on Judith s financial position and how she plans to maintain the child. The deceased has a moral and legal obligation to maintain his child but this may be discharged by the partial intestacy sum. There is no suggestion at the moment that Judith is proposing to claim on the estate personally or on behalf of their child. A claim must be made within 6 months from the grant after which time proceedings can be commenced only with leave of the court - there has to be good reason. Page 8 of 8