LEVEL 6 - UNIT 21 PROBATE PRACTICE SUGGESTED ANSWERS - JUNE 2011

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1 Note to Candidates and Tutors: LEVEL 6 - UNIT 21 PROBATE PRACTICE SUGGESTED ANSWERS - JUNE 2011 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 June 2011 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. Question 1 (a) Memorandum to Mr Wu explaining aspects of the IHT liability (i) Paula s estate for IHT purposes consists of: Property passing under her will - House Hillside 400,000 House contents 20,000 Cash & investments 200,000 and Property in which she had an interest in possession - Trust fund supporting her life interest 100,000 Total 720,000 gross IHT estate Less Debts 4, ,000 net IHT estate Deduct available Exemption - Charity legacy 10, ,000 chargeable IHT estate No evidence of prior chargeable transfers (including failed PETs), so first 325,000 charged at 0% and balance of 40% = 152,400 total IHT payable. Page 1 of 9

2 (ii) That part of the IHT applicable to the life interest trust is payable by the trustees of the fund no later than 30 November 2011, being 6 months from the end of the month of death. This IHT amounts to: 100,000/706,000 x 152,400 = 21, The balance of the IHT amounting to 130, is the liability of Deidre and Montague as Paula s PRs and this is also due for payment by 30 November However, the IHT on non-instalment property must be paid before the application for the grant can be made. The value of the non-instalment property on which the PRs must pay the IHT is: Total Chargeable IHT estate 706,000 Less: Trust Fund (100,000) Less: Hillside (instalment option property) (400,000) 206,000 Therefore IHT payable on application for the grant is: 206,000/706,000 x 152,400 = 44,468. The balance of the PRs liability - 86, ( 130, ,468) is attributable to Hillside and must be paid in full by 30 November The PRs have the option of paying by 10 equal instalments with the first being due on 30 November 2011 and subsequent instalments falling due (with interest) on each anniversary of that date. (b) Completion of oath for administrators (with will). See Oath form below. (This shows page 1 only. Page 2 just requires completion of the jurat with the names of the two deponents) NOTES TO CANDIDATES on the Oath form (reference numbers on the form): 1 In the will, Natalie Braithwaite is appointed executor according to the tenor. The language used by the testatrix in clauses 1 and 4 makes it clear she intends Natalie to be the executor although she does not refer expressly to her as her executor. Since Natalie has predeceased, she must be cleared off in the oath to establish the right of the applicants to the grant. 2 Since their full names do not appear in the will, the applicants need to describe themselves as the sister and brother of the testatrix to establish their identity and entitlement under Rule 20 NCPR as two of the residuary beneficiaries entitled under the will. 3 Since IHT is payable in this estate, IHT400 must be completed and the gross and net probate estate must be sworn. The value of the trust fund is not included in the gross estate figure because it is not property passing to the PRs. Also the net estate only takes account of debts and not any IHT exemption (in this case the amount going to charity). Page 2 of 9

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4 (c) Paragraphs for inclusion in a letter to the clients explaining entitlement under clauses 1 and 2 of the will. As regards clause 1 of the will, because Natalie died before Paula, its provisions can no longer take effect. Consequently, the legacy of 15,000 will not be paid and all the items of property mentioned will now be available for distribution as part of the general estate to the four of you under clause 4. In clause 2 of the will, Paula intended Michael to have the Honda car which she owned when she made the will last February. Unfortunately, having since sold the car, there is now nothing for Michael to inherit and his gift cannot therefore take effect. Furthermore, it is my view that the rest of clause 2 giving a legacy to her other nephews and nieces will also fail to take effect. This is because the amount each of them is intended to receive is dependent on knowing the value of the car at the time Paula died. However, since she did not have a car when she died, it is impossible to put a value on the legacy. These consequences are unfortunate because it means of course that neither Michael, nor the other nephews and nieces, benefit under Paula s will in the way she clearly intended. This is something that you and your siblings can rectify because you are entitled to the residue of her estate. In other words, you could agree to allow each of them a legacy out of the residue equivalent in value to what you think they might otherwise have received. If you wish to do this, please let me know and I can advise you further about what you need to do. ] Question 2 (a) Memorandum to Mr Wu explaining whether Mitchell Foster & Gibbons are correct in what they have told Marigold Fossett and if not whether she might have any form of redress. Mitchell Foster & Gibbons are correct in saying that since Estuary View was held by the testator as beneficial joint tenants with his sister, his interest passes to her automatically by survivorship on his death and so was incapable of being disposed of by his will. They are also correct in saying that Marigold is entitled to the legacy of 10,000 which she can expect to receive in due course once probate has been obtained. However, they are not necessarily correct in saying there was nothing they could have done regarding Estuary View. The courts have said that a solicitor owes a duty to check the ownership of property and the way it is held by a testator [Kecskemeti v Rubens Rabin & Co 1992]. If this is not consistent with the way in which the testator wishes to leave the property on death, then the solicitor should advise severance of a beneficial joint tenancy to create an interest under a tenancy in common which he can then give away by will [Carr-Glynn v Frearsons 1998]. The House of Lords has further said that whilst the primary duty is owed to the testator as the client, a duty is also owed in tort to a potential beneficiary who might suffer loss resulting from a solicitor s failure to carry out the above duties [White v Jones 1995]. Page 4 of 9

5 Consequently, if Mitchell Foster & Gibbons were negligent in firstly not establishing the nature of the testator s beneficial interest and secondly in not advising severance, then Marigold, as the disappointed beneficiary, may well have a cause of action against the firm. (b) Memorandum to Mr Wu advising on Marigold s proposed claim under Inheritance (Provision for Family and Dependants) Act 1975 and chances of success. Since she is a child of the deceased, Marigold could make a claim against his estate under the Inheritance (Provision for Family and Dependants) Act The claim would be for reasonable financial provision on the basis that no such provision has been made. As a non-spouse applicant, her claim is limited to such provision as is required for her maintenance. The court has a discretion and will take into account guidelines set out in s 3 of the 1975 Act including her financial needs and resources together with those of any other applicant or beneficiary, the size and nature of the estate, the deceased s moral obligations to Marigold and any other relevant matter such as the conduct of the parties towards each other and any statements made by the deceased. What might count in her favour is the fact that the terms of the will clearly suggest his feelings towards his daughter and that he wanted to leave her something substantial. On the other hand, the following factors will probably count against her: - She made little effort, if any, to contact her father despite his attempts at reconciliation; - She seems to be financially reasonably well off and unless she has specific needs or special circumstances (we would need to make further enquiries), the courts have been reluctant to make awards to adult able bodied children [see eg Re Coventry 1980, Garland v Morris 2007, H v Mitson 2009]. However, see the Court of Appeal s recent view in Ilott v Mitson 2011, overturning the previous decision of the lower court, which confirms that even though an adult child is cut out of a will, they can still be successful. On the facts of that case the court said, that when viewed objectively, making no provision for an adult child and leaving the whole estate to charity instead did not amount to making reasonable financial provision for the child; - She is entitled to 10,000 under the will which may be seen by the court as satisfying the need for reasonable provision anyway. On balance, it looks as though she has only little chance of success though if she were successful, the court could decide to make an award under s 9 using his severable share of Estuary View but it would need to take account of Rosemary s position as the surviving joint tenant. The claim would need to be commenced within 6 months of a grant being issued in respect of estate. (c) Memorandum to Mr Wu explaining the appropriate way to find out when Mitchell Foster and Gibbons obtain a grant to the estate. Page 5 of 9

6 We should make use of the standing search facility. Application is made on a prescribed form [Form 2] by sending it with the appropriate fee to the Principal or any District Registry. We will then be sent an office copy of any grant made within 12 months before or six months after the application (which is always renewable on payment of a further fee). Since the validity of the will is not going to be disputed, use of a caveat is not appropriate as a means of finding out when a grant is being obtained. Question 3 Paragraphs for inclusion in a letter to Mrs Shirley Williams explaining certain matters relating to the estate accounts of her father. (a) To explain the necessity for a missing person s indemnity policy. As you know, clause 3 of the will gave a legacy of 6,000 to each one of my nephews and nieces as are living at my death. The total amount payable under this legacy depends on the number of nephews and nieces who can be identified as living at your father s death and, consequently that amount will determine how much you and your brother and sister are entitled to receive as residuary beneficiaries. The estate accounts have been drawn up on the basis that 30,000 has been set aside to meet the entitlements of the five known claimants. We have of course reached this decision following discussions with the family of Steven Davies and their view is that he is unlikely to have been living when your father died. However, despite the findings of the investigation into his disappearance, we have no firm evidence to confirm that he did not survive and if Steven is in fact still alive, he can still claim 6,000 from Kempstons as the executors of the estate and we in turn would then be entitled to recover this amount from Michael, Sylvia and yourself as residuary beneficiaries. The executors are entitled to use funds in the estate to protect themselves from potential liability and the usual practice in such cases is to take out a missing person s indemnity policy. In the event of Steven ever making a claim, this would meet the executors personal liability to satisfy it, and also any secondary liability which might arise on any of the residuary beneficiaries to whom the estate has already been paid. There are alternatives, one of which might have been for Kempstons to keep back 6,000 until any such claim becomes time barred after 12 years but of course this would hold up final distribution of the estate and, in the meantime, the entitlement of the residuary beneficiaries would have to be reduced. For what has been a relatively modest outlay, the insurance policy has allowed us as the executors to distribute the whole estate immediately without risk of any comeback for either ourselves or you and your siblings. (b) To explain why there was a refund of IHT and why the IHT applicable to the house is not being paid by instalments. Page 6 of 9

7 It is indeed possible to pay the inheritance tax applicable to land and houses by instalments over 10 years. However, this option no longer exists once the property in question is sold and of course 8 Gladstone Way was sold by the executors on 26 July In these circumstances, the full amount of inheritance tax has to be made in one payment. When the initial inheritance tax liability for your father s estate was first calculated, we used the asset values at the time of his death (or as subsequently agreed with Her Majesty s Revenue and Customs in the case of 8 Gladstone Way) and the appropriate amount of tax was duly paid on this amount. However, an estate can claim a refund of inheritance tax if certain investments are sold within a year of death and overall there is a net loss on the sale. On 28 April, two holdings of shares were sold by the executors. As the accounts reveal in Schedule 1, the holding of Sintra plc shares was sold at a gain of 8,300 compared to their value at the date of your father s death. On the other hand, the sale of shares in Alester Petroleum plc produced a loss of 18,540 as against the value at death. Overall, this produced a net loss to the estate of 10,240. Consequently, the executors were allowed to recalculate the inheritance tax liability by reducing the taxable value of the estate by 10,240. Needless to say, this revised calculation led to a reduction in the tax bill and so a refund was made to the estate of 10,240 x 40% = 4,096. This refund is reflected in the total inheritance tax amount of 208,540 as shown in the capital account. (c) To explain the best way for the client to pass 100,000 of her inheritance to her children. If you wish to pass 100,000 of your inheritance to your children, the most tax efficient way to do this is for you to execute a deed of variation. Whilst you could simply write cheques totalling this amount made out to your children, this could have adverse inheritance tax consequences should you fail to survive the gift by seven years. Similarly, if you had to sell any of your inherited shareholdings to raise some of the cash, or even if you decided to transfer shares to your children, there could be adverse capital gains tax implications. However, if you make the payment or transfer of investments in conjunction with an effective deed of variation, which complies with certain statutory conditions, this will eliminate the risk of any adverse tax consequences. The effect of the deed of variation will be to treat the gift of 100,000 as being made from your father s estate directly to your children, as if he had left them a legacy in his will, rather than being made by you personally. The most important condition I need to draw to your attention is that you must execute it no later than the second anniversary of your father s death; that is you must make it by 14 February I shall be happy to prepare such a deed of variation for you and so I suggest you make an appointment to see me as soon as possible (bearing in mind the above date) to discuss its terms if you wish to proceed. Page 7 of 9

8 Question 4 (a) Draft Codicil This Codicil dated day of 2011 is made my me Louisa Elaine Raddison of Hawley House, Mallard Road, Welham Green, Hertfordshire AL12 7BH [and is supplemental to my will dated 28 August 2009*]. 1 (a) I give a pecuniary legacy of 20,000 to Kidney Research UK of Kings Chambers, Priestgate, Peterborough PE1 1FG (registered charity ) for its charitable purposes; and (b) I declare that the receipt of the person professing to be its treasurer or secretary shall be a sufficient discharge to my Executors [Trustees#] and; (c) I further declare that if at the date of my death such organisation has ceased to exist or has changed its name or has amalgamated with another organisation then my Executors [Trustees#] shall have the power to pay the legacy to such other charitable organisation which in their opinion carries on the same or similar objectives. 2 Subject thereto I confirm my said will dated 28 August *Signed by the testatrix in our joint presence and then by us in hers * An alternative approach would be to omit the reference to the original will in the introduction and instead change the attestation clause to read Signed by the testatrix as a codicil to her will dated 28 August 2009 in our joint presence etc. # Need to check how the executors and trustees have been defined in the will itself. (b) Paragraphs for inclusion in a letter to Louisa explaining the income tax position regarding the trust income. Your liability to income tax involves your initial liability, as one of the trustees of the fund, and then your subsequent liability as the beneficiary who is entitled to the income. Dealing first with your liability as a trustee, you and your two co-trustees are liable to basic rate income tax on all the trust income. However, since the whole trust fund is currently invested in quoted shares, the income will be received in the form of dividends from which tax at the rate of 10% is deducted at source by the paying companies. The 10% tax credit, which the trustees receive, will in fact satisfy the trustees basic rate tax liability. Consequently, you and your co-trustees will not be called upon to pay any further tax on the net income received. When the net income is paid over to you as the beneficiary, you must include it in your annual tax return along with your other earnings and income from other sources. The amount you must enter is the gross Page 8 of 9

9 amount of the trust income, rather than the net amount which you have actually received. Your taxable income for the year will then be calculated and, consequently, your liability to income tax. Whilst you will be given credit for the 10% tax deducted at source, as evidenced by a tax deduction certificate that comes with the dividend, you will have to pay some additional tax to make up your liability as a higher rate tax payer, assuming your taxable income exceeds the basic rate tax threshold. Given your current level of earnings, this looks likely to be the case. The higher rate applicable to dividend income is 32.5% and so allowing for the 10% credit, you will have to account for a further 22.5% of the gross trust income. (c) Memorandum to Mr Wu explaining possible CGT liability if advancements are made to Ian s children from the trust fund created by Ian s will. (i) If the trustees advance cash. In order to raise sufficient cash, the trustees would need to sell some of the trust shareholdings. As such, the trustees would make an actual disposal which would trigger a charge to CGT. The disposal price would be set against the trustees acquisition cost (most likely the probate value of the shares which they would have received as legatee from Ian s executors) to calculate the gain (if any). After taking account of the annual exemption, any resulting gain would be charged on the trustees at 28%. The subsequent transfer of the proceeds to Ian s children would not give rise to any CGT because a disposal of sterling (ie cash) is exempt. (ii) If the trustees transfer shareholdings by way of advancement. If the trustees transfer shareholdings to Ian s children, they will make a deemed disposal of the shareholdings because the beneficiaries become absolutely entitled to that part of the trust property as against the trustees. The trustees disposal price is the market value of the shares at the time of the deemed disposal and this is set against the trustees acquisition cost to calculate their gain (if any) and the resulting charge to tax as above. [NOTE TO CANDIDATES: 1 Since the shareholdings are in various PLCs, they will not qualify as business assets within s 165 TCGA Also, the deemed disposal is not within s 260 IHTA 1984 since it is a PET (by Louisa as the life tenant of an immediate post death interest) and not a chargeable transfer giving rise to an immediate charge to IHT. Therefore, it would not be possible to defer an immediate charge to CGT by claiming holdover relief. 2 Also, any disposal now is by trustees and not by personal representatives. This is because the Case Study says the administration of the estate has been completed and the residuary trust fund has been vested in trustees who would have taken as legatee from the executors of the will. Consequently the trustees exemption limit applies. Also, any transfer of shares to the children will not be a transfer to a legatee but rather one to a beneficiary who has become absolutely entitled as against the trustees hence the trustees make a deemed disposal]. Page 9 of 9