Note to Candidates and Tutors: LEVEL 6 UNIT 21 PROBATE PRACTICE SUGGESTED ANSWERS JUNE 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 June 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. Question 1(a) (i) The residue of the estate is directed by the will to be divided into three equal shares, one each for Louise, Ryan and Nathan. Louise and Ryan will take one share each but, because Nathan predeceased his mother, he cannot take his share. Normally a gift lapses when a beneficiary predeceases. However, in the case of a gift to a child of the testator who dies with issue, Wills Act 1837, s33 provides that (in the absence of any contrary intention) the gift does not lapse, but instead, passes to the issue. Nathan adopted Anup, who is therefore treated as his child. Hence, Anup takes Nathan s one third share of the residue. The will did not impose any age contingency so the gift is absolute. Personal Representatives (PRs) are entitled to a discharge from beneficiaries who are absolutely entitled to property. This is normally in the form of a receipt signed by the beneficiary but a minor cannot give a good receipt. However, under Children Act 1989, ss3 and s5 a parent with parental responsibility is entitled to receive property including legacies and so can give a good receipt. (ii) The legacy to the Wildlife Foundation cannot take effect as the charity no longer exists. Fortunately, clause 7 of the will makes express provision for this possibility. It directs you to identify a charity with similar purposes and pay the legacy to that charity. As regards the bracelet, when an item that has been specifically left to someone in a will is lost or stolen before death, the gift fails completely and the beneficiary is not entitled to receive anything. Ms Turner has no right to receive the money paid by the insurance company. Page 1 of 11
So far as the porcelain collection is concerned, there are some problems with your proposal. A person who is left a specific item is responsible for cost of delivery unless the will says otherwise so it is Ms Bennett who should pay the cost of delivery not the estate. Obviously you are both free to pay the cost from your shares of the estate if you wish. However, it would not be correct to reduce the share which is due to Anup. The legacy is given subject to tax which means that Ms Bennett has to pay the share of the inheritance tax which is attributable to her legacy. Obviously we do not yet know what that figure will be. It would be preferable to make delivery of the legacy contingent on receipt of the money required to meet the tax. As executors you are personally liable to creditors and claimants against the estate up to the value of the assets of the estate. So if you distribute all the assets and then discovered an unpaid liability, you would be responsible for the liability and would have to try and recover the distributed funds from the beneficiaries. It is, therefore, important to be cautious about distributing assets from the estate until all creditors and possible claimants against the estate have been identified. It is possible for you to protect yourself from liability in your capacity as executors by advertising for creditors and waiting for at least two months before distributing the assets. However, unpaid creditors who emerge at a later stage can still seek payment from the beneficiaries of the estate. Advertising does not protect your own assets (received from the estate as beneficiaries) from creditors, but it does mean that you are not liable as executors for assets distributed to other beneficiaries. In the case of the porcelain you may take the view that its value is relatively low and the remaining assets of the estate are substantial so there is little risk involved in distributing this one item. It is not necessary to have more than one executor so it is possible for Louise to act alone. The options for Ryan are that he can renounce the executorship completely but this would mean that he could not act as an executor on his return even if Louise wanted him to. As an alternative, he could have power reserved which means that Louise would apply for the grant alone but you would retain the possibility of taking the grant at a later stage. Page 2 of 11
Question 1(b) (i) On the basis of current figures the value of the estate for inheritance tax is calculated as follows: 4 Dexter Avenue 350,000.00 Bank Account - Current 10,649.00 Bank Account - Saver 48,510.00 Porcelain Collection 7,500.00 Jewellery 17,000.00 Contents 2,000.00 Car 5,000.00 Quoted Investments 300,000.00 Total gross estate 740,659.00 Less Credit card debts ( 1,159) Funeral Account ( 2,500.00) Net estate 737,000.00 The charity exemption will apply to the two legacies to charity reducing the taxable value of the estate by 2,000 to 735,000. It appears that the deceased had a full nil rate band of 325,000 available to her at death, plus a full nil rate band transferred from her husband. Thus only 85,000 is chargeable to inheritance tax. Tax is calculated at 40% giving a liability of 34,000. (ii) However, before making the final determination of liability, it is necessary to make full enquiries as to the existence of any further assets or debts. Also, further and better up to date information is required regarding the open market value of some of the assets. Executors must make the fullest enquiries about the assets and liabilities of the estate to meet HMRC requirements as otherwise they will be liable to penalties. They should also direct further enquiries before confirming that Eve did not make any lifetime gifts relevant for inheritance tax. For example: The house although the house is on the market at 350,000, this is a selling figure. It would be prudent to get a professional valuation as at the date of death; Page 3 of 11
Bank Accounts confirmation of the balances, including accrued interest, at death should be obtained from the bank since the balances in the list are several months out of date; Quoted shares check price quoted on day of death; Contents and Car these valuations need checking and verifying; Jewellery and porcelain open market valuations should be obtained as the insurance figure is likely to be a replacement value figure which is not the same as a probate value. Question 2(a) (i) Because the proceeds of the policy are payable to the estate, we will need to show the company an office copy of the grant of representation to obtain payment. A copy of the death certificate will not be sufficient so there is no need to do anything at this stage. The 100,000 will be an extra asset of the estate and so will increase the amount of inheritance tax payable. Your mother s estate exceeds the tax free allowance already so tax at 40% will be payable on the whole 100,000. (ii) The tax due has to be paid when we apply for the grant of representation on everything except the house. We must deliver an IHT Account and pay any tax due within 12 months of death but it is sensible to try and do this more quickly as interest will start to run six months after the end of the month of death. We can elect to pay the tax attributable to the house in 10 equal instalments, the first of which will be due 6 months after the end of the month of the death. When the house is sold, however, the outstanding tax becomes payable in full. Although you cannot access your mother s accounts before you have obtained the grant, there is a direct payment scheme which allows HMRC to obtain payment direct from banks and building schemes. If this is not enough we can ask Lloyds to provide a bank loan unless you or Louise have sufficient liquid funds to lend to the estate to cover the shortfall. (iii) PRs have power under s41 Administration of Estates Act 1925 to appropriate assets in or towards satisfaction of pecuniary legacies and shares of residue. Usually PRs cannot take assets from the estate as part of their entitlement without the consent of the other beneficiaries. This is because they are in a fiduciary position and subject to a rule against selfdealing. An appropriation by a PR of an asset to themselves is normally voidable by the other beneficiaries. However, this is not the case where an asset can be regarded as equivalent to cash because it has a clearly ascertainable value. Quoted shares come into this category. Hence Louise can use the power of appropriation, to appropriate the shares to herself. They must be appropriated at their market value as at the date of the appropriation. Page 4 of 11
Question 2(b) Sale of shares Capital Gains Tax implications The sale of the shares at a gain has no effect on the estate s liability to IHT. For CGT purposes there is a disposal which after deduction of the costs of disposal gives a net gain of 10,100. PRs are liable to CGT at 28%. However, in the tax year of death (and two following tax years) they have an annual exemption available. On the basis of the exemption for 2015/16 of 11,100, no tax is payable. Sale of land Inheritance Tax implications Where the instalment option has been claimed and the property is sold, the tax becomes payable in full so the executors must inform HMRC and pay the balance of the tax. If land is sold by the appropriate person (that is the person liable for the payment of the inheritance tax - here the executors), for less than probate value within four years of death, loss relief is available under Inheritance Tax Act 1984. The effect of the relief is that the sale proceeds are substituted for the IHT value. If the executors want to utilise the relief, they must claim it. Capital Gains Tax implications When PRs sell an asset during the administration, there is a disposal for CGT purposes. If the asset is disposed of for less than probate value, this would normally give rise to a loss which could be set against any gains made by the PRs. However, where IHT loss relief is claimed, the sale price becomes the PRs acquisition value for the purposes of CGT. Hence the disposal is at the same figure as the acquisition and there is no loss. As the only other sale has produced a gain covered by the annual exemption, it is clearly preferable for the PRs to claim the IHT reduction rather than the CGT loss. Question 3(a)(i) Michael may well have a claim under the Inheritance (Provision for Family and Dependants) Act 1975, s1(1a). He must show that during the whole of the period of two years ending immediately before the date when the deceased died, he was living in the same household as the deceased, and as the husband of the deceased. The period must be unbroken but it is unlikely that the absence caused by working abroad would be treated as breaking the period so long as the parties can be regarded as continuing to live in one household. The couple must have been living together as husband and wife. The relationship does not have to be sexual. However, since marriage is a publicly acknowledged relationship, it is essential that the couple are recognised and acknowledged by the outside world to be in a relationship. It is not necessary for Michael to have been maintained by Felicity. Page 5 of 11
If he was unable to establish the required elements for a claim as a cohabitee, the only other option would be a claim as a person who immediately before the death of the deceased was being maintained, either wholly or partly, by the deceased. Section 1(3) provides that a person is to be treated as being maintained by the deceased, if the deceased was making a substantial contribution in money or money's worth towards the reasonable needs of that person, other than a contribution made for full valuable consideration pursuant to an arrangement of a commercial nature. Providing rent free living accommodation is likely to be regarded as a substantial contribution. Whichever basis the claim is made on, Michael must show that reasonable financial provision was not made for his maintenance. If he is financially secure, the court may take the view that reasonable financial provision was nothing. There are common guidelines which the court takes into account in relation to all applicants: the financial needs and resources of the applicant, any other applicant and any beneficiary; any obligations and responsibilities that the deceased had to the applicant; the size and nature of the estate; any physical or mental disability of any applicant or beneficiary; any other relevant matter. Under s3 there are additional guidelines which are specific to each category. In the case of cohabitants the court will have regard to the age of the applicant and the length of the period during which the applicant lived as the husband or wife of the deceased and in the same household as the deceased; the contribution made by the applicant to the welfare of the family of the deceased, including any contribution made by looking after the home or caring for the family. In the case of persons maintained by the deceased, the court will have regard to the basis upon which the deceased assumed responsibility for the maintenance of the applicant, and to the length of time for which the deceased discharged that responsibility. Question 3(a)(ii) Information Brian and Urwin should seek. It will be necessary to establish the extent to which Michael and Felicity were regarded as a couple, so enquiries should be made of friends and neighbours. Michael s financial position will be of crucial importance. He will have to disclose information as to his financial position. Brian and Urwin should make enquiries as to the length of the cohabitation. The court will consider any reasons the deceased gave for the terms of the will so anything said to the solicitors making the will would be relevant. The court will not necessarily be persuaded by the deceased s reasons. Question 3(b) Your firm has admitted making an error as a result of which Michael Broadstairs has been deprived of a valuable asset. This would normally give rise to a claim for negligence against you. However, Administration of Justice Act 1982, s20 allows the court to rectify a will if it is clear that the will fails to carry out the testator s intentions as a result of a clerical error. Page 6 of 11
It is, therefore, appropriate for your firm to bear the cost of an application to the court for rectification of the will to reinstate the gift of the house. In the alternative, Brian and Urwin may be willing to vary the terms of Felicity s will to include the gift of the house and elect that it be treated as Felicity s disposition for IHT and CGT purposes. Provided the variation complies with the requirements of Inheritance Tax Act 1984, s142 and Taxation of Chargeable Gains Act 1992, s62, the disposition will be read back into the will. This would be a cheaper way of approaching the issue, but we would expect your firm to bear the cost of preparation of the variation. Question 3(c) The later will appears to have been correctly signed and witnessed. However, the attestation clause is defective as it does not state that the witnesses were both present when the testatrix signed nor that they signed after her. It will, therefore, be necessary to obtain affidavits of due execution from the witnesses. Assuming that they confirm that the formalities required by Wills Act 1837 were complied with, the will is valid. It does not contain a general revocation clause and, therefore, only revokes the earlier will to the extent that they are inconsistent. Hence the house will pass to Michael under the later will and the rest of the estate will pass to the nephews under the earlier will. Both wills will therefore need to be submitted for probate. Question 3(d) Although Brian is an established client of the firm, it is his mother not him who is the client in relation to her new will. As advised by the Golden Rule you should see her alone and explore her reasons for adding the legacies to the grandchildren. It is a perfectly reasonable disposition but may result from pressure applied by Brian. Does Urwin have any children? If so, it is strange that they are not being given legacies as well. You should satisfy yourself, so far as you can, that the client has testamentary capacity and fulfils the Banks v Goodfellow test. She must understand the nature and effect of the will making act, understand the extent of her property, appreciate the claims she ought to consider and not be suffering from any mental disorder or insane delusion which affects her judgement. It is important to ask her open questions as to what she wants to do rather than asking her whether she wants to make the new legacies. If you are doubtful as to her capacity, you should explain to her that, to avoid any later challenge to her will, it would be prudent to obtain a medical report as to the effect of her medication and her testamentary capacity. If she agrees, you should brief the practitioner on the test of testamentary capacity. If you take the step of arranging the report, Feltham v Bouskell (2013) suggests that you must chase for the report after 10 days. You should also try to establish that the client herself wants to change her will and has not been subjected to undue influence from Brian. Page 7 of 11
You should make a full file note of both your questions and the client s responses as this will be important evidence if the will is challenged later. As we are on notice that the client is unwell, it would be prudent to make an appointment as quickly as possible. Agree a time frame for preparation of the will and again this should be done with an eye to the client s health. The court has suggested that it is appropriate to prepare a will within 7 days when a client is ill but not in danger of imminent death. If death is imminent then it could be negligent not to prepare the will on the spot and have it executed immediately. Does the client want the new legacies to carry with them the right to receive interest? If so, the will must provide for this expressly as contingent pecuniary legacies do not carry interest automatically. Question 4(a) A copy of the completed Oath is attached. Question 4(b) The assets of the estate amount to 261,000. Debts and funeral expenses are 2,000 and there is an allowance of 3,000 for our professional charges and disbursements. Hence the estate available for distribution is 256,000. Although there is a will, it does not dispose of the estate due to the named beneficiaries having predeceased, so the executor will administer the estate in accordance with the intestacy rules. Mr Blythe s wife and daughter predeceased him as did his parents. Under the intestacy rules contained in Administration of Estates Act 1925 as amended, his estate is held on the statutory trusts for the brothers and sisters of the whole blood. His brother and sister predeceased him but left children who will take the share that their parent would have taken. The children must attain the age of 18 or marry earlier to qualify for a share. No child can take whose parents are still alive. Therefore the estate is divided into 2: Doreen s share and Frank s share. Each share is 128,000. Doreen s share Doreen has one son, Rudi, who is still living and one son, Gervase, who predeceased her leaving two daughters, Marion and Paula. Rudi will take one half of Doreen s share ( 64,000); Marion and Paula will take 32,000 each. Frank s share Frank s son, Scott, will take the whole of the 128,000 his father would have taken. Question 4(c) We have received 6,400 in interest and 90 in dividends. You are entitled to one quarter of each so your share of the income will be 1,600 in interest and 22.50 in dividends. Page 8 of 11
The bank interest has already had basic rate tax at 20% deducted at source. Your share is therefore treated as a receipt of 2,000 with basic rate tax paid of 400. When we make the payment of interest to you, we will give you a certificate showing that this tax has been paid. You should retain these for use when completing your next income tax return. Provided your total income for the year remains within the basic rate band, this satisfies your liability and there is nothing further for you to pay. Unless you have other income apart from the pension income you mentioned, it appears you should remain well within the basic rate band and have no further income tax liability. The share dividends received are also a net amount as a result of 10% tax having been deducted. This 10% tax deduction acts as a tax credit and satisfies your liability to pay basic rate income tax on the gross amount of the dividend. However, if your total income for the year means that you pay income tax at the higher rate, then you will have to pay tax of 32.5% on the dividends. Since you have the benefit of the 10% tax credit, you would need to pay a further 22.5% of the gross amount of the dividends to satisfy your higher rate liability. Page 9 of 11
Completed Oath for Executors Page 10 of 11
Reproduced for the purposes of this examination only by kind permission of Oyez Professional Services Limited. Page 11 of 11