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Deeds of Variation

Posted by: admin    Tags:      Posted date:  January 9, 2012

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Post Death Deeds of Variation are a method by which the terms of a Will can be altered. They must be entered into within 2 years of the death in question. They are a very useful tax planning tool, however it is important not to rely on them to the detriment of preparing a Will as they may not be available indefinately.

A recent case highlights how the Courts view some aspects of Post Death Variations (“PDV”).

In (Wright v Garter [2011] EWHC 2881 {Ch}) the grandfather (Edward) & the father (Kieran) of a 3 year old boy called Rory, both died in quick succession, each without leaving a Will. Under the intestacy rules, Rory was entitled on the statutory trusts to part of his father’s estate (which included monies from the unadministered estate of his grandfather, Edward). It should be noted that on the statutory trusts Rory would become entitled to the capital and income at age 18.

There was no inheritance tax (“IHT”) payable on Edward Wright’s estate. Kieran Wright’s estate however, had to pay £89,000 in IHT.

Rory’s mother, Ellen, and her solicitors prepared a PDV firstly to avoid the inheritance tax “IHT” bill, and secondly to defer Rory’s entitlement to the age of 30 as Ellen felt that an 18 year old may not be able to properly control the sizeable income & capital, which would be around £750,000.

The PDV was submitted to the Court for approval. The Court was happy to approve the tax saving part of the variation, however it was not happy with that there was lack of separate representation of Rory’s interests - Ellen as one of Kieran Wright ‘s personal representatives put forward the PDV for approval and also acted as Rory’s litigation friend. Also no consideration had been given to the possibility of Rory failing to obtain a vested interest (e.g. if he died before the age of 30) and the interests of those entitled under those circumstances were also not represented.

Norris J explained that in these matters the Court had to be satisfied that the outcome was to the minor’s benefit (usually financial but not exclusively) and it was not enough to show that it does not do him any harm. Apart from the clear immediate benefit of an IHT saving of £89,000 there was a disadvantage in the proposed PDV trust which would lead to anniversary charges and exit charges. Also, the PDV deferred Rory’s entitlement for 12 years; a lengthy period. Ellen contended that the delay conferred a moral benefit in her son by preventing him from being in absolute control though able to access funds in the usual way, upon request when needed, subject to the approval of the trustees.

The Court found that the PDV was almost a resettlement rather than a variation. There was nothing in Rory’s character to suggest that he would not be able to deal with his entitlement till he reached the age of 30 and Rory had the right to have his independence as a young adult.

The Court approved a revised Variation in which:

The trustees included a professional, non- family member;

Rory became entitled to the income at 18;

Rory became entitled to 10% of the capital at 21;

Rory became entitled to the balance at 25; and

Default trusts providing for the eventuality of Rory not attaining a vested interest were included.

It is important to glean from this case the following and the private Client team at Ziadies Solicitors can advise you at every stage:

1. As an adult, it is very important to make a Will and provide for your family whatever your age;

2. The Court is happy to approve straightforward IHT saving measures and so it is important to obtain advice when dealing with an administration of an estate, especially if IHT is payable, as there may be a way of achieving a tax saving.

3. The Court will always ensure the interests of the young and vulnerable are duly protected.

4. Any trust prepared must be carefully thought out with all the eventualities considered and provided for and the interests of all involved separately represented, if appropriate.

5. It is acceptable to stagger the entitlement of a beneficiary so that they take control of funds over a period of time and not in one go - that may be a good lesson to learn when drafting inter vivos or will trusts.

Please call Louisa Calligas, Manal Fouad or Esteddar MacGreggor who will advise you in this regard.