Estate planning update
Where there's a will there's an intention, but honest mistakes, nil rate bands and tax consequences can affect interpretation, say Helen Bryant and Richard McDermott
The courts have shown increasing willingness to look back and examine the original circumstances and intentions of parties. The options are to rescind (Pitt v Holt), rectify (Marley v Rawlings) or pronounce on the legal construction of documents where mistakes would critically affect the beneficial interests in the estate and/or the implementation of
estate-planning measures.
Marley v Rawlings concerned the husband who signed his wife’s will by mistake. The wife died in 2003, with her estate administered without anyone noticing that she had signed the will prepared for her spouse. The husband’s error only came to light after he
died in 2006.
Notwithstanding the small amount at stake, the case went to the Supreme Court, which considered whether a botched execution of a will was something that could be rectified under of section 20 of the Administration of Justice Act 1982. Section 20 allows the court to rectify a will if it fails to carry out the testator’s instructions because of either a clerical error or the draftsman’s failure to understand instructions.
Clearly there was no failure to understand the testator’s instructions in this case. Was there a clerical error when two perfectly adequate wills were signed and witnessed in accordance with the correct procedure but the wrong way round?
Traditionally, a clerical error was assumed to
mean a mistake in typing, printing or copying.
There was no such mistake in this case. The court held, however, that a relatively wide meaning should be adopted, which would include mistakes in routine office work, such as preparing, filing, sending or organising the execution of a document.
Lord Neuberger said that the 1982 Act is “aimed at making the law on wills more flexible and rendering it easier to validate or ‘save’ a will than previously”. In general, a will is to be interpreted in the same way as any other legal document, such as a contract or a notice. Rectification of a document is permissible where it fails to give effect to the underlying intention of all the parties or, as here, the sole party to it.
Inevitably, these cases arise after the testator has died, but the court will nevertheless seek to establish what the intentions were. The court also confirmed that a document does not have to satisfy the formal requirements of section 9 of the Wills Act 1837 to qualify as a “will” capable of rectification under section 20. It is enough that it was intended to
be a will.
The Supreme Court reversed the Court of Appeal’s earlier decision, holding that the husband’s will should be rectified so that it contained the typed parts of the will signed by the wife, in place of the typed parts of the will signed by the husband.
Nil rate band legacies
In Loring v Woodland Trust [2013], decided before Marley v Rawlings, the High Court was asked to determine the amount of a legacy to the testatrix’s grandchildren of “such sum as is at the date of my death the amount of my unused nil rate band for inheritance tax” (IHT) by clause 5 of her will. Residue was left to charity.
The testatrix was a widow whose husband’s estate had used none of his nil rate band, so when she died in 2011, a double nil rate band was available. The legatees claimed they should receive £650,000. The charity claimed the gift was restricted to £325,000. Although there was little useful external evidence as to the testatrix’s intentions about the amount of the legacy, because the will was signed long before a transferable nil rate band became available, the court found in favour of the grandchildren.
One important factor in the decision was that the Inheritance Tax Act provision covering a spouse’s unused nil rate band operates to increase the nil rate band of the second to die, rather than reallocating the nil rate band of the first spouse.
Brooke v Purton [2014] concerned a will in
which the nil rate band legacy contained a crucial drafting error. The testator, who was divorced,
had intended to leave business assets and an amount corresponding to the nil rate band on discretionary trusts.
However, the draftsman used a precedent designed to set aside a nil rate band legacy out of spouse exempt residue. As the residue of this particular testator’s estate was not exempt, on a strict construction of the will, the discretionary legacy was nil.
The High Court held that “considering ‘armchair’ evidence of matters known to or in the contemplation of the testator, one is left with uncertainty as to what was intended by the wording of the will”. That was sufficient to bring the 1982 Act into play. The court was entitled to take into account evidence of the testator’s intention, and to interpret the will in accordance with
his wishes.
The case illustrates the fine line between the remedies of construction (interpreting the meaning) and rectification (amending the document to achieve the testator’s intention). The time limit for an application for rectification of a will is six months after the grant of probate, unless permission from the court is obtained.
In Brooke v Purton, the six-month period had expired and the court was asked to permit rectification out of time. The judge held that rectification was unnecessary as the court had determined that the will should be interpreted disregarding the offending sub-clause.
High Court v tax tribunals
A conundrum arises where the court is asked to rectify a deed or will because of the possible tax implications. The court has to decide on rescission or rectification; the tax tribunals to decide on the tax consequences of the deed. Can the court decide on rectification when the tax treatment of the controversial document has not been established? Should the tax tribunal determine the tax effect of a deed which may be rescinded
or rectified?
In Pitt v Holt, there was no controversy about the disastrous tax effect of the deed that the Supreme Court agreed to rescind. Kevern v Ayres [2014], however, confronts the unreality of a rectification application in a tax vacuum.
This case concerned post-death IHT planning
for an intestate estate. Under the provisions of the Administration of Estates Act 1925, the deceased’s widow and his sister were entitled to share his residuary estate equally.
They agreed to split the estate 70:30, with the widow receiving 70 per cent outright and a life interest in the remaining 30 per cent.
The intention was that the whole estate would qualify for spouse exemption and that the later termination of the widow’s life interest would take effect as a potentially exempt transfer by her.
An unfortunate drafting error in the deed of variation put the plan in jeopardy. The deed provided for the life interest to terminate exactly two years after the date of death. HM Revenue therefore argued that the life interest fell within section 142(4) of the IHT Act 1984.
It claimed IHT on the 30 per cent share on the basis that for IHT purposes, the deceased’s sister, not the surviving spouse, was the beneficiary. The estate beneficiaries challenged the Revenue’s technical analysis (an issue within the jurisdiction of the tax tribunal) and sought rectification of the deed of variation (a matter for the discretion of the court). The beneficiaries and the Revenue agreed that the rectification claim should proceed first. The Revenue did not take any active part in opposing the rectification claim.
The judge declined to make a ruling about
the rectification of the deed. Clearly, the key question was whether there had been a mistake about the meaning of the words in the deed
and/or the requirements of section 142(4). Neither the beneficiaries nor the Revenue were prepared to argue whether there was or was not such a mistake.
There is no power in English law to order the words of a written document to be changed where the court has not determined that those words have failed to express the parties’ intentions. The application was adjourned, so that the parties could consider how to proceed.
The judge suggested a combined hearing by a court operating simultaneously as High Court and tax tribunal; or, more practically, for the High Court to hear the action on its merits, with the active participation of the Revenue.
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LESSONS LEARNED
triple objective:
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Helen Bryant is a partner and Richard McDermott is an associate at Farrer & Co