Varying a Will or the distribution of an estate after death

Varying a Will or the distribution of an estate after death

Contents

A person who receives a gift under a Will is not obliged to accept the gift. The gift may either be rejected outright (in whole or in part) or those managing the estate can be instructed to make the gift to another beneficiary whether or not he or she is named in the Will.

Introduction

At the time of making the Will, the testator (someone who makes a Will) may be of the view that leaving assets to particular beneficiaries is appropriate in all the circumstances. However, circumstances change and at the death of the testator, the beneficiaries may decide that it is more appropriate that certain assets should go to other relatives or friends of the deceased.

The same principles apply in the case where somebody dies intestate. Although the law provides that where there is no Will the assets are distributed in a particular order, it may not be suitable in particular circumstances, for example, if the surviving spouse is well cared for but the children require further financial assistance. Alternatively the children may receive benefits in terms of a Will but the surviving spouse's position has deteriorated and the children may feel that their parent will be better served if he or she receives greater benefits in terms of the Will.

A beneficiary is entitled to re-distribute property inherited. This can be achieved by the beneficiary accepting the property and subsequently giving the property to some other person. In the case of redistribution in that way there may well be taxation implications. Alternatively tax liability can be avoided by taking advantage of certain provisions whereby a beneficiary under a Will or intestacy can alter, for tax purposes, the gifts given to him or her from the deceased person's estate. If certain conditions are satisfied, such altered gifts are 'read back' into the Will or the distribution on intestacy. The gifts are then treated for tax purposes as though they were made by the deceased person and taxed accordingly.

Transfer of a gift

Variation of a gift

A beneficiary is entitled to transfer a benefit from a gift to some other person. This is called a variation and allows a beneficiary to control the destination of the property. The beneficiary is entitled to instruct the executors to transfer some or all of the property subject to the variation, to a particular person or persons who may or may not be beneficiaries already under the Will or on an intestacy (see 'Dying without a Will').

The beneficiary is not restricted as to the circumstances when they may enter into a variation. For example, a variation is available even if a benefit has been enjoyed from the property. Unlike a disclaimer, part of a gift may be varied, and the remainder retained by the beneficiary.

Tax implications

Where a beneficiary decides to vary the terms of a Will or the distribution of an estate on intestacy, it may result in either an increase or decrease in Inheritance Tax. The beneficiary may also be liable for capital gains tax where the value of the gift increases from the date of the deceased's death until the date of variation. Very often variation is used to create an overall tax saving.

For example, where a substantial amount of money is left to the children, they may well decide that their parent (the surviving spouse) should receive the benefit. A variation in favour of the surviving spouse will reduce the liability for Inheritance Tax because the gift to a surviving spouse is exempt from Inheritance Tax. Should a beneficiary decide to donate the benefit to a registered charity, it will also be exempt from Inheritance Tax.

If certain conditions are satisfied, the tax will be calculated as if the deceased had left the property to the person entitled to it as a result of the variation. These are:

  • The variation must not be for a consideration in money or monies worth which means that the beneficiary cannot receive any form of reward, financial or otherwise
  • The variation must be in writing
  • The variation must be made within two years of the death of the deceased
  • The variation must state that it is intended to be effective for Inheritance Tax and/or Capital Gains Tax

In the case of a variation, where there is a potential increase in the liability of the deceased's estate to Inheritance Tax, the executors must join in the election. They may refuse to do so only if they hold insufficient assets to discharge the additional tax. For example, if a spouse enters into a variation redirecting property to the children there may be additional inheritance tax to pay since the spouse exemption is lost once the variation is made.

If the executors have already distributed the majority of the assets, they may find that the estate has insufficient funds to meet the additional Inheritance Tax obligations. In such circumstances the executors will refuse to join the election by the beneficiary to vary the gift. Should this occur, the beneficiary will have to retain the gift.

Outright rejection of gift

A disclaimer

The outright rejection by the beneficiary of a gift of property is called a disclaimer. It is possible to disclaim a benefit under a Will and also an entitlement on intestacy in whole or in part. All that is necessary for the disclaimer to be effective is for the beneficiary to indicate an intention to disclaim to the deceased's executors. There is no formality required, although, in practice, the executors are likely to insist that notice of the disclaimer is given in writing.

The disclaimer must be made before the beneficiary receives some benefit. For example, after the beneficiary has lived in a house left to them, or after they receive a dividend from shares, they cannot disclaim the property. It is not necessary that the beneficiary disclaim the entire gift. The beneficiary can decide to retain one part of the gift and reject the other part.

The beneficiary has no control over the asset once it is disclaimed. The Will may say what happens if a gift is disclaimed. Failing that, the property is returned to the estate and it depends on the type of gift that has been disclaimed. For example, if the gift was a pecuniary or specific gift that gift will fall into the residue. If the beneficiary disclaims a gift of residue, the disclaimed property will fall into intestacy.

Tax implications

The rejection of a benefit amounts to a potentially exempt transfer. If the beneficiary elects to disclaim the gift, they are effectively making a lifetime gift to the person receiving it in their place. Unless that gift is made to a surviving spouse/civil partner or a charity, the beneficiary's estate may well be responsible for Inheritance Tax. In addition to payment of Inheritance Tax, if the benefit increases in value between the date of the deceased's death and the granting of the gift to some other person, the beneficiary may be liable for capital gains tax. This will only apply in the case of a relatively large estate.

However, if the beneficiary satisfies certain conditions, Inheritance Tax/Capital Gains Tax will be calculated as if the deceased had left the property to the person becoming entitled to it once the disclaimer has taken effect. The conditions that must be satisfied are the following:

  • The disclaimer must not be for a consideration in money or monies worth which means that the beneficiary cannot receive any form of reward, financial or otherwise
  • The disclaimer must be in writing
  • The disclaimer must be made within two years of the death of the deceased
  • The disclaimer must state that it is intended to be effective for Inheritance Tax and/or Capital Gains Tax

If all these conditions are met, the beneficiary's estate will have no liability for Inheritance Tax and the same principles will apply to Capital Gains Tax.