Private client section

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Issue 24 – January 2008

Contents

Cases
Features
Articles

News

Events

Offers (how to claim book discounts)

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Cases

1. Heyman and another v Dobson and another

Citation: [2007] All ER (D) 275 (December)
Court: Chancery Division
Judge: Evans-Lombe J
Hearing date: 18 December 2007
Summary: will – trustee – personal representative – removal – whether unchallenged evidence justifying removal of defendants as personal representatives of deceased – administration of Justice Act 1985, section 50

The deceased died in 2004. Her will gave a lifetime interest in certain parts of her house (the property) to her sister and certain parts of the property to the first defendant pending the death of her sister in which case the property was to be realised and divided between the relevant beneficiaries. The deceased also bequeathed the residue of her estate to her granddaughter, the first claimant, absolutely. The first defendant applied for probate. The solicitors instructed by the first defendant set up a trust of the property and declared the first defendant to be trustee of the property. In September 2005, a copy of the will, together with a copy of a document confirming probate, was passed to the mother and litigation friend of the first claimant. Thereafter, solicitors instructed by the first claimant wrote to the first defendant's solicitors asking for information in relation to the estate. Further letters were written to the first defendant by the first claimant's solicitors, but they received no response. The claimants applied for, inter alia, an order pursuant to section 50 of the Administration of Justice Act 1985 to remove the defendants as personal representatives of the deceased's estate. In the course of those proceedings, the first defendant provided accounts, which he submitted showed the expenses he had incurred in relation to the property. The claimants did not accept those accounts. The matter was dealt with summarily by a deputy master who granted the order. He also ordered the defendants to pay the first claimant's costs. The defendants appealed against those orders.

The issue arose as to whether, on the unchallenged facts, there was enough evidence upon which to remove the defendants as personal representatives of the deceased.

The appeal would be allowed in part.

(1) In the circumstances of the case, the deputy master's judgment did not give a clear idea of what it was on which he had relied to come to his conclusion. However, on the evidence, there had been sufficient material in the unchallenged facts to justify the order removing the defendants as personal representatives of the deceased's estate. The fact that there had been difficulties between the beneficiaries and the first defendant in that the beneficiaries had been reluctant to accept that the first defendant's account of his dealings with estate was sufficient ground for applying the discretion under section 50 of the Act.

(2) The appeal against the costs order would be allowed following practice in case authority.

Letterstedt v Broers [1881-5] All ER Rep 882 applied; Thomas and Agnes Carvel Foundation v Carvel [2007] 4 All ER 81 applied.
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2. Clark v Clark and others

Citation: [2007] All ER (D) 186 (December)
Court: Chancery Division
Judge: Blackburne J
Hearing date: 12 December 2007
Summary: will – construction – ambiguity – dispute over meaning of clause – whether farmhouse included in purchase option granted to claimant

The testatrix died in June 2000. Her sons, the claimant and the first and second defendants, were named as the testatrix's executors under a will created in 1982. Pursuant to her will, the testatrix divided her residuary estate into nine equal parts, granting two parts each to the three defendants and three parts to the claimant. Clause 9 of her will provided that the claimant be granted an option to buy “my farm, known as the Homestead Farm” at a fair market price. The defendants argued that clause 9 was effectively spent at the time the testatrix died, as the claimant had previously purchased the land, excluding the farmhouse, which had at all material times been known as the Homestead, from the testatrix at a date between the creation of the will and her death. Further, it was clear from the phrasing of the will that the testatrix had intended to exclude the farmhouse itself. The claimant argued that the farmhouse, where he had lived all his life, had been included within the terms of the clause 9 option.

The issue for the determination of the court was the meaning of “my farm, known as the Homestead Farm” in clause 9 of the testatrix's will.

The court ruled:
On its true construction, clause 9 of the will included the farmhouse. There had been no explicit exclusion of the farmhouse that would have been necessary given that, to find otherwise, would have deprived the claimant of the only place he had made his home.
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3. Blackman and others v Man and others

Citation: [2007] All ER (D) 118 (Dec)
Court: Chancery Division
Judge: Sir Donald Rattee
Hearing date: 7 December 2007
Summary: will – testator – soundness of mind – testatrix suffering from mild dementia – whether will valid

The claimants were all nephews or nieces of the testatrix. Following the death, her husband and son, the first two defendants, who had been involved in running a Chinese restaurant, had been described by the testatrix as her best friends. The third defendant was the testatrix's executor under two wills dated May and August 1994. Pursuant to those wills, the first two defendants were named as the major beneficiaries of the testatrix's £10 million estate. The claimants sought to challenge the validity of the wills on the basis that, at the time they were made, the testatrix lacked testamentary capacity or that she did not have the requisite knowledge or approval of the wills' contents.

The claimants relied on medical evidence that the testatrix was suffering from mild dementia prior to commissioning the wills. The first and second defendants relied on the fact that the testatrix had independently obtained and completed a will writing form when commissioning her May 1994 will as evidence of her capacity and intent.

The claim would be dismissed.

On the evidence, the manner in which the testatrix had the wills drawn up had been significant. Although she had been suffering from mild dementia, the testatrix had understood the implications of making the will and had contemplated the claims the claimants had to her estate.

Banks v Goodfellow [1861-73] All ER Rep 47 considered.
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4. Kostic v Chaplin and others

Citation: [2007] All ER (D) 119 (December)
Court: Chancery Division
Judge: Henderson J
Hearing date: 7 December 2007
Summary: costs – contentious probate action – claim on estate – whether party having been justified in challenging will

In proceedings concerning the claimant's challenge to the testator's will, in which £8 million had been bequeathed to the Conservative Party Association, the court found that, at the material time, the testator had been unable to form a proper appreciation of the claimant's claims upon his estate, and, accordingly, lacked testamentary capacity to make the relevant will (see [2007] All ER (D) 203 (October)). It subsequently fell to the court to determine the issue of costs.

The court ruled:
The costs of a contentious probate action, like those of any other civil claim, were within the discretion of the court, applying Civil Procedure Rules (CPR) parts 43 and 44. The general rule, enshrined in CPR 44.3(2)(a) was that the unsuccessful party would be ordered to pay the costs of the successful party, subject to sub-paragraph (2)(b). In contentious probate actions, however, there were two long-established exceptions to that general rule, which survived the introduction of the CPR: if a person who made a will, or persons who were interested in the residue, had been the cause of the litigation, a case was made out for the costs to come out of the estate; and, if the circumstances led, reasonably, to an investigation of the matter, then the costs could be left to be borne by those who had incurred them.

The Conservative Party Association had been fully justified in investigating the issue of the testator's testamentary capacity once the claimant's challenge to the will had been advanced on a formal basis.

The Conservative Party Association's costs of investigating the claimant's claim would be paid out of the estate at least down to the stage where a realistic assessment of the merits of the claim could first properly be made.

Mitchell and Mitchell v Gard and Kingwell 3 Sw & Tr 75 considered; Davies v Gregory [1861-73] All ER Rep Ext 1008 considered; Boughton v Knight [1861-73] All ER Rep 40 considered; Twist v Tye [1900-3] All ER Rep Ext 1410 considered; Spiers v English [1907] P 122 considered; Plant, Re, Wild v Plant [1926] All ER Rep Ext 751 considered.

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Features

1. A deed of variation can help make the most of inheritance

There are various ways of planning ahead to minimise a potential inheritance tax (IHT) bill, but what happens if you are the beneficiary of someone who has died without taking any steps to reduce the bill? It may not be too late.

There are a number of ways in which you may be able to reduce the tax payable after someone's death, says Peter Nellist, a financial planner and partner at Clarke Willmott, the firm of solicitors. "In fact, the amount of tax you can save on an estate after death can be astronomical if you know what to look for, but it can be a very technical area."

One way in which it may be possible to achieve IHT savings is through a deed of variation. (see the Inheritance Tax Act 1984 section 142 (1)).

The above legislation provides the following.

142. Alteration of dispositions taking effect on death:
(1) Where within the period of two years after a person's death
(a) any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied, or
(b)  the benefit conferred by any of those dispositions is disclaimed,
by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.

This will enable you to change someone's will or change the way the estate is divided under the intestacy rules – provided that any beneficiaries affected by the change agree to it.

Deeds of variation must be made within two years of someone's death. They can be implemented either before or after probate.

A deed of variation may also be used if a person has failed to make full use of any of the available exemptions. Leoni Kerswill, tax partner at PricewaterhouseCoopers, the accounting firm, explains: "One such example is where shares in a family company are left to a spouse or civil partner, and cash is left to the children. It would be more tax-efficient to change the will using a deed of variation so that the shares, which qualify for business property relief and are, therefore, free of IHT, are left to the children, while the cash is passed to the spouse because all transfers between spouses or civil partners are free of IHT.

The surviving partner could then use the cash to repurchase the shares from the children, so they would be back in the same situation but without having to pay tax."
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2. How to ensure your heirs aren’t stuck with the widow’s mite

Issuing department: The Daily Telegraph

Hundreds of thousands of married couples have good reason to celebrate the Tories' recent rediscovery of the popularity of tax cuts that, perhaps by happy coincidence, came immediately before Labour's sudden decision to change the way inheritance tax (IHT) works. However, partly because of the hasty way the new rules have been introduced, many questions remain about how they will work in practice.

This year everyone has a £300,000 IHT allowance. Anything you leave over and above that value attracts a 40 per cent IHT bill. In the past, husbands, wives or – more recently – civil partners have been able to inherit all their partner's assets without being liable to IHT.

However, when the second partner died, the tax was liable on everything above the allowance or nil rate band, as it is known. What the changes mean is that, in addition to the free transfer, any unused allowances on the first death also pass to the other partner. So if the first partner dies and leaves everything to the other one, there will be a double allowance at the time of the second death. In addition, the rule is enacted retrospectively and so can be claimed by all widows and widowers, no matter when their partner died.

Importantly, the calculation is based on the percentage of the allowance used at the time of the first death and then applied to the allowance at the time of the second death.

Julie Hutchison, estate planning specialist with Standard Life Assurance, said: "It is all worked on percentages and, for once, the fact it is retrospective means people who have lost spouses in the past will also benefit. That even includes people whose husband or wife died in the Second World War.''

Ms Hutchison explained: "This reinforces the need to keep paperwork. It will be up to executors to ensure everything is correct and, where necessary, carry out investigations into court papers to confirm the arrangements when the spouse died. It might cause extra delays in settling people's estates – especially where there was no original will. It is not a case of just assuming someone has a double allowance. Nor does it mean that people can ignore IHT planning. Potentially exempt transfers – which are outside of your estate if you survive seven years – will still be a valuable tool."

Paul Wilcox, chairman of IHT planning specialist Way Group, said: "The message is that careful planning well in advance – at least seven years before death and longer for larger estates – remains the cornerstone of IHT planning. Making gifts within your nil rate band means you could put at least £1.2 million from a joint estate beyond the IHT grasp of HMRC, provided you survive seven years, and you will not have to bother about changes to your will.''

Everyone agrees people with larger estates in particular need to get advice. Justine Littlemore, a probate partner at Cheshire solicitors SAS Daniels, noted: "It is likely that each case will vary slightly. So without doubt the best course of action is to discuss the matter with a solicitor or other expert in wills and estate planning.''

Additional information from HM Revenue and Customs (HMRC) is available at: www.hmrc.gov.uk/pbr2007/it-nil-rate-guide.pdf.
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3. Battle goes on to keep the family home out of IHT

Issuing department: Financial Times

Nearly two million people remain liable to inheritance tax (IHT), and for most, the biggest asset – and IHT liability – is the family home. According to Halifax, nearly 100,000 UK residential properties are now worth more than £1 million. Consequently, owners of family abodes in the priciest areas are still likely to have huge chunks of wealth consumed by the taxman. Probably the simplest way to deal with home-related IHT is to insure against the future tax bill. A joint whole-of-life second death policy can pay out a sum assured equal to the couple's expected IHT liability when the second spouse falls off his or her perch. Premiums are normally paid monthly or yearly for as long as you live.

To keep the sum outside your estate, the policy should be written in trust for your heirs. Julie Hutchison, estate planning specialist at Standard Life, says the trust structure also means the beneficiaries can lay their hands on the money on day one, rather than wait up to six months for probate.

This route is not necessarily completely tax-free – there could be a charge, depending on the type of trust you use and the level of contributions. However, Hutchison says that, in reality, given a bit of thought, most trusts will not have to pay a levy. However, whole-of-life is a bit of a gamble. Kevin Carr, head of protection strategy at Lifesearch, says: "It's like going to the bookies to put a bet on how long you're going to live." If you perish soon after taking out the plan, you may have the comfort of knowing, on your deathbed, that you (or rather your estate) are quids in. Survive too long, and the opposite will probably be true.

The big drawback with whole-of-life is the cost. If you are young and in good health, the cover is comparatively cheap. Not so, however, for older people, or anyone in less than perfect health. Lowest monthly premiums for a healthy 70-year-old couple with a £250,000 sum assured are £553.78, reviewable after 10 years, or £621.27 fixed for life.

Reviewable "balanced" policy premiums can double at the 10-year point. Those unable to pay more will see their sum assured slashed. Persons in poorer health could find premiums doubled, tripled, or more, or find themselves refused altogether.

Some use whole-of-life policies as a tax planning tool, in conjunction with a lifetime mortgage or equity-release scheme secured on the home.

Under equity release, you are allowed to borrow up to 30 per cent of the value of the property, depending on age, which can be used to fund life assurance. The interest on the loan rolls up and is repayable, together with the capital when you die, thus reducing your estate and the IHT bill. The life assurance payout, meanwhile, is out of the estate and could mean your heirs end up with substantially more than if no scheme were in place.

Playing around with the capital in the family residence is not to all tastes, though. Owners often have an emotional tie, and would sooner suffer the IHT hit.

Paul Garwood, director and London head of financial planning at Smith & Williamson, says your financial adviser needs to do a fair amount of analysis to work out whether this route is worthwhile. A drawdown arrangement, in which the equity release provider allows you to access the money a little at a time to fund monthly premiums, helps limit the impact of rolled up interest. Garwood says capital sums gifted to children are seen as a potentially exempt transfer (PET). The money falls out of IHT if the donor survives for another seven years.

People with higher incomes might take out a standard, as opposed to a lifetime mortgage.

Clive Garnett, private client director at Brown Shipley, says clients sometimes use the capital from their homes to invest in Aim IHT portfolios, whereby assets drop out of the estate in just two years or alternatively discounted gift plans, in which the value of the asset may be discounted from day one. A third possibility is to use the capital to buy an annuity so that the income funds a whole-of-life policy. Some accountants are also marketing family debt schemes to avoid IHT on the family house. Vantis offers such a plan.
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4. Agreement has legal force

Issuing department: The Times

An agreement between spouses to compromise an ancillary relief claim need not be approved by the court to have legal force.

The Court of Appeal so observed when dismissing the appeal of the defendant, Kathleen Soulsbury, as personal representative of the estate of her late husband, Owen Soulsbury, from Judge Cowell, who, at Central London County Court on 27 June 2006, held that the estate was liable to pay the sum promised, and he entered judgment for the claimant for £116,750, including interest.

The claimant, Elizabeth Soulsbury, had been married to the deceased in 1966, and, in 1986, following their divorce, the court made a periodical payment order for her.

In 1993, she agreed to waive her periodical payment claim on the promise of the deceased to make provision for the payment of £100,000 to her in his will, and he did so.

On the morning of 10 October 2002, the deceased married the defendant and died the same evening. By virtue of section 18 of the Wills Act 1837, the effect of that marriage was to revoke the deceased's will, and the defendant claimed that the £100,000 promise was not enforceable.

Mr Charles Howard, QC, and Mr Mark Dubbery for the defendant; Mr Richard Millett, QC, and Mr Mark Twomey for the claimant.

Lord Justice Ward said that, although a will was always revocable, a testator could bind his assets so that his personal representative had to give effect to that agreement at the expense of the beneficiaries (see Williams on Wills (8th edition) paragraph 3.1).

An agreement converted into a court order had the advantage of a means of enforcement available, whereas a party had to sue on an agreement to obtain eventual enforcement. However, settlement without recourse to the courts was none the less enforceable.

His Lordship referred to the dictum of Lord Justice Thorpe in Xydhias v Xydhias ((1999) 1 FLR 683, 691) that the only way of rendering a bargain enforceable was to ensure that the applicant converted the concluded agreement into an order of the court, but that was in conflict with Goodinson v Goodinson ((1954) 2 QB 118), Gould v Gould ((1970) 1 QB 275), de Lasala v de Lasala ((1980) AC 546) and Kelley v Kirsten ((1998) 1 FLR 996).

The conclusion expressed by Lord Justice Thorpe, that if there were negotiations to compromise a claim for ancillary relief, then there was a duty to seek the court's approval, was too wide. Even an agreement subject to the approval of the court was binding to the extent that neither party could resile from it.

In this appeal, there was no pending application for any financial relief to compromise. The parties did not envisage going back to court to approve it. There was no need to do so. Either could have done so, but neither chose to do so. The event upon which payment depended came to be fulfilled.

Lord Justice Longmore delivered a concurring judgment, and Lady Justice Smith agreed.

Solicitors: Warner Goodman & Streat, Southampton; Anthony Louca, Camden Town.

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Articles

1. Death, severance and survivorship

Journal name: Family Law Journal
Author: John Wilson
Citation: Fam Law 37 (1082)
Issue date: 1 December 2007
Summary: This article asks when someone who is the beneficial joint tenant of a property dies, does his “share” pass to his fellow joint tenant(s), or does it fall into his estate? Does a divorce petition or an application for ancillary relief made before death have the effect of severing the beneficial joint tenancy, and, if not, what is needed to effect severance? These are the perennial issues that arise between the executors and beneficiaries on the one hand and the fellow joint tenants on the other, particularly when the death is sudden and unexpected. This article seeks to address the issues raised.
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2. Private client: under the influence

Journal name: Legal Week
Author: Sarah Foster
Citation: Legal Week, 29 November 2007, 26
Issue date: 29 November 2007
Summary: This article looks at the difficulty of succeeding with a claim that a testator/testatrix was unduly influenced into making a specific gift in a will or the will itself. The author argues that Re Edwards (deceased) Edwards v Edwards and another [2007] All ER (D) 46 (May) may represent a turning point in such claims.
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3. Don’t fear the reaper

Journal name: Taxation
Author: Penny Bates
Citation: Taxation, 15 November 2007, 528
Issue date: 15 November 2007
Summary: This article examines how all assets held by the deceased at death are uplifted for capital gains tax purposes. This means that the executor acquires the assets at his or her probate valuation at the date of death, but there is no deemed disposal by the deceased and hence no capital gains tax to pay. Likewise, assets forming part of a settlement in which the deceased had a life interest are also uplifted at the date of death and are not subjected to tax in the same manner as personally held assets.
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4. Undue influence in will cases

Journal name: EMIS Property Service
Author: Leon Swerling
Citation: (2007) 5 EMIS Property Service 3, 66
Issue date: 1 November 2007
Summary: In a will-making context, the case of Hansen v Barker-Benfield [2006] EWHC 1119 (Ch) summarised the principles of undue influence in the leading case of Royal Bank of Scotland plc v Etridge (No. 2) [2002] 2 AC 773 (“Etridge”) as they apply to will cases.

The testator died in February 2003. In January 2003 he had made a will in favour of his daughter by his first marriage. In November 2002 he had transferred his interest in a number of properties to his second wife. His daughter claimed that the transfer of the properties should be set aside on the basis that the testator did not have sufficient capacity and was under the undue influence of his second wife. His widow counter-claimed that the testator had not had capacity when he made the will in favour of his daughter in January 2003.

The claim was dismissed and the counter-claim allowed.

The court found that, on the evidence, it was likely that the testator did not have the necessary capacity to execute the January 2003 will. The transfer of property in November 2002, however, was valid, and weight was given to the relationship between the parties.
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5. Problems in getting paid in probate matters

Journal name: EMIS Property Service
Author: Leon Swerling
Citation: (2007) 5 EMIS Property Service 3, 51
Issue date: 1 November 2007
Summary: As a solicitor, if you deal with the administration of an estate without a grant of probate or letters of administration and no grant materialises, you run the risk of incurring costs without being able to recoup them since the right to charge derives from the grant of representation. If a grant is revoked, however, the revocation is not like a contractual rescission. Costs incurred under the grant until it is revoked are still recoverable.

Thus, in the sort of case where an issue or question as to who is to take the oath remains open, a special retainer letter is necessary, whereby you would need to seek an indemnity for costs from the would-be executor or administrator.

A similar practical problem occurs when trying to trace the nearest relative when a client cannot be found to deal with the estate administration and take the grant. Once found, he or she may wish to change solicitors, and, therefore, costs need to be kept to a minimum in the meantime.

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Books

1. How to book and claim discounts
  • Law Society Publishing: quote “Probate Section” to receive a 20 per cent discount off related titles (excluding directories) via Prolog at The Law Society, PO Box 99, Sudbury Suffolk CO10 2SN, telephone 0870 850 1422, fax 01787 313 995 or email lawsociety@prolog.uk.com.
  • LexisNexis Butterworths: quote “Law Society Section discount offer” when ordering via www.lexisnexis.co.uk, customer.services@lexisnexis.co.uk or 020 8662 2000.

This e-alert is not intended to provide comprehensive records of information concerning the probate sector. If you have any feedback or suggestions, please email probatesection@lawsociety.org.uk. This e-alert was created in conjunction with LexisNexis UK Legal Updater Service. For further information about any of the articles, please contact claire.melvin@lexisnexis.co.uk. The views expressed by the Legal Analysis interviewees are not necessarily those of the proprietor.
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