Checking the terms of the Will
It sounds obvious, but it is important to ensure that you have fully understood the terms of the Will and the implications that arise from any embedded trusts. For example, the default provisions may leave the residue to a certain group of individuals or charity, but subject to a discretionary power, exercisable by the executors/trustees, which can over-ride the apparent intention on the face of the Will.
It is often seen in professionally drawn Wills that the residue of an estate is left on fully (flexible) discretionary trusts. If that is the case, you will have to exercise your discretion and to consider the implications of s144 Inheritance Tax Act 1984. For example, is there an inheritance tax benefit to exercising your powers within 2 years of death so that any appointments can be ‘read back’ into the Will for Inheritance Tax purposes? This may be required in order to claim spouse exemption (ie relief from Inheritance Tax).
Are there assets that benefit for Agricultural Relief or Business Relief and what is the best way to deal with these assets so as not to lose the reliefs? Timing is important here too, as it is likely that the Revenue will take some considerable time to agree to these reliefs being available, and may not accept that they apply in full. If that is the case, it is important to try and agree the position with HMRC within the 2 years of death to maintain flexibility – which means submitting any claim at the earliest opportunity.
Deeds of Variation
It is possible to vary the distribution of the deceased’s estate within 2 years following their death. This can be done by way of a ‘deed of variation’ (also known as a Deed of Family Arrangement) or by way of a Disclaimer. These are often used as a way to redirect gifts under the deceased’s Will so as to take account of particular circumstances within the family at the time of death, such as a wish for inheritance to ‘skip a generation’ or to take advantage of tax reliefs, which might otherwise not be available. You may be approached by beneficiaries of an estate to implement a variation, and you will need to be alive to any additional tax or reporting requirements that might result from action taken in this regard.
Risk of insolvency
Remember that as an LPR you are personally liable for your dealings in an estate. This does not mean that you take on the deceased’s lifetime debts or liabilities merely by being appointed, but can mean that you are ‘on the hook’ for liabilities of the estate if you take on the role of executor. Fortunately, you can protect yourself against these risks if you act prudently and understand your exposure. This requires a detailed consideration of the estate at an early stage to determine the overall liquidity and related funding requirements. If there is any prospect of the estate being insolvent then extreme care needs to be exercised.
Inheritance Act claims
In the increasingly litigious society we now live in, claims against the estate under the Inheritance (Provisions for Family and Dependants) Act 1975 are very common. A claim against an estate can make the administration complex and costly. You need to consider the possibility of a claim at the outset, and certainly before you make any distributions from the estate, to avoid a situation in which the estate owes sums but lacks liquidity. Again, there are steps that can be taken to assist and protect you where an early distribution from the estate is intended.
You will generally need to produce an inheritance tax return for the deceased’s estate. If there is inheritance tax payable the Revenue will likely raise enquiries: to have anticipated these enquiries will help deal with the enquiries promptly and efficiently when they are raised. If the Revenue feels that proper care has not been exercised when submitting the inheritance tax reporting, they are able to levy penalties.
Particular care needs to be taken over the reporting of lifetime gifts. If the Revenue were to finds evidence of gifts which were not reported in the initial inheritance tax reporting, it may be difficult to avoid penalties. It is also key to establish at the outset who is responsible for the tax on the chargeable lifetime gifts and to consider how this will be funded.
Remember that there is now a requirement for a capital gains tax return to be submitted on the disposal of a property within 60 days.
If you would like to discuss any of the issues raised, please do not hesitate to contact the author or your usual Payne Hicks Beach contact.