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LEGACY ADMINISTRATION – MAXIMISING THE BENEFIT

LEGACY INCOME

• Vital Funding Source

• £1-9 billion raised in 2008

• Can represent 80% of voluntary income

• Economic downturn poses threat

CHARITABLE GIVING

• 2/3 regularly give to charity in lifetime

• 1/3 make a Will

• 15.7% of wills in 2008 charitable

MAXIMISING LEGACIES

• Check all legacy receipts carefully

• Monitor progress

• Look to the future

TOPICS FOR TODAY

• The Will – what to look for

• Probate procedure and timescales

• Basic tax – IHT and CGT

• Accounts

• Income tax and tax deduction certificates

• What can go wrong – looking out for fraud

• Assessing fees

• Making the most out of legacies

• Questions

THE WILL

• No set form

• Must be in writing

• No need to be dated

• No need to be on paper

• Can dispose of almost anything

• Complete testamentary freedom

VALIDITY REQUIREMENTS

S9 Wills Act 1837 as amended:-

“No Will shall be valid unless:-

(a) It is in writing, and signed by the testator, or by some other person in his presence and by his direction; and

(b) It appears that the testator intended by his signature to give effect to the Will; and

VALIDITY REQUIREMENTS Cont’d

(c) the signature is made or acknowledged by the testator in the presence of two or more witnesses present at the same time; and

(d) each witness either:-

(i) attests and signs the Will; or

(ii) acknowledges his signature

in the presence of the testator (but not necessarilyin the presence of any other witness), but no form of attestation shall be necessary”

WHO MAY MAKE A WILL?

• Anyone over 18 (unless privileged)

• Intention to make a Will

• Mental capacity

• Free from undue influence

WHAT MAY BE DISPOSED OF BY WILL?

• Any assets owned by testator except:-

- some jointly owned assets

- some pension funds

- property held in trust

- donatio mortis causa

- some foreign assets

COMMON PROBLEMS

• Will invalidly executed

• Will is lost/unattested alterations

• Contains mistake

• Ademption

• Mis-description

• Legal challenge

EXECUTORS’ POWERS

• “Collect and get in” the estate

• Power to sell

• Power to appropriate

• Power to insure

• Power to invest

• Power to appoint nominees

• Power to delegate

• Power to charge

EXECUTORS’ DUTIES

• Trustee Act 2000

• Duty of care

• Duty to account

BENEFICIARIES’ RIGHTS

• Right to due administration

• Right to information

• Right to remove/place PRs

WHAT TO LOOK OUT FOR

• Always read entire Will – does it make sense?

• Compare with schedule of assets/liabilities

• Check signature/Death Certificate

• Executors – professional or lay?

• Who are beneficiaries – family/charity?

• Are there foreign assets?

PROBATE PROCEDURE

Some starting points:- •Time of bereavement •Who contacts you?

Family?

Professional? • The beneficiaries – who are they? • Communication is key

THE WILL

• Where is it?

• Funeral wishes

• Who can see it?

• Home-made/professionally drawn?

• Executors –professional/lay? None?

• Problem assets

• Construction issues

• Possible legal claim?

THE ASSETS

• Sole or joint?

• Valuations •Shares

•Property

• Protection of assets

• Tax/variation issues

GRANT OF PROBATE

• Is it necessary?

• Inland Revenue account

• Oath

• IHT loans

• Timescales

ONCE THE GRANT IS OBTAINED

• Trustee Act Notices

• Pay debts

• Pay legacies

• Realise assets

• Claims

• Consider Deed of Variation

TAX

• IHT/CGT – who to sell?

– exemptions

• Appropriation

• Deduction of costs

– IRC -v- Richards’ Executors

• Reliefs – shares – 1 year

property – 4 years

• Penalties

TAX RETURNS/ACCOUNTS

• Tax to date of death

• Estate administration return

• Estate accounts

• Corrective Accounts

• Tax Clearance

WINDING UP

• Approval of Estate Accounts - Receipts and indemnities

• Distribution

• Tax Deduction Certificates

-R185E (Estate Income)

BASIC TAX

• Inheritance Tax – IHT

• Capital Gains Tax – CGT

INHERITANCE TAX

• A direct tax on transfers of value

• Lifetime transfers - “PETs”

- Chargeable transfers

• Transfer on death

WHAT IS TAXABLE?

• Share of joint property

• Interest in trust

• Life policies

• Gifts with reservation

EXCLUSIONS:-

• Property outside UK (if non-UK domiciled)

• Reversionary interests

• Certain life/pension policies in trust

EXEMPTIONS AND RELIEFS

• Gifts between spouses

• Gifts to charity

• Gifts for National Purposes/National Heritage

• Small lifetime gifts

• Relief for business/agricultural property

• Quick Succession Relief

POTENTIALLY EXEMPT TRANSFERS (“PETs”)

• Taper relief

• Reduces tax payable not value of the gift

HOW TO CALCULATE IT?

• Current threshold - £325,000

• 0 - £325,000 – NIL

• Over £325,000 – 40%

S41 INHERITANCE TAX ACT 1984

“Notwithstanding the terms of any disposition:-

(a) None of the tax on the value transferred shall fall on any specific gift if or to the extent that the transfer is exempt with respect to the gift,

AND

(b) None of the tax attributable to the value of the property comprised in residue shall fall on any gift of a share of residue if or to the extent that the transfer is exempt with respect to the gift”

EFFECT OF S41:-

• Gross up legacies exceeding tax band

• If residue is split charitable/non-charitable:-

- charitable share will pay tax on legacies

- charitable share won’t pay tax on share of residue

BENHAM:-

“as to the residue …… to pay the same to those beneficiaries as are living at my death and who are listed in List A and List B hereunder written in such proportions as will bring about the result that the aforesaid beneficiaries named in List A shall receive 3.2 times as much as the aforesaid beneficiaries named in List B …..”

WHEN IS IT PAYABLE?

• 6 months after end of month of death

• Instalment option may apply

• clearance certificates

CAPITAL GAINS TAX

• A capital tax on the disposal of capital assets producing a gain

• Not payable on death transfers to legatees/trustees

SALES BY EXECUTORS

• Annual exemption of deceased available for tax year of death and the next 2 tax years

• 18% rate

• Base cost is value at death

EXEMPTIONS

• Disposal of Government Stock

• Transfers between spouses

• Disposal by charities

• Main residue exemption ceases on death

CALCULATING THE TAX

• Sale value

Less - base cost

- allowable expenditure

- costs deduction

- annual exemption

Multiplied by rate of tax (18%)

• Appropriation

VARYING A WILL

• Deed of Variation

• Disclaimer

WHY VARY?

• Make use of nil-rate band

• Compromise a claim

• Make Will more tax effective

WHO CAN VARY?

• Beneficiaries giving up entitlement

• Executors

• Minors/mentally incapable excluded

THE TAX EFFECTS

• S142 IHTA 1984

• S62 TCGA 1992

• Income tax – not retrospective

TIME LIMITS

• Within 2 years of death

• Election for tax within 6 months of Deed

ESTATE ACCOUNTS

S25 AEA 1925 as amended

“When required to do so by the Court, exhibit on Oath in the Court a full inventory of the estate and when so required render an account of the administration of the estate to the Court”.

WHEN SHOULD THEY BE PREPARED?

• Before major distributions

• Each tax year

• At end of administration

WHO IS ENTITLED TO SEE THEM?

• Executors

• Residuary beneficiaries

• Legatees?

WHO SHOULD APPROVE THEM?

• Executors

• Beneficiaries

• Indemnities

FORMAT

• Narrative

• Balance sheet

• Estate Account

• Administration Account

• Income Account

• Distribution Account

• Schedules/Notes

CHECKLIST

• Check assets and liabilities

• Check administration expenses

• Check legal fees

• Check Inheritance Tax

• Check Income Account/R185

INCOME TAX

• Pre-death

• Post-death

INCOME AFTER DEATH

• Interest on savings accounts

• Dividends

• Rental income

• Interest on client account

WHAT IS NOT INCOME?

• Refunds

• Premium bond prizes

• Encashment of assets

WHAT SHOULD THE EXECUTORS DO?

• R40

• Complete Trust and Estate Tax Return

• No personal allowance

TAX DEDUCTION CERTIFICATES R185

• Each year in which a distribution is made

• Final year of the administration

• Distribution includes appropriation

STEPS TO TAKE

• Calculate net residuary income

• Divide income between beneficiaries

• Compare net income with amount actually received

WHAT HAS THE BENEFICIARY RECEIVED?

• Nothing – carry forward income

• More than his share – include all income on certificate

• Less than his share – include income equal to distribution and carry forward balance

WHAT TO CHECK?

• Do the figures add up?

• Is the certificate in your name?

• Have you received one for each tax year you received a distribution?

• Has it been signed?

WHAT CAN GO WRONG?

• Construction problems

• Delay

• Negligence/rectification

• Fraud

• High fees

WHO IS AT FAULT?

• Executors

• Beneficiaries

• Solicitors

• Other third parties

FEES

• Solicitors

• Banks

• Will-writing companies

• Lay Executors

MAKING THE MOST OUT OF LEGACIES

• Set procedures

• Communication

• Tackling problems early

• Pooling resources

• Seeking professional advice where appropriate

• Follow-up

• “New for old”