Dianne Paterson: A legal lesson to be learned from Diana's death
Less has been said about a consequence of her death in relation to her will and final requests.
Few people believe they will die young and that their affairs should be in order from an early age.
Last wills and testaments are associated with the elderly and those of failing health. The young believe time is on their side and they can put their affairs in order at some future date. Unfortunately, this is not always the case.
The Princess of Wales had made a will in 1993, but at the date of her death the terms of that will were not considered appropriate by her Executors and those terms were subsequently varied by her Executors, after her death in 1997, to make provision for her 17 godchildren, butler and charities.
This redrafting of the will was made possible by way of a Deed of Variation. Within two years following someone’s death, it is possible to make changes to the terms of their will by a Deed of Variation, provided the beneficiaries under the will (those who are inheriting) agree
These changes can sometimes make use of Inheritance Tax (IHT) or Capital Gains Tax (CGT) reliefs, which have not been fully utilised within the will. Such variations can also be used to provide for someone who has been left out of the will or to pass on certain assets to the next generation.
They can be used to clear up uncertainties within the will or provide for any change in circumstances. A variation can sometimes be used to move the deceased’s assets into a trust for under-age or vulnerable beneficiaries, or simply to benefit certain charities.
If someone has died intestate (without a will) the law decides who inherits; however, a Deed of Variation can also be used in such circumstances if everyone agrees that the Intestacy Rules do not create the best outcome.
If any such variation is completed within two years of death, an election can be made under IHT and CGT legislation to have the variation written into the will.
This can allow the redirection of the estate to another, to be treated as a gift made by the deceased, and not by the individual who was originally due to benefit.
To ensure that a variation is valid and recognised by HM Revenues and Customs, certain conditions require to be met, including the following:
The variation must be made within two years after the death and be in writing
It must be signed by all beneficiaries who would lose out as a result of it.
It must clearly identify the parts of the estate being varied and who will benefit;
It must contain a statement, if appropriate, that those beneficiaries signing it must intend it to take effect for tax purposes such as IHT and/or CGT.
The advantages of a Deed of Variation are varied and many. To be able to retrospectively carry out estate planning not only for the Executry Estate itself but also for the potential beneficiaries under the Estate has clear advantages.
To be able to take measures to protect under-age or vulnerable beneficiaries, or to benefit certain charities, has even greater advantages.
However, the future of Deeds of Variation and the reliance on them remains uncertain.
In 2015, George Osborne, announced a consultation on Deeds of Variation as part of a wider review on tax avoidance measures.
More that three years on, Deeds of Variation are still with us – but the clock is ticking.
What is clear, however, is that the use of Deeds of Variation extends further than just tax avoidance. The Deed of Variation can be used for many other reasons, often simply to achieve a more sensible and prudent redistribution of the deceased’s estate.
However, what is also clear is that Deeds of Variation can never be taken for granted or used as any part of estate planning. Nothing quite replaces a well thought through, up-to-date, and frequently reviewed will.
Untimely deaths happen and it makes sense to be prepared.
Dianne Paterson is a Partner, Russel + Aitken LLP