Changing a will after death: is it possible?

The need for wills to be kept up-to-date

How often do your clients update and/or check their wills – assuming, of course, they have made one? For many, the answer is ‘not that often’, if at all…

A will made some months or indeed years ago may no longer reflect the testator’s current wishes. Perhaps, for example, one or more of the intended beneficiaries is no longer alive or the financial circumstances of one or more of the beneficiaries has changed; perhaps the wealth of the testator has materially changed, whether for better or worse.

Failing to update a will may therefore mean that what the testator intended to happen, vis-à-vis benefiting certain beneficiaries, may not in fact happen.

Example one

Mary Grey, a widow, died. In her will (executed two years previously) left pecuniary legacies of £50,000 to her niece, Sandra, £25,000 to Sandra’s husband, Brian, and £75,000 to her close friend, Olive. Her residuary estate of £100,000 she left to her favourite charity, the ‘Home for Lost Cats’.

Mary’s friend, Olive, however, died a few weeks before Mary at a time when Mary herself was not well; Mary had not amended her will before she died.

There was no substitutional clause to deal with this eventuality indicating what should happen to the gift in the event of Olive’s death and, as a consequence, Olive’s £75,000 gift fell into the residuary estate. The Home for Lost Cats, therefore, received not only their original inheritance of £100,000, but also Olive’s £75,000.

This may not have been Mary’s wish. It may have been that, had she taken action after Olive’s death, Mary would have preferred the £75,000 to be split between Sandra and Brian, and not to have gone to the charity, given the already significant bequest she had made.

In example one, is there anything that either Sandra or her husband, as beneficiaries, could have done? In short – no, assuming the will cannot be challenged, for example, alleging undue influence.

Even if Sandra and Brian were also the executors of the will, they must implement the testator’s instructions contained in the will. The fact that some of those who benefit under the will (Sandra and Brian), or some of those who are not beneficiaries, do not feel that the testator’s current wishes were reflected in the will, is not important; the will as executed stands.

Substitutional gifts

In the above example, had Mary provided a substitutional clause, all would have been well. In her will, for example, she could have stated that, ‘in the event that Olive predeceases me, I leave the £75,000 to my brother-in-law, Albert’; the Home for Lost Cats would not have then received the extra £75,000.

The fictional world of tax

For tax purposes, however, the position concerning changing a will after death is different; it is permitted and does not give rise to adverse tax consequences.

Strictly speaking, the content of the will is not actually changed, but, for tax purposes, it is effectively treated as if it had been changed. Enter the fictional world of taxation.

In this fictional world, disclaimers and/or variations may be entered into that re-direct the gifts under the will without creating additional adverse inheritance-tax consequences. The following example illustrates the inheritance tax (IHT) issues involved.

Example two

Howard and Mary have each been married before. Howard has two children, Tina and Thomas, from his first marriage. Tina has never forgiven her dad for remarrying and hasn’t spoken to him for many years.

In his will, Howard leaves his son, Thomas, £150,000 and the rest of his estate, £850,000, to his wife, Mary. He leaves nothing to his daughter, Tina.

Thomas feels bad about the situation and doesn’t think his dad should have cut Tina out of his will. Accordingly, Thomas executes a variation under which he redirects £75,000 of his £150,000 to his sister Tina.

In the absence of special IHT provisions that create this fictional world, Thomas would be treated as making a PET [potentially exempt transfer]. Should he die within seven years of making it, a potential IHT charge arises of up to a maximum of 40 per cent of £75,000 (£30,000). All things being equal, this would probably serve as a deterrent to making such a variation.

Under special IHT provisions, however, a variation is treated as if the redirected gift had in fact been made by the testator. So Thomas is not treated as making a gift to his sister, and instead Howard is treated as having left Tina the £75,000 in his will, and no IHT charge can arise even if Thomas were to die within seven years of making the gift.

The IHT charge on Howard’s estate remains the same, and in substance, although not in actual form, his will has been changed after his death.

The concept of the variation may also be used to actually reduce the IHT liability arising on death.

Example three

Bert, a widower, left: £15,000 each to his sons, Harry, Norman and Toby; £15,000 to each of his daughters, Karen and Lucy; and, the residue of his estate to his brother, Ted, amounting to approximately £60,000.

Bert had executed his will about three years previously, but had then forgotten all about it.

In the seven years before his death, Bert had made a number of gifts amounting to £312,000 (the nil-rate band for the tax year 2008/09) and had used up his nil-rate band. His estate on death, amounting to £135,000, was therefore liable to IHT at 40 per cent, giving £54,000 of IHT payable out of the residue of £60,000 – leaving Ted with only £6,000.

Within a few months of Bert’s death, Harry and Norman, who regularly played the lottery together, won £500,000 between them and, as a consequence, felt that it was not fair to take their £15,000 each from Bert’s will and decided to donate it to a charity.

If Harry and Norman do in fact take their inheritance and then each gift the money to charity, the IHT on Bert’s estate remains the same. However, Harry and Norman could instead executed a variation under which they redirect their inheritance to the charity.

In the fictional world created by the IHT legislation, the effect of the variations is that it is Bert who is ‘deemed’ to have donated £30,000 to the charity and not Harry and Norman.

This means that the IHT on Bert’s estate is reduce by 40 per cent on £30,000 (£12,000) because gifts to charity are exempt from IHT.

Consequently, it is Bert’s brother, Ted, who accordingly receives this extra £12,000 from the IHT reduction.

A variation following a death may, for IHT purposes, be used to reduce an IHT liability on the death estate, as well as permitting some degree of reorganisation of the various inheritances. Even if IHT on the death estate is not reduced, it may permit future such liabilities to be reduced or deferred.

Example four

Nancy is a wealthy widower. She has only one son, Keith, who in turn has two children, Paul and Susan. The value of her estate is £1.5m and she has left £750,000 to Keith and the balance equally to Paul and Susan – £375,000 each.

Since executing the will, Paul has become terminally ill and, at Nancy’s death, Paul is expected to live for only four or five more years. Paul is unmarried and already quite wealthy in his own right, with an estate of £1m.

If no action is taken in view of Paul’s changed circumstances, on the £375,000 left to Paul, IHT at 40 per cent will be payable once on Nancy’s death and again on Paul’s death; effectively, double IHT on the same amount of money.

Paul could execute a variation in favour of, say, Susan (who is younger, fit and well) under which she receives Paul’s £375,000. So, the IHT payable on Nancy’s death will remain the same, but the IHT that would have been payable on Paul’s death has been avoided.

The use of variation

The above are just three examples of the use of variations. There are many more. A number of points, however, need to be noted in connection with variations:

To enter the fictional IHT world requires that a variation (normally executed in writing as a deed) is executed within two years of the death of the individual whose will is to be varied;
Beneficiaries adversely affected by the variation must agree to it and sign it. This can be a stumbling block if the beneficiaries cannot agree among themselves or if minors are involved;
Variations can also be used where the deceased died intestate;
Variations can be used, inter alia, to effect a perceived ‘fairer’ distribution (see example two above) and/or to reduce the IHT on the testator’s estate (see example three above);
If appropriate, variations can be used to create trusts under the will; and,
Favourable capital gains tax consequences also arise as a similar fictional world is also created for capital gains tax purposes.

Disclaimers (for instance, where a beneficiary simply rejects the gift) are also available following death but are less flexible than variations and used much less frequently; they may, however, be appropriate in some circumstances (although not discussed here).

Conclusion

The concept of variations is perhaps difficult to understand; it is a fiction, created purely for IHT purposes. However, it can be extremely useful in a variety of circumstances following death.

Where a death occurs (whether testate or intestate) and the beneficiaries would like to re-organise some of the gifts made in the will, and/or reduce IHT due, perhaps, to a badly drafted will, thought should be given to the disclaimer and/or deed of variation – two very powerful weapons in the beneficiaries’ armoury.

Malcolm Finney and is the author of a recently published book, Wealth Management Planning: The UK Tax Principles. He can be contacted at malcfinney@aol.com