Update: wills and probate

On 8 July 2009 the Law Commission published its Annual Report 2008/09 and announced a review of the rules for intestate succession and for claims under the Inheritance (Provision for Family & Dependants) Act 1975. The Law Commission will consider the rights of members of the deceased's extended family, including cohabitants who were not married to, or in a civil partnership with, the deceased. There will be a review of the purpose of the statutory legacy, and the Law Commission will consider whether to take into account lifetime gifts or assets which pass on the death of the individual but outside his or her estate '“ joint interests passing by survivorship, life assurance policies and other death benefits.

The Court of Appeal's decision in Baynes v Hedger [2009] EWCA Civ 374 (for the first instance decision see Solicitors Journal 153/1, 13 January 2009) emphasises the high qualifying threshold to be met by an applicant under section 1(1) (e) of the 1975 Act who claims that he or she 'was being maintained, either wholly or partly, by the deceased' and the importance of section 3(4) of the Act, which requires the court to consider the extent to which the deceased assumed responsibility for the maintenance of the applicant.

In this case, the claimant, the deceased's goddaughter, had received numerous cash gifts and effectively unrepayable loans over the years, mostly to pay off her debts. The Court of Appeal held that although the applicant was in fact being maintained by the deceased immediately before her death, it did not automatically follow that the deceased had assumed responsibility for her maintenance. On the facts, the applicant had failed to show any such assumption of responsibility, and consequently she was not eligible to make any claim under the 1975 Act. It was not necessary for the court to consider the question of whether the will failed to make reasonable provision for her, although the chancellor helpfully added that, had the question arisen, they would have agreed with Lewison J that the will did make reasonable provision for the applicant.

Secret trusts

The court may override a gift appearing on the face of the will in order to enforce a secret trust (a secret trust being one where, to a stated beneficiary, the donor secretly communicates that he/she holds title in trust for another). The burden of proving a secret trust is on those who seek to establish it, and the standard of proof is that of the balance of probabilities. What must be proved is that the testator intended to create a legally enforceable trust, not simply a moral or family obligation.

In Davies and Another v HMRC [2009] UKFTT 138 (TC) the revenue disputed that a secret trust had arisen under the will of a Mr Goodman, who died in 1969. His widow and two daughters survived him. The will provided for the whole estate to pass to the widow outright, subject to estate duty, which was payable under the rules then in force. When the widow died in 2006, her estate, which passed to her daughters, was again subject to inheritance tax. The daughters asserted that notwithstanding the unconditional gift in his will, their father's estate had passed to their mother on a legally enforceable secret trust under which she was entitled to a life interest only. This would have been exempt from IHT on the death of the widow, by virtue of the spouse relief introduced on the transition from estate duty to inheritance tax. No written trust existed, but the daughters claimed that the existence of the trust could be inferred from the fact that the widow kept the inherited investments in her husband's estate separate from her own assets.

The special commissioner accepted that when the father had made his will in 1965, he and his wife intended that their joint resources should be available to her in her lifetime and, after both their deaths, the property should pass to their children. There is nothing at all unusual about this '“ as the commissioner noted, it is consistent with the wishes of many families. On the evidence, the court held that no legally enforceable secret trust had been established. This outcome is not surprising. If the court had found that a binding life interest trust had been created by a gift of residue to the surviving spouse, coupled with a family understanding that the children would eventually inherit, this would set an alarming precedent for all married couples who make wills in each other's favour.

Proprietary estoppel

Commentators welcomed the House of Lords decision in Thorner v Majors [2009] UKHL 18 (see Solicitors Journal 153/20, 26 May 2009), as a landmark in the development of proprietary estoppel claims. Lord Walker's judgment confirmed 'the three main elements '¦ a representation or assurance made to the claimant; reliance on it by the claimant; and detriment to the claimant in consequence of his (reasonable) reliance'. It is becoming clear that proprietary estoppel is a doctrine which the courts can use to achieve a flexible, practical solution.

Hopper v Hopper [2008] EWHC 228 (Ch), decided by the High Court in February 2008, was another successful proprietary estoppel claim, with a perhaps surprising outcome. Mr Hopper developed a successful fruit and vegetable wholesale business. The profits of the business enabled the family to buy land on which they ran various businesses. When Mr Hopper died, leaving his estate to his widow, his daughter Carol successfully claimed that she was entitled to the benefit of a proprietary estoppel binding her parents and her brother Robert, the other partner in the family business. Having accepted Carol's claim, the court considered how to satisfy her equity in the property while at the same time dealing fairly with Robert. The court adopted a flexible approach, putting forward two alternative methods of satisfying Carol's equity: she could purchase Robert's interest for its current value, or the land could be partitioned. The court allowed Robert to choose between these alternatives. It is interesting that the court was prepared to acknowledge the claimant's proprietary rights, but gave the defendant a choice of what she should actually receive. It remains to be seen whether the court's willingness to adopt a flexible approach will help families to reach a constructive solution to disputes over family assets, or whether the lack of certainty will lead to opportunistic litigation.

Another instance of the court's willingness to uphold proprietary estoppel rights was seen in the Hong Kong case of Luo v Hui And Others: Glory Rise Limited (in liquidation) [2009] WTLR 849. The Hong Kong Court of Final Appeal decided that the claimant's rights in equity against her late fiancé, Mr Hui, also bound the company of which he was the controlling (but not the only) shareholder. The company was the owner of the flat in which the deceased and his fiancée had lived before his sudden death. Although the deceased could not give his fiancée a proprietary interest in the flat (as he was not the owner of it), as controlling shareholder in the company he was in a position to fulfil his promise to ensure that she was allowed to occupy the flat as her home until it was sold, and to receive the promised share in the proceeds when sold. It seems from this decision that the court can and should look through the corporate veil to enforce the equity that arises in a proprietary estoppel case.

Administration of estates

Certified accountants are joining the ranks of probate practitioners. The Probate Services (Approved Bodies) Order 2009 Number 1588 allows members of the Association of Chartered Certified Accountants (ACCA) to provide and to charge for probate services with effect from 1 August 2009.

Lloyd's Names

The administration of estates of individuals who were Lloyd's Names before 1992 and all of whose liabilities were reinsured into Equitas will be simplified following the court's approval on 25 June 2009 of the transfer of Equitas' liabilities to Speyford Limited (now Equitas Insurance Limited). The transfer means that no claims can be brought in any jurisdiction of the European Economic Area against an individual member for such liabilities. It appears that executors of a deceased Lloyd's Name now need to consider a re Yorke application to the court for relief from liability only in respect of underwriting liabilities not reinsured into Equitas.

Inheritance tax

Professional executors in particular will welcome the judgment on 30 March 2009 of the special commissioner in the case of HMRC v Cairns [2009] UKFTT 67(TC). An experienced Scottish solicitor had been appointed in 2003 to manage the affairs of an elderly man who lacked capacity. The family home was in extremely poor condition. A heavily qualified professional valuation at £400,000 was obtained in January 2004. The deceased died in October 2004, and the inheritance tax account IHT200 was lodged in April 2005. Knowing that the property would have to be sold, the solicitor declared its value at £400,000 but failed to state that this was provisional pending further enquiries. The property was marketed shortly afterwards, and in July 2005 HM Revenue & Customs was informed of an offer of £695,000. The eventual sale price was £600,000 which was duly agreed as the value at date of death.

HM Revenue & Customs sought to impose a penalty on the administrator for fraudulently or negligently providing an incorrect valuation of the property in the IHT200. The special commissioner dismissed the summons. The solicitor had 'acted perfectly sensibly and reasonably throughout. Any finding of negligence would have been the merest technicality.' There was no loss to HMRC whatsoever.

The burden of inheritance tax on death was considered in the special commissioners' decision in Smith v HMRC Commissioners [2009] SPC 00742. After inheritance tax clearance had been obtained, and the estate had been distributed, the discovery of a joint building society account meant that further IHT was payable. The commissioner decided that the account was held in a trust in which the deceased had an interest in possession, and which was entitled to a portion of the IHT nil rate band. This increased the IHT payable on the deceased's free estate. An assessment was issued to the residuary beneficiary, who argued that all the extra tax should be paid out of the account. This was rejected.

The special commissioner's judgment contains a useful analysis of section 200 of the Inheritance Tax Act 1984, which deals with the allocation of liability to IHT arising on a death. More than one person may be liable for the same inheritance tax liability.

This case illustrates one of the many familiar misconceptions about the burden of inheritance tax. One of the most persistent '“ and dangerous '“ urban myths is that joint assets passing by survivorship are outside the scope of inheritance tax. In fact, the co-owner, the executors, and the residuary beneficiaries may all be liable to inheritance tax on such assets, and to penalties for negligent or fraudulent failure to disclose them. Even the most financially aware clients need to be reminded of the executors' responsibility to make full disclosure, based on all reasonable enquiries, concerning all matters relevant to IHT.