Whose money is it anyway?

In this article I’m going to stray slightly, but not too far, from mainstream financial planning issues. I’ve discussed previously strategies for mitigating inheritance tax, whether for early birds or for the last minute merchants amongst us. Tax aside there are other issues to consider however when drafting wills and trusts, the consequences of which are going to impact your beneficiaries after you have shuffled off your mortal coil.

So, I’m going to run through a couple of case studies, situations of which I have had up close  experience. When a solicitor drafts a will trust, he or she ideally will try to strike a balance between flexibility and ensuring the interests of the life tenant and the beneficiaries are catered for. When drawing up his will, Mr X had a very clear set of objectives; he wanted to ensure his wife would have sufficient income to live out her days comfortably but at the same time he wanted to ensure that his blood children should inherit after his wife’s death, rather than her children from his wife’s previous marriage. This is classic will trust territory and interest in possession trusts are frequently set up in this manner. Unfortunately it is also classic family feud territory.

Problems can arise when the interests of the beneficiaries and those of the life tenant of the trust diverge. In the current example, Mr X’s widow had remarried, runs a successful business and now has substantial income and assets. The intention underlying the setting up of the trust in Mr X’s will is now no longer relevant. At the same time the children from Mrs X’s earlier marriage are keen to extract as much money from the trust as possible, despite the income no longer actually being needed to fund their mother’s expenditure needs. In such a scenario it may suit all parties to strike a deal that would enable the trust to be dissolved. This could clearly have inheritance tax benefits, as passing the assets down the generations to children or grandchildren sooner rather than later could be beneficial if Mrs X survives for 7 years after making such gifts. 

For an agreement along these lines to be feasible, it is essential for all concerned to be fully aware of how the nil rate band has been used to date, as this will have a direct bearing on the amount of inheritance tax due if Mrs X were in fact not to survive 7 years. Caution here is therefore of the essence!

As happens frequently in this type of situation, there was little love lost between what were effectively two competing sets of beneficiaries. This meant that it was impossible to know with certainty what assets Mrs X now owned and how much of her nil rate band had already been used through making lifetime gifts. In this real-life scenario the web was so tangled that our advice to our clients was to do nothing and wait until their mother died rather than  try to sort all of this out before the event. 

A different scenario comes to mind on the subject of inheritance. Even closer to home, my uncle had married a widow whilst in his forties and the couple spent many happy years together. Her two children from her late husband at first had a good relationship with my uncle, and there appeared little cause for concern. However families and money can be a heady cocktail, once the ingredients are poured into the shaker!

As the happy couple advanced in years the daughter became more involved in their financial dealings. After her mother got into her eighties her health began to wane, and so the daughter decided that she would kill two birds with one stone and take both her mother and my uncle along to the solicitor’s to redraft wills and also put in place lasting powers of attorney. She herself coincidentally was to be appointed as attorney for both of them. This had the somewhat negative effect of frightening the horses, as regards my uncle. He was still in good health both physically and mentally and he found his step-daughter’s behaviour pushy. He therefore put his foot down and rejected the power of attorney idea, especially as regards property and finance.

His wife died some twelve months later and things took a nasty turn. A month or so after the funeral the daughter sat down in my uncle’s living room and announced that she and her brother had no further use for the house they had just inherited, and that she and her brother were going to put it on the market. According to the redrafted wills they would be within their rights to do so. She told him he would therefore need to find somewhere else to live! 

Although he only lived a few tube stops away, my uncle and I hadn’t been in contact with each other much for a number of years. However he was now in something approaching a state of panic with these developments. I got a call.

He explained his previous misgivings about the power of attorney and said that this had led to a deterioration in the family relationship. He now felt he was being bullied out of his own home. In an effort to calm the situation I suggested a family meeting, during which we could find a solution amicably. This offer was refused point blank and it became apparent that they had been preparing for just this scenario. The daughter explained on the phone that they had from day one when my uncle moved in ensured that every mortgage payment was made from her mother’s sole bank account. Her mother, she said, was adamant that the house was hers and that it should ultimately belong to her children. 

I pleaded that all my uncle would want for peace of mind was for written confirmation giving him the right to remain in the property, so he could live out his days in his own home. This idea was dismissed with contempt and as the house was now theirs in their eyes, they were now coming and going unannounced using their set of housekeys without even asking my uncle if it was convenient. 

If the solicitor they had used in the redrafting of the wills had been worth his salt, he would have explained that what they were trying to do was legally untenable. We decided that on our side some top quality legal representation was called for, and we were recommended and promptly instructed a Gray’s Inn solicitor to look after my uncle’s case. According to the Inheritance (Provision for Family and Dependants) Act 1975, it is not possible to disinherit a spouse or dependant completely via your will unless there remains proper provision in place to cater for their needs; somewhere to live and money to cover regular living expenses. 

In my uncle’s case he had been living with his late wife for well over thirty years, and irrespective of which bank account the mortgage was being paid from, he had paid his share towards the running of the household. In terms of the law, it didn’t actually matter whether or not he paid anything at all in fact, as the property was his home and he was therefore protected from eviction. When the case came to court the judge not only granted leave to remain in the family home, the judgement also said he was entitled to 50% of the equity outright. This did not go down well with the other side needless to say! The moral of the story is that if you wish to give all of your wealth to the cat’s home for example, the law will only allow you to do so after your dependants are taken care of. Married or not, someone who lives under your roof for two years or more, or who is in some way dependant on you, can make a  claim against your estate, if you try to disinherit them. 

The moral is: don’t cut corners when choosing a solicitor to draft your will!

Photo by Cytonn Photography on Unsplash

Joe Coten is a member of the Personal Finance Society. He may be reached on 0207 588 9626.