Update: wills & trusts
Catherine McAleavey and Catherine Sanders discuss Inheritance (Provision for Family and Dependants) Act 1975, severance of joint tenancy by will, contract to make a will, capacity for severance of joint tenancy, Finance Act 2006 changes, trustee exemption clauses and Re Hastings-Bass
Inheritance (Provision for Family and Dependants) Act 1975
Witowska v Kaminski  EWHC 1940 (Ch);  All ER (D) 357
Janina Witowska and Konrad Kaminski cohabited since shortly after Ms Witowska's arrival in England on a six months' visa in 1997, until his death in 2002. Between those dates, Mr Kaminski made a number of payments, ranging from £250 to £3,000, to Witowska. Kaminski's son, who would have been entitled to the whole of his father's estate on intestacy, appealed against the decision of the County Court judge who had agreed that Witowska was a dependant and awarded her £50 per week, being an amount sufficient to maintain her in Poland.
Dismissing both the son's appeal and Witowska's cross-appeal on quantum, the judge held that cohabitation and financial dependency which are questions of fact had been established. The fact that Witowska had been living illegally in the UK did not prevent her from making a claim under the 1975 Act. On the basis of the evidence, which indicated that Witowska had close ties with, and was likely to return to Poland, it was appropriate to base her award on maintenance needs there.
Dingmar v Dingmar  EWCA Civ 942,  All ER (D) 160
The issue that fell to be determined by the Court of Appeal was whether, for the purposes of making an order under the 1975 Act, a severable share of a jointly owned property should be taken at its current value or if the words 'at the value thereof immediately before death' used in s 9(1) of the Act created a cap on what could be awarded. At the date of death, the property in question was worth £40,000, by the time of the trial £95,000, so that the deceased's half-share valued at death represented c21 per cent of the equitable interest. The court held (Lloyd LJ dissenting) that 'at the value thereof at the date of death' meant a share of property that formed part of the net estate, rather than the value of the property at the date of death, and that the court could, therefore, make an order in respect of a half share of the current value.
Land v Land  All ER (D) 71
The claimant pleaded guilty to and was convicted of his mother's manslaughter.
Section 2 of the Forfeiture Act provides that the court may modify the effect of the forfeiture rule in s 1 if having regard to the conduct of the offender, and other material circumstances, the justice of the case so requires.
Section 3 provides that the forfeiture rule shall not preclude the making of a claim or order under the Inheritance (Provision for Family and Dependants) Act 1975.
The court refused to grant relief for forfeiture under s 2 (part of the reason for this was that the claim was brought out of time). It went on to say that in all the circumstances the forfeiture rule did not serve the public interest and made an order under the 1975 Act (awarding the claimant a life interest in the family home).
Severance of joint tenancy by will
Carr v Isard  All ER (D) 343
Grace and Thomas Carr owned a property as beneficial joint tenants. In 1967, both made wills purporting to give each other a life-interest in their respective shares. The wills were made by the same firm of solicitors, but there was no evidence that Grace and Thomas had knowledge of the contents of each other's wills or had given instructions in each other's presence. The terms of Grace's later will were inconsistent with the continuance of a joint tenancy. Thomas's later will was less conclusive. The court held that in the absence of a clear communication of intention to treat the property as no longer held as joint tenants, severance from a course of dealings could not be inferred. There was insufficient evidence to show that Grace and Thomas had severed the joint tenancy by their 1967 wills. It therefore passed by survivorship.
Rights over disposal of a body
University Hospital Lewisham NHS Trust v Hamuth  EWHC 1609 (Ch);  All ER (D) 145
This was an application for directions concerning the disposal of a body where there was a dispute as to validity of the last will (containing directions for cremation) and disagreement between the purported executor and other family members. The judge held that an executor has a general, probably unassailable, right to make arrangements for the disposal of a body. However, where the appointment of an executor was the subject of a dispute that could not be solved within a reasonable time, the court could intervene. That was the case here, where the NHS Trust, being in lawful possession of the body, should make the decision about the method of disposal.
Contract to make a will
Irani v Irani  EWHC 1111 (Ch),  All ER (D) 335
In response to his former wife's application for periodical payments on divorce proceedings, the deceased had agreed to leave his property to his children (two legitimate and one adopted) and signed a document in which he 'hereby left' it to them. This was not, however, properly executed as a will and he died intestate.
Lightman J held that there was an enforceable contract to leave the property to the children for which the consideration was the wife's discontinuance of the divorce proceedings. Mr Irani's written offer to leave the property to the children had been accepted orally by Mrs Irani which was sufficient for the purposes of s 40 of the Land and Property Act 1925. Consequently, the property did not form part of his estate and his illegitimate son was not entitled to a share on intestacy.
It should be noted that the events which led to the making of the contract predated the Law of Property (Miscellaneous Provisions) Act 1989, s 2(3) of which provides that a contract for the sale or other disposal of land must be made in writing and signed by both parties.
Capacity for severance of joint tenancy
Wainwright v Wilson  All ER (D) 180
The court held that the degree of understanding for a contract varies. However, where a deed of gift disposes of the main asset, the level of understanding was the same high degree as was always required for a will. Where, as in this case, the deed of gift created a joint tenancy, the donor had to understand not only that he was transferring the property into joint names but also the effect on death (ie, survivorship). Following an earlier decision in which the will was set aside for want of capacity the deed of gift was also set aside so that the property formed part of the donor's estate.
Practice points: probate
1. Following the decision in the Estate of Edith Lilian Rogers  WTLR 691 (See SJ 30.06.06) guidance has been issued on the form of oath where partners in a firm have been appointed as executors. A "partner" must now state that he/she is:
- a partner
- a member
- a share owner of a solicitor's incorporated practice
- a member of a solicitor's incorporated practice
and is a profit sharing partner or equivalent. The wording is:
"At the date of death of the Deceased I [equity or fixed share partner] was one of the partners in the said firm and as such I am [one of] the Executors named in the Will and I share in the profits of the said firm
Power is to be reversed to the other profit sharing partners in the said firm".
Oaths not in this form will be rejected.
2. The rate of interest for late payment or repayment of inheritance tax increased from 3 per cent to 4 per cent with effect from 6 September 2006.
3. The Department of Constitutional Affairs has announced that it will implement recommendations made by the Law Commission in its 2005 report that where a potential heir cannot inherit, or is disqualified from inheriting due to the forfeiture rule, property should be distributed as though that person had died. This will mean, for example, that where a son kills his parent, and there is no will, his children will benefit (under the current rule they would also be cut out). If a will gives a legacy to A or if he predeceased to B, and A forfeits the legacy, it will pass to B. See www.gnn.gov.uk/environment/dca/
4. In its December 2006 newsletter, HMRC once again reminded practitioners of the importance of ensuring that IHT 200 is complete and, in particular, that form D4 (joint property), the most common problem area, is included and completed fully. The HMRC goes on to discuss in some detail when and how D4 (which is to be redesigned) should be completed and the rationale behind some of its questions. In the same newsletter HMRC has said that the normal turn around time for issue of receipted D18s where all information has been submitted and tax paid, is seven days, that references should not be obtained for exempted estates and that it will stop using the name "Capital Taxes" '“ in future being known as HMRC Inheritance Tax. See www.hmrc.gov.uk(cto/newsletter.htm).
Since the shock announcement in the Chancellor's 2006 Budget that there was to be a major overhaul of the inheritance tax treatment of trusts, the changes in the Finance Act 2006 have, quite understandably, dominated the trust press and will do for some time to come.
On that topic, in November, HM Revenue and Customs (HMRC) published a response to a number of queries put to them jointly by the Society of Trust and Estate Practitioners (STEP) and the Chartered Institute of Taxation (CIOT) '“ these are extensive and helpful and can be found on the STEP website www.step.org.
Fortunately the Chancellor's pre-budget report last December was less eventful. Although the contents of PBRN18, which announced the proposed introduction of anti avoidance rules for artificial capital gains tax losses arising to individuals and trustees should be noted, so should the proposed consultation on the offshore regime and multi tiered funds.
Otherwise, the beginning of 2007 seems a good opportunity to catch up on the other things that have been happening in the trusts arena, which may have been overlooked in our haste to grapple with the new legislation.
The question of whether the use of trustee exemption clauses (TECs) should be restricted was originally referred to the Law Commission for consideration, following worries raised during the debate surrounding the enactment of the Trustee Act 2000. A consultation paper was published in January 2003, which expressed concerns that people have set up trusts without being aware of an exemption clause in the deed, which would exempt the trustees from liability to negligence. However, their suggestion that professional trustees should no longer be able to rely on such clauses was not well met by those involved in trusts, and a further report on TECs was issued in July 2006. This report recognised that it is sometimes reasonable for there to be a TEC and that it would be difficult to draft a statutory rule setting out in what circumstances and to what extent they should and should not be permissible. It also accepted that while many trustees and solicitors do draw TECs to the attention of their clients and explain its impact, many do not. The result was that for the first time ever the Law Commission proposed self-regulation by the trust industry, and the promotion by the government of the following rule of practice:
'Any paid trustee who causes a settlor to include a clause in a trust instrument which has the effect of excluding or limiting liability for negligence, must (before the creation of the trust) take such steps as are reasonable to ensure that the settlor is aware of the meaning and effect of the clause.'
The England and Wales Branch of STEP has as a result published its own practice rule, with guidance notes, which is an expanded version of the Law Commission's rule, and found at www.step.org. It is to be hoped that other professional bodies will follow suit.
In relation to TECs, the recent decision in Re Clapham, Barraclough and Mell  WTLR 203 should be noted. This was made prior to the publication of the Law Commission report and, unsurprisingly, HHJ Behrens commented generally that the law in this area was ripe for reform. The testator (Mr Clapham) died in 2003 leaving the residue of the estate to his daughters, Mrs Mell and Mrs Barraclough, appointing them both executors. Mrs Mell alone took out the grant with power reserved to her sister, who died months later. The family home was the principal asset in the estate and was sold after the sister's death. The proceeds of sale were paid to Mrs Mell, who, almost immediately visited Mrs Barraclough's two daughters and gave each a cheque which together approximated to Mrs Barraclough's share of the sale proceeds. She did this because when she looked at the will after her sister's death she believed that a substitutional provision in favour of Mrs Barraclough's children if Mrs Barraclough predeceased her father, operated in the circumstances. In fact it was Mrs Barraclough's estate that was entitled, the sole beneficiary of which was her widower.There was a wide trustee exemption clause which excluded liability for loss unless happening through the executor's 'own personal act done by him either with the knowledge that it was wrongful or without any belief that it was rightful and not caring whether or not it was wrongful.' Although HHJ Behrens found that Mrs Mell's conduct was not only negligent but probably grossly negligent, he found that she was within and entitled to rely on the exemption clause because she had genuinely made a mistake and positively believed that she was correct in making the payments to her nieces. As the payments were made under a mistake they were repayable by the nieces, but, if loss occurred because either failed to repay, Mrs Mell and Mr Barraclough would in effect bear this loss equally and the exemption clause could not cause the entirety of the loss to fall on Mr Barraclough. It is worth noting that had Mr Clapham's will been drawn up by a STEP member after the introduction of the new practice rule, the existence and effect of the exemption clause would have had to have been disclosed to the testator. However given that lay executors were being appointed the clause might well have stood in any event with the same end result.
In Tax Bulletin 83 (June 2006), HMRC has given a useful indication of their current views on the Re Hastings-Bass decd  Ch 25 principle, which has been applied by the courts to set aside transactions in certain circumstances where a trustee has a discretion, which he exercises, only to find that the purported exercise has unintended consequences. The original principle as stated in Re Hastings-Bass decd has been reformulated in Mettoy Pensions Trustees Ltd v Evans  WLR 1587, and there has been an increase of interest in and reliance on the principle resulting in a series of cases decided at first instance, the most recent being Sieff v Fox  EWHC 1312 (Ch). In most of these cases the unintended consequence of the mistake has been a liability to tax, hence HMRC's interest. Where the court has been asked to set aside a transaction in reliance on the principle, however, the Revenue has in the past declined invitations to be joined as a party to any proceedings. However in the light of observations made by Lloyd J in Sieff v Fox that it might be easier if HMRC were joined in some cases, and because they are concerned that the current formulation of the principle is too wide, HMRC will now give active consideration to participating if there is substantial tax at stake or where they feel that they could make a useful contribution to the development of the principle.
On the principle itself, HMRC comment that in line with Re Hastings-Bass itself this should state that the court 'may' rather than 'will' interfere with a trustee's actions and that the effect of the principle, if it applies at all, should be to make the trustees decision voidable rather than void. They further agree with the view of Lloyd J in Sieff v Fox that the relevant test is whether the trustee 'would' rather than 'might' have acted differently if he had taken the correct considerations into account. While accepting that trustees should take fiscal consequences into account when deciding how to act, they consider that there is only scope for the principle to apply where the trustee completely fails to address relevant fiscal considerations, and not where he takes fiscal advice that turns out to be wrong, or fails to implement the transaction according to correct advice. In the latter scenarios, the view of HMRC is that the transaction should stand and those suffering loss should be able to pursue remedies against the trustee and/or their professional advisers. HMRC retain their basic position that they will not consent to a reversal of the tax consequences of a transaction based on the Re Hastings Bass principle in the absence of a court order, on the basis that whether or not a transaction should stand is for the court to decide.
Finally, HMRC have published a research report entitled 'Trusts: Experience of setting up and running trusts' '“ in order to inform their continuing modernisation of the taxation of trusts. The report makes interesting reading and can again be found, together with a summary on the STEP website.