Estate planning update: Inheritance Act claims after Lilleyman

In this summer update we look at an Inheritance (Provision for Family and Dependants) Act 1975 claim involving another contentious probate costs judgment which highlights the financial risks of rejecting a Part 36 offer even where the claim is successful; and we consider a case involving a dispute over two joint bank accounts which held the lottery winnings of one of the account holders. Following the introduction of the new reduced rate of inheritance tax for estates where at least 10 per cent of the net estate is left to charity, we comment on the updated guidance from HM Revenue & Customs.

Inheritance Act claim

The case of Lilleyman v Lilleyman [2012] EWHC 821 (Ch) was brought by the late Roy Lilleyman's widow Barbara Lilleyman, against Roy's sons Nigel and Christopher Lilleyman (from an earlier marriage) as executors of their father's estate, on the basis that his Will failed to make reasonable provision for her. Roy had left his company shares which made up the bulk of his £6 million estate to his two sons. His Will left to Barbara only some of his chattels and limited rights of occupation in two houses, subject to which Roy's interest in the houses would pass to his two sons. The total market value of the two houses amounted to approximately £500,000 at the date of Roy's death and Barbara, as tenant in common, was already a joint owner of one property. Roy had also set up a fund which provided a fixed annuity of approximately £378 (net) per month.

A separate property had been purchased jointly by Roy and Barbara as a home for Barbara's son from her first marriage and the estate's precise interest in it was in some doubt. It had a market value in the region of £130,000.

Despite Roy's sons initial assertions to the contrary, by the time of their counsel's closing submissions the sons accepted that Roy's Will had failed to make reasonable financial provision for Barbara. This was something which Briggs J considered 'manifestly clear' in any case and he later criticised the sons for failing to accept the point earlier on. Therefore the judgment centred on what financial provision should be made for Barbara.

In assessing the relevant factors which fall to be considered in an Inheritance Act claim, Briggs J considered Barbara's age - 66 years - and what provision she might have received if the marriage had ended in divorce rather than upon Roy's death (the so-called 'divorce cross-check'). Mr and Mrs Lilleyman had been married for two and a quarter years, although their earlier cohabitation was taken into account such that de facto the relationship was nearly four years. Given the relatively short length of the marriage and the size of Roy's estate, this was classed as a 'short marriage big money' case for the purposes of the divorce cross-check.

It was held that the fairest and therefore most reasonable provision which should be provided to Barbara out of the estate consisted of the outright transfer of the estate's share of the three residential properties (or at her option, a lump sum representing the property which had been held in Roy's sole name). Barbara also retained the gift of chattels contained in Roy's will. The shares in the family business remained in the estate to pass to Roy's sons. Briggs J considered that the award to Barbara amounted to approximately 8 per cent of the net estate, which was a 'very modest burden' on the value of Roy's sons' interests in the estate.

The main case was heard on 12, 13 and 14 March and the parties' representatives returned to court on 4 April for judgment followed by the costs hearing. In the costs judgment handed down by Briggs J on 26 April 2012, his discomfort at being obliged by the costs regime to award a proportion ?of costs against Barbara, such that her award was depleted quite significantly, ?is evident.

As is the case with offers to settle made under Part 36 of the Civil Procedure Rules, if one party rejects such an offer and subsequently fails to beat the terms of that offer in court, then the costs of both parties from the last date on which the Part 36 offer could have been accepted will, generally, lie with the rejecting party.

A series of Part 36 offers had been made by both Barbara and by Roy's sons between the issue of the claim in February 2011 and the hearing in March 2012. In particular, the defendants' solicitors made a Part 36 offer on 27 July 2011 whereby the two jointly owned properties (with total market value of approximately £300,000) would be transferred to Barbara along with a lump sum of £450,000. A separate offer of £18,000 to purchase Roy's chattels was also made. The consequence of Barbara accepting this Part 36 offer within 21 days would have been that her costs would have been paid from the estate.

However, Barbara did not accept the offer and the specified period expired on 17 August 2011. As the award given by Briggs J did not beat the terms of that Part 36 offer, the provisions of Part 36.14(2) required that an order be made for Barbara to be liable for the defendants' costs (and her own) from 17 August 2011 plus interest. However the court has discretion to depart from Part 36.14(2) where it is considered unjust to make such a costs order.

The defendants' costs for this period were £68,000 and Barbara's were £114,500, although it was estimated that the total would reduce to £150,000 after detailed assessment. Clearly such an award would significantly reduce the provision awarded to Barbara.

While Briggs J expressed his sympathy at Barbara's situation, he noted that 'the unfortunate reality is that Mrs Lilleyman was, from August 2011, engaged in a high risk venture in which she played for high stakes and, in substance, lost'.

However, the judge considered there was injustice in allowing Roy's sons to recover their costs in full in light of the 'no holds barred' way in which the claim had been defended. In particular the defendants' refusal to concede until the last minute that their late father's Will had not made reasonable financial provision for Barbara was criticised. Therefore, a 20 per cent disallowance of the defendants' costs was ordered, to signify the court's disapproval. Barbara Lilleyman was still left with ?a large costs bill.

In concluding his costs judgment, Briggs J expressed 'a real sense of unease' at the disparity between the costs regime enforced in Inheritance Act cases as compared to that in financial relief proceedings arising from divorce. It is interesting to note the different regimes applicable in such types of cases. Where the emphasis is on making open offers, the court can make financial provision which properly takes into account the respective parties' costs liabilities. However, with the emphasis ?on without prejudice negotiations and Part 36 offers in Inheritance Act claims, it is perhaps becoming increasingly likely that the costs outcome will undermine the court's efforts to make appropriate provision for the applicant.

Lucky numbers

We turn now to the lottery winner joint account case. In Drakeford v Cotton and Anor [2012] EWHC 1414 (Ch), Mr Justice Morgan held that the stated but unwritten intention of the late Mrs Mary Cotton was that monies in the joint accounts she held with her younger daughter (Michelle) were owned beneficially, as well as legally, as joint tenants. The effect was that upon Mary's death in August 2008, Michelle took the legal title and beneficial interest in the entire account monies by survivorship.

The brief facts of the case are that Mary and her husband Ernest had won approximately £107,000 on the National Lottery in 1997. They immediately made wills in essentially mirror form, leaving their estates to each other and in default to their three children, Lynn, Russell and Michelle, in equal shares. Prior to Ernest's death in February 2008, he and Mary held two joint bank accounts holding the remaining lottery monies (approximately £50,000). One week after Ernest's death, Mary and her daughter Michelle went to the building society and transferred the two accounts into their joint names. It was agreed that, at that stage, Mary and Michelle were trustees holding the monies on trust for Mary alone.

Following Mary's death, her elder daughter Lynn claimed that the monies in the joint bank accounts was held on trust for Mary's estate and should pass according to her will. However Michelle contended that Mary's intention had changed in the months following Ernest's death and by the time of her own death, Mary's intention was for Michelle to receive the funds after her death as she wished to reward Michelle for being her principal carer.

It was held that Mary had intended that the monies in the accounts on her death would be owned beneficially as well as legally by Michelle. Mary had formed a settled intention to this effect in June 2008 and she expressed that intention by stating to Michelle, Russell and others that the monies would pass to Michelle and not Lynn. There was no requirement for Mary to have amended her will.

The judgment in this case contains a helpful summary of the four possible outcomes following the transmission of the accounts into joint names, namely that one or other joint account holder could hold the entire beneficial interest in the accounts to the exclusion of the other or each joint account holder could hold the beneficial interest in 50 per cent of the accounts either as joint tenants (such that the beneficial interest in the whole would be held by the survivor) or as tenants in common (such that the account holder's beneficial interest would pass under their will).

The case also reminds us briefly of the requirements of section 53(1)(c) Law of Property Act 1925 and, in confirming that this provision does not apply to these circumstances, confirms that there was no requirement for Mary to have stated her intentions in writing.

Reduced IHT rate

As mentioned in the last Estate Planning Update (Solicitors Journal 156/16, 24 April 2012), the new rules introducing the reduced rate of inheritance tax (36 per cent) for estates where at least ten per cent of the net estate passes to charity came into force on 6 April 2012.

On 14 May 2012, HM Revenue & Customs updated its IHT Manual so that the guidance now refers to the requirement to notify charities when a deed of variation redirects assets to them. For obvious reasons, HM Revenue & Customs would not wish to allow the 36 per cent rate to apply in circumstances where the charitable legacy is not in fact claimed by the charity in question and seeks to minimise the likelihood of this occurrence.