Fair or Unfair? The Overlooked Factors That Could Make or Break Your Estate Distribution Plan
We all have different opinions on what makes an estate distribution fair, however, failure to consider certain factors could lead to unhappy beneficiaries and an estate being distributed in a way you have not foreseen.
Problems can therefore arise where:
- an asset specifically left is no longer owned at the date of death;
- an asset specifically left rises or falls in value disproportionately to other assets;
- you become richer or poorer between the date of your Will and date of death;
- you want to provide for several family members, but the bulk of your wealth is tied up in a business and some family members work in the business, but others do not.
It is never possible to cover all potential scenarios when making a Will but taking the right advice and looking at alternative options can greatly reduce the risk of beneficiaries feeling left out and treated unfairly, leading to matters being contested.
Failure of a specific gift
Leaving your car to someone upon your death may seem like a simple bequest, however, what happens if the car was sold during your lifetime, and you never updated your Will?
Specific assets which no longer form part of your estate upon death will fail, meaning the beneficiary receives nothing. This may be something you foresee, and a note can be made stating that no substitution shall be made.
However what if you had left a car to each of your sons but only one of the cars was present at the date of your death. Should a pecuniary legacy be made instead to replace the car that has been sold? Greater consideration to these factors should be made as doing so could avoid any upset for those you leave behind.
Asset left to one beneficiary falls or rises disproportionately
Not considering how assets may rise and fall over time can lead to expensive challenges to your Will. For example in Re Skillett, Deceased [2022] EWHC 233 (Ch).
The testator left:
- his smallholding valued at £50,000 to one of his 4 children (a son who worked on the smallholding with his father)
- legacies of £50,000 to the other 3 children, and
- residue to be divided equally between the 4 children.
When he died the smallholding was valued at £110,000. The 3 siblings were not happy and (unsuccessfully) challenged the Will.
The outcome may have been very different if one of the following was considered:-
- The Will clause could have been drafted to leave legacies of equal value to the smallholding at date of death, rather than specifying an exact amount at the time the Will was prepared.
Noting that specific gifts are paid in priority to pecuniary legacies so if the estate is too small to pay the pecuniary legacies in full, they would have to abate, and the siblings might still be unhappy.
- The Testator could leave the whole estate, including the smallholding, to the children with an option for the son to purchase the smallholding at market value at the date of death.
This achieves greater fairness between all parties but if the smallholding has increased significantly in value the son may not be able to raise sufficient funds.
Clients become richer or poorer after making the Will
Making specific or pecuniary gifts to one or more persons and leaving residue to others, gives rise to the risk that the specific/pecuniary beneficiaries benefit more or less than you intended.
For example:-
- John wants to leave the bulk of his estate to charity but wants to leave his niece a pecuniary legacy. At the time he is making his will, his estate is worth £1m.
- He decides to leave his niece £250,000 (25% of the estate).
- He goes into self-funded care, and at the date of his death his estate is valued at £500,000. The niece’s legacy is now 50% of the estate.
Leaving your estate as a percentage to various beneficiaries could perhaps achieve a fairer outcome ensuring your overall aim is achieve, which in the above example was perhaps for the charity to always receive a larger proportion.
Client’s wealth is tied up in a business
A common problem for clients is making a fair distribution to children where some children work in the business and some do not. You may want those who work in the business to inherit or at least be given a larger share to give them control. But if the business is left to those who work in it, there are no funds to provide for the others.
Giving those who work in the business an option to purchase or making the gift of the business to them conditional on making a payment to the estate could be a better option.
Discretionary Trust?
Although a Discretionary Trust does not provide a ‘nailed down’ approach it can be the best alternative provided suitable Trustees are appointed.
A letter of wishes can be left explaining your priorities and who you would like the Trustees to benefit. The Trustees can make appointments of capital reflecting the values at death and the circumstances at the time.
Provided the appointments of the assets are made within 2 years of death, they will be read back to the date of death for Inheritance Tax purposes allowing the trust to be wound up with no Inheritance Tax charges.
Keeping your Will under review is vital and taking the necessary advice could save your loved one’s time, money, and potential upset in the future.
The author: Jenna James
