Feature

posted 25 Sep 2001 in Volume 6 Issue 6

Dying tidily - the perfect client’s paperwork

By Amanda King-Jones, Solicitor and Partner of Thomas Eggar Church Adams

This Article seeks to highlight the necessity for all professional advisors to be aware of the importance of their clients having their records and paperwork in order for their financial affairs. This priority has been enhanced by the introduction of the revised IHT Form 200 demanding much greater detail and accuracy combined with the increased readiness of the Inland Revenue to impose penalties under Section 247(1) IHT Act 1984 and under Section 248 IHT Act 1984 (fraudulent or negligent supply of information provided by persons liable to IHT and by others).

1. A will

It is a timely reminder to draw attention to the key reasons why everyone should make a Will:

To ensure the devolution of the testator’s estate in a way that they wish, not as the law decrees it under the Intestacy rules, in many cases actually prejudicing the surviving spouse;
To appoint Executors of the testator’s choice to administer the estate;
To appoint guardians for minor children;
To protect assets and beneficiaries;
To protect against potential claims under the 1975 Act particularly where insufficient provision would be given under the Intestacy rules;
To record funeral requests and arrangements;
To protect against the future bankruptcy of a Beneficiary (Protective Trust);
To protect against future financial claims on divorce (Discretionary Trust);
To overcome indecision of a Testator as to how the Estate is divided giving Executors guidance in a separate letter of wishes (Discretionary Trust);
To protect mentally/physically incapacitated beneficiaries, preserving assets against DSS claims and community care (Life Interest/Interest and Possessions Trust);
Postponing the age of entitlement beyond 18 years under the Intestacy Rules (Accumulation and Maintenance Trust).

If a will has been made, it is vital that its whereabouts are recorded and where possible with evidence or confirmation that it is the last Will.

2. Letters of wishes

These are vital papers giving Testators opportunities to record and have in place instructions regarding:

Funeral arrangements and wishes remembering the executors of the will have legal authority over these, not the next of kin;
Requests for distribution of chattels (with timescale and mechanism for selection) enabling these to be dealt with by executors without large lists being made in the will or a testator having to make decisions on making the will and enabling the use of Section 143 IHT Act 1984 (Precatory Trust). Attention should also be given to the definition of ‘personal chattels’ under the Administration of Estates Act 1925 Section 55(11(x)).
Guidance to Trustees of Discretionary Trusts (of nil rate or residue) which a testator might not otherwise be able to, or wish to, put on the face of a will
Guidance to the trustees for the advancement of capital or any other matters (Life Interest and Accumulation and Maintenance Trusts)

It is important to be able to locate the letter of wishes to ensure that it is not incorporated into the will unless it is intended to be.

A letter of wishes should be signed and dated by the testator but not witnessed if it is not to be incorporated in the will. The basic rule of incorporation is that a document is deemed to be incorporated in a will (even though a document is not itself executed as a testamentary disposition:

(a) The document is in existence at the time of the will;

(b) The Will refers to the document as an existing document;

A written record should also be made to record reasons of a testator (if appropriate) as to why provision has or has not been made to seek to prevent claims on death for greater provision. the case of Gillett v Holt (2000 2AER289) has widened the potential for claims using the principle of proprietary estoppel. The claimant succeeded in receiving a share of an Estate. A promise had been made that a benefit in property would be received on a person’s death and the claimant changed his situation and acted to his detriment based on that assurance/promise.

3. Asset logs

Although these are usually referred to as ‘asset logs’, it is just as important for details of debts and liabilities to be recorded. There should be two parts to such logs, the first dealing with the practical information of what a client owns and the whereabouts of the client’s papers, for example where keys are held, details of insurances, information required for a death certificate (e.g. maiden name, place of birth), details of pre-paid funeral plans, burial plots (particularly important if there is to be no confusion as to burial or cremation), National Insurance number, details of Inspector of Taxes. This list is not exhaustive.

The second part needs to address all areas of the IHT Form 200 and in particular:

(a) Foreign assets and domicile

It is very important to establish domicile of a deceased. This has an impact on:-

1. Validity of the will;

2. Liability to IHT and other taxes (and particularly the application of Section 18 IHT Act 1984 – Spouse Exemption);

3. The right to a grant to representation

4. Succession to the Estate

5. Deemed domicile provisions (S.267 IHT Act 1984) (A person may be domiciled outside the UK for other purposes but be deemed domiciled in the UK for IHT).

Many people assume if they own assets abroad these will not be taken into account for inheritance tax on their death. If the client is domiciled in the UK (broadly this is their home and where their assets are based) they will be liable for Inheritance Tax on their worldwide assets.

Even assuming a UK will has been made, it is advisable for there to be a will covering the assets in the foreign jurisdiction particularly as many European countries have laws that require particular proportions of an estate to go to certain ‘reserved beneficiaries’, generally the testator’s children rather than their spouse. While it may not be appropriate to determine domicile in advance of death, it is vital that the issues of evidence concerning domicile are addressed prior to death and should wherever possible be recorded including:

1. Nationality of the deceased (and if appropriate their surviving spouse) and where they were born;

2. An outline of their education and employment history;

3. The date they left the United Kingdom and set up their main home abroad;

4. The dates of return to the United Kingdom;

5. How long they stayed in the United Kingdom;

6. The purpose of the stay;

7. A statement as to why the deceased did not intend to remain in or return to the United Kingdom with details of the evidence to support this;

8. Details of citizenship and passports held by the testator during his or her lifetime.

(b) Debts and liaibilities

Written evidence of debts and liabilities are essential and while this may take many forms, depending on the nature of the debt, it will need to be evidenced both for the purposes of enforceability against the debtor but also to ensure that it is a debt able to satisfy Section 5(5) IHT 1984. Debts owed by the deceased at the date of death are deductible for Inheritance Tax purposes provided they were incurred for money or moneys worth. There may be contingent or unascertained liabilities of a testator for which personal representatives may be held liable. A lien can be taken by personal representatives provided they are aware of the liabilities. X -v- A and Others 2000 1AER 490 determined that despite the absolute entitlement of a beneficiary, the Trustees were entitled to retain the assets until the liability was no longer contingent.

Personal representatives were required with effect from 9th March 1999 to provide details in D3 of the IHT Form 200, of all chargeable transfers and PETs made within seven years of death and if any chargeable transfers of death are made in that period, of all chargeable transfers during the previous seven years (ie. up to fourteen years) before death. Penalties can be imposed by the Inland Revenue for failure to provide accurate information with the penalties being up to a maximum of £1,500 plus 100 per cent of the extra tax arising as a result of the amended unreported information (in addition to the payment of tax).

Gift records are therefore very important and can take a number of forms but the key information that clients should be recording are of all transfers (cash and other) the dates, the amount or value and the details of the recipient. They must also record whether it is a gift or a loan (preferably large gifts or loans should be recorded by deed) whether the annual exemption is to be utilised in that current year (and/ or carried forward a year) and whether the normal expenditure out of income relief is to be sought. The IHT Form 200 requires disclosure of all gifts (other than to exempt beneficiaries).

Documentation in support of gifts or transfers differs depending on the assets involved but it is essential that the evidence of a gift or transfer is as a starting point in writing and it must comply with the requirements of the specific asset, for example the transfer of land must be by deed to be effective. Loans converted into gifts need to be evidenced by Deed to be accepted as transfers of value for Inheritance Tax purposes.

Clients should also address whether gifts are made in satisfaction or are to be brought into hotchpot. This should be recorded in the will. This is particularly important in the light of the case of Re Cameron deceased 1999 2AER924. Gifts had been made prior to the deceased’s death by the Attorneys exercising their powers under the Enduring Powers of Attorney Act 1985. It was held that the making of a gift during the lifetime had deemed the provision in the Donor’s will to the same person on her death.

In the light of this, testators need to make a choice one way or the other as to whether payments or advances made in their lifetime

are to be taken into account in calculating the Beneficiaries entitlement on death. ‘Hodgepodge’ is the expression used to describe the process of dealing with assets which do not form part of the Estate of the deceased but which have to be brought into account in calculating the final entitlement. This mechanism can be usefully applied where a Donor is unable to equalise benefit in his lifetime but can achieve that equalisation on the eventual distribution of the estate.

4. Ownership and trusts

Schedules D4 (Joint Assets), D5 (Assets held in Trust), D6 (Pensions) and D9 (Life Assurance and Annuities) accompanying the IHT 200 Form raise pertinent and searching questions of personal representatives on the death of a testator. Provision of records by your clients in advance of death could save considerable time and costs if the information is available and in order.

Establishment of ownership is vital because it has an impact on:

Devolution of assets;
The ‘estate’ available under IHT 1975 Act claims;
The burden of Inheritance Tax and personal representatives liability – they are liable to the extent of the ‘estate’ of the deceased and they are personally liable for the incorrect distribution of assets

The basic assumption is that the clients name on the title or other documentation is evidence of beneficial ownership, but if that is not to be treated as the correct ownership, then further documentation must be in place:

1. Clients must retain all papers, closing account statements, passbooks that have been subject to a gift or transfer to a non-exempt person for the seven years prior to death.

2. Declarations of Trust must be made by deed or document to establish ownership as tenants in common or joint tenants that in relation to land must be recorded by formal notice of severance and/or a restriction enforced on the Land Registry Title.

3. Assets that are not in sole or joint beneficial ownership, eg. held as nominee, trustee, attorney must be so documented. In the case of Rowe -v- Prance 2GLR 1999, it was held that a boat purchased in the sole name of a person was owned as to a half share by a second party on the basis that there was an expressly constituted trust or that a constructive trust had arisen in the other party’s favour. In the case of Mollo -v- Mollo [2000] WTLR 227 a husband successfully claimed a beneficial interest in a property that was in his wife’s sole name.

4. Assets written in Trust, particularly for tax planning purposes (eg. insurance proceeds, pension death benefits), must be recorded through proper documentation, normally in the form either of specially prepared declarations of trust or in standard printed forms produced by insurance companies. These need to be submitted to the insurance companies or placed with the will.

5 General

Family Tree

This is very important to ascertain the correct Beneficiaries and for those administering the estate to ensure that they do not cause upset where it is not necessary. A family tree should address legitimate, illegitimate, adopted children as well as other relations, previous marriages, “living together” situations, divorce, death, separations, dates of birth, and generally classes of beneficiaries. In addition identification should be made of any potential dependants who may fall within the categories of claimants under the 1975 Act.

Bundle of Personal Papers

These should include birth, marriage and death certificates of close family and, in particular, divorce papers and orders relating to any continuing financial payments. Details of a divorce are very important and can be difficult to locate many years later. Firstly, such an order may exclude a former spouse making an application under the 1975 Act, and secondly, it is important to ensure that there has been a decree absolute. Divorce Orders will be particularly important in the future with financial provision now including pension splitting where rights may kick in a very long time ahead.

6. Summary

On a practical note, it may be appropriate for practitioners to develop a Client Questionnaire in such a way that these provide in-depth “know your client information” for good client care and potential for new work, whilst at the same time the documentation once completed may provide a very suitable personal record for the client which can be sent to them at intervals to be updated and replaced with their records. The Law Society’s Personal Assets Log is available from their Publications Department (Tel: 020 7320 5748).

Amanda King-Jones, LL.B

Solicitor and Partner of

Thomas Eggar Church Adams

5 East Pallant

Chichester

West Sussex PO19 1TS

Telephone number: 01243 786111

Email: amanda.king-jones@teca.co.uk