The legal implication of intestacy, particularly for married couples, are often underestimated with many assuming the entirety of the deceased’s estate will pass to the surviving spouse/civil partner. While this may hold true in instances where the deceased has no children, the presence of issue complicates the distribution under the intestacy rules, potentially leading to outcomes that do not reflect the deceased’s intentions and triggering unnecessary tax liabilities.
When someone dies intestate in England and Wales, the distribution of their estate is determined by a strict and inflexible formula. These rules (imposed by the Administration of Estates Act 1924 as amended), entitle the spouse/civil partner to the personal chattels, a statutory legacy (which was increased last year from £270,000 to £322,000) and half of the residue of the estate. The remaining half of the residuary estate is divided equally among any children of the deceased. If there are no surviving spouse/civil partner and children/grandchildren, the estate may pass to specified members of the wider family. The presumption that the surviving spouse/civil partner is adequately provided for can be dangerously misleading in cases involving larger estates or complex family dynamics.
Potential tax consequences
A significant issue that arises under intestacy is the inadvertent creation of a chargeable transfer for inheritance tax (IHT) purposes. Assets that pass to the deceased’s children directly are not eligible for the spouse exemption under the Inheritance Tax Act 1984, which would otherwise allow an unlimited transfer between spouses free of IHT. Consequently, the half share of the residuary estate that passes to the deceased’s children on intestacy is immediately subject to IHT at a rate of 40% on the amount exceeding the nil-rate band, unless specific reliefs apply. This scenario not only imposes an immediate tax burden on the estate but also potentially erodes the estate’s value, which might have been preserved with proper testamentary planning.
Inheritance Act claims by a surviving spouse or civil partner
Furthermore, the intestacy rules may leave the surviving spouse/civil partner inadequately provided for from the estate, particularly if the estate is substantial and a significant portion is diverted to the deceased’s children. In such cases, the surviving spouse/civil partner may have to pursue a claim under the Inheritance (Provision for Family and Dependants) Act 1975 (the ‘1975 Act’) for reasonable financial provision. The 1975 Act allows the court, on consideration of a number of factors, to decide whether reasonable financial provision has been made under an intestacy and, if not, what order it should make for reasonable financial provision from an estate. The 1975 Act gives the court broad powers to decide what order to make on behalf of a claimant. Although the majority of claims brought under the 1975 Act are resolved by alternative methods of dispute resolution such as negotiation or mediation, litigation under the 1975 Act is inherently uncertain and can be both expensive and time-consuming, not to mention the potential for family discord. It is worth noting in this context that, with effect from 1 October 2024, when the Civil Procedure (Amendment No.3) Rules 2024 come into force, parties who refuse to engage in non-court dispute resolution (ADR) may find themselves subject to an order for costs.
Pitfalls for unmarried couples
The situation becomes even more precarious for unmarried couples. Under the intestacy rules, a surviving unmarried partner is not entitled to anything from their deceased partner’s estate, regardless of the length of the relationship or any shared assets. This lack of provision can lead to severe financial hardship for the surviving partner, who may be forced to rely on bringing a claim under the 1975 Act to seek reasonable financial provision from the deceased’s estate. However, such claims are far from guaranteed and may be complicated by the need to prove dependency on the deceased or other qualifying factors, making the process both uncertain and potentially adversarial. Further, any claim brought by the surviving partner will be limited to what is required for their reasonable maintenance. Claims brought by a spouse or civil partner under the 1975 Act are not limited to provision required for their maintenance.
Deeds of variation and minor children
Another critical consideration involves the presence of minor children. Where minors are beneficiaries under the intestacy rules, any attempt to mitigate adverse tax consequences through a deed of variation is fraught with complexity. A deed of variation generally requires the consent of all beneficiaries. However, minors lack legal capacity to consent, necessitating the appointment of a litigation friend and an application to the court for approval under the Variation of Trusts Act 1958. The court must be satisfied that the variation is in the best interests of the minor beneficiaries, a threshold that can be challenging to meet, particularly when the primary motivation is tax mitigation rather than the minor child’s direct benefit.
Deeds of variation and illiquid assets
In the context of intestacy, the inability to make a deed of variation without court intervention can exacerbate the tax implications and delay the administration of the estate. This is a particular problem when the estate includes illiquid assets that may need to be sold to meet tax liabilities, potentially resulting in the forced sale of assets that could otherwise have been preserved within the family.
Conclusion
Failure to execute a Will exposes couples who are married or in a civil partnership, particularly those with children, to a myriad of legal and financial risks. The intestacy rules, while providing a default framework, are often inadequate in reflecting the nuanced intentions of the deceased or the practical needs of the surviving spouse/civil partner.
Moreover, the potential for unintended IHT liabilities and the procedural complications of dealing with minor beneficiaries underscore the necessity for comprehensive estate planning.
The situation is even more dire for unmarried couples, who stand to receive nothing under the intestacy rules. By ensuring that a valid Will is in place, individuals can safeguard against these pitfalls, ensuring that their estate is administered in accordance with their wishes and that tax efficiency is maximised.
Advisers should promote careful estate and succession planning, together with regular, open communication amongst family members. Failing to take a considered and well communicated approach to testamentary planning is likely to lead to family disputes, costly litigation, and the breakdown in family relationships.
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First published by Today's Wills & Probate on 2 September 2024
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