Chapter 15 The Law of gifts and succession law Flashcards
15.2 The Law of gifts
It is important for tax purposes to establish if a transaction is a lifetime gift and when it takes place.
Making a valid lifetime gift – a transaction is an effective inter vivos (lifetime) gift of property where the donor intends to make a gift to the done and transfers the ownership of the property. The oral or written words of a gift are not sufficient to make the gift effective unless there has been a delivery of possession to the done. The gift does not occur tax benefits unless the ownership is transferred. The legal formalities of the transfer must be observed.
At common law the ownership of the property does not pass unless the formalities are satisfied in detail. In Equity is passes once the donor has done everything in their power to transfer the property.
Imperfect gifts – when the property is gifted but the transfer of ownership fails, so the gift is imperfect and no tax benefits occur for the done. Equity usually will not perfect an imperfect gift but if the donor dies still owning the property intending to make the gift, it becomes perfect as long as the original done is appointed as the personal representative.
Other gifts – it is not necessary for a gift to be made outright to another person; the donor can in essence make a gift in their lifetime to another person by creating a trust in favour of that person. Gifts may also be made on a person’s death.
15.3 The Deceased’s Estate
When a person dies, they cannot own property. A deceased person’s estate may compromise of the following:
• All the property which the deceased was legally and beneficially the sole owner except chattel subject to a donatio mortis causa (gift expressed to be conditional upon and intended to take effect on death, the rules do not apply in Scotland).
• The deceased undivided share of property co-owned under a tenancy in common
• Where the deceased was a trustee of property, the legal title passes to their personal representatives but the equitable ownership remains subject to the trust. The trust property does not form part of the estate
Property first passes into ownership of the deceased personal representatives and then into the ownership of the legatees (persons entitled to receive any proportion of the estate). Who ultimately inherits the property depends on the will or whether they died intestate.
The personal representatives become the absolute owners of the property in law and equity. Who use the estate to pay off any debts. A legatee has no legal ownership of the property, they only have the right against the personal representatives to require the estate to be properly administered. Property left over is passed to the legatees in accordance to the will or under the law of intestacy.
Where the personal representatives identify property that can be passed to a legatee, they are said to be appropriate to the legacy and a trust is created over the property and the equitable ownership is passed to the legatee and the representatives become the trustees of the asset and holders of the legal title. Before this the representatives draw up an assent indicated it can be passed to a legatee, this must be in writing.
15.4 Personal representatives
Generic name given to the person responsible for administering the estate. There are two types executors and administrators.
Executors – appointed under a will to carry out the terms. If they die during the process their executors become the executors of the estate of the first deceased person. There is no limit on the number of executors appointed, a minor cannot obtain probate until 18 and a person mentally incapable cannot be an executor. A court can in special circumstances (no executor found or is in prison) pass over the executor named in the will and appoint an administrator in their place. An executor may renounce their appointment in writing, they are determined to have accepted where they obtain a grant of probate or deal in the estate. Once they accept, they cannot renounce it.
Administrators – appointed by the court where there is no will or there are no executors. The Administration of Estates Act 1925 determines who is entitled to act and the court can appoint a maximum of 4 administrators. Where there are minor beneficiaries or a life interest trust involved, the grant must be made to at least two individuals or a trust corporation.
Power to act – personal representatives must obtain a grant of representation before they act. This is either a grant of probate (for executors) or grant of letters of administration (for administrators)
The grant of representation is obtained on application to the Probate registry in the family division of the High Court. Executors derive their authority from the will and the property is vested with them from the moment of death. Administrators derive their power from the courts and vest the property when the grant of letters of administration is received.
Duties and powers – the primary duties of personal representatives are:
• Obtain probate or letters of administration
• Ascertain the assets and liabilities of the estate
• Collect the assets that have been hired out, recover debts and preserve the assets
• Pay the expenses, debts and liabilities of the deceased and their own expenses in administering the estate. The personal representatives can be sued by the deceased contracts, however not contracts personal to the deceased like employment contracts
• Distribute the estate in accordance to the will or intestacy rules
Generally personal representatives have no authority running the deceased business, but they must meet any of the business’s outstanding contractual obligations.
15.5 Wills
What is a will – the term testamentary disposition is the term given to instruments in writing by which persons dispose of their possessions after death. Once an individual has made a will but has not died, the will is a mere declaration of intention. Where an individual has assets in several countries, a will in each country is advised, wills are known as concurrent Wills. It is possible to make a mutual will which is made by two persons on the basis of agreement that when they each die their estates will devolve in a certain manner.
Formalities for making a valid will – the testator must have the mental capacity to make a will and comply with the requirements of the 1837 Wills Act:
• Must be in writing
• Must be signed by the testator
• Signature witnessed by two persons who are present together when the will is signed. The witnesses must sign the will in the presence of the testator and each other. A witness or the spouse of a witness cannot benefit under a will. If a witness marries a beneficiary after the will, this does not invalidate a bequest
• The testator must be sui juris, have the capacity to make a will
• The testator must intend the will to be operative and must be made of the testator’s own free will
Changing a will – they can change aspects of it without having to rewrite the whole will. They can execute one or more codicils to the will, the making of a codicil must observe the same legal formalities as the making of a will. You can alter a will by making an alteration on the face of the will, the same formalities must be observed. The will may be varied two years after the deceased’s death by a deed of variation as long as the beneficiaries left worse off agree.
Revoking a will – can be revoked in the following ways:
• By executing a later Will or codicil which revokes all former wills
• By executing a later Will or codicil which impliedly revokes an earlier will
• By marriage or forming a civil partnership
• By physical destruction
• By letters, signed by the testator and witnessed by two persons
15.5 Wills (2)
Gifts of property under a will – a gift to the beneficiary is called a legacy (or bequest), thy are classified in the following ways:
• Specific legacy – gift of a specific part of the estate. It also carries all the income from the item since the testator’s death
• General legacy – gift of property which does not refer to a specific property of the testator. They carry interest at a current rate of 0.1% unless stated otherwise in the will, the interest runs from one year after the deceased’s death unless the deceased says otherwise
• Pecuniary legacy – gift of money which may also be a specific or general legacy as the case may be. It may be payable out of a specific bank account or a specified part of the testator’s estate
• Residuary legacy – gift of the residue of the deceased’s property after the liabilities of the deceased and the expenses of the personal representatives have been met and specific and general legacies have been satisfied. It carries all the income accruing from its subject-matter since the testator’s death.
A specific, general or pecuniary legacy may fail if:
• The legatee divorces the testator
• The legatee witnessed the testator’s will
• The property which is the subject-matter of the gift no longer belongs to the deceased at the date of death (known as ademption of the gift)
• The legatee is not a descendant of the testator and dies before the testator (lapse of gift). In the gift of a descendant of the deceased the gift would not lapse and passes to their descendants
• The legatee refuses the gift (disclaimer of gift)
• The legatee loses their entitlement to the gift where it has been used to pay the deceased liabilities or expenses (gift is said to abate)
• The legatee forfeits the legacy (for example where they murder the deceased)
A residuary legacy may fail:
• If it lapses
• If it has been given subject to a condition which has not been fulfilled
• If it has been disclaimed by the beneficiary
• For uncertainty, illegality or failure to observe the formal rules for making a valid will
A will should prevent failure of the residuary legacy by providing for a substitutional gift.
The Advantages of making a will – the advantages are:
• Can choose personal representatives
• Executors can be appointed as trustees
• Executors can act before probate
• Guardians of minor children can be appointed
• Executors and trustees can be given extended powers
• A will can contain special requirements
• The estate can be distributed as the deceased wishes
15.6 Intestacy
Where a person dies without a valid will, they can be partially intestate where the residuary gift under a will fails or the residuary legatee dies before the testator.
Distributions of property under intestacy – the estate is distributed after the payment of debts under the rules in the Administration of Estates Act 1925. However, property held as a joint tenant does not devolve under the intestacy rules but passes by the right of survivorship to the surviving tenant. The rules are:
• Spouse with no issue, parents, siblings – spouse gets all the estate
• Spouse and issue – spouse take personal chattels, £250,000 plus interest and half the residue. Issue share the other half of the residue
• Spouse, no issue or parents but siblings of whole blood – spouse gets all the estate
• No spouse but issue – issue take all estate
• No spouse but parent – parents takes all estate
• No spouse but siblings of whole blood – siblings take all
• No spouse but just siblings of half-blood – they take all
• No spouse but grandparents – they take all
• No spouse but uncles and aunts – they take all
• No spouse but uncles and aunts of half-blood – they take all
• No relatives – the crown, the duchy of Lancaster and the Duchy of Cornwall is entitled to the estate
A spouse does not inherit under the rules if they die within 28 days of their spouse. If a child predeceases a parent, then the child’s children take the share of the parent.
15.7 Commorientes
Where two or more persons die at the same time, it is assumed in England and Wales under the rule of Commorientes that the elder died first. This rule enables personal representatives to determine the succession of a deceased’s property.
15.8 Claims by family and dependants
Under English law testators may dispose of their whole estate under their will as they see fit, they enjoy freedom of testation. Under the Inheritance (Provision for Family and Dependants) Act 1975, an application or family provision claim may be made in court to set aside the terms of a will on the grounds that reasonable financial provision has not been made for the applicant. An application must be made within 6 months from the issue of the grant of probate or letters of administration. Applicants must fall within one of the following categories:
• The surviving spouse or civil partner
• A former spouse or civil partner who has not remarried
• A child of the deceased or a person treated as a child of the family of the deceased
• A person who was being maintained by the deceased before the death
• A person living with the deceased during a two-year period immediately before death, as the spouse of the deceased
If the court approves the application, the estate devolves according to the terms of the order and not in accordance with the will or rules on intestacy. The court can take the following orders:
• The transfer of property
• Payment of a lump sum
• Payment of income
• Settlement of property on trust
It can also make an order in respect of property disposed of by the deceased before death, if the disposal was intended to avoid the provisions of the 1975 act. In making an order, the court will consider:
• The financial resources and needs of the applicant and the beneficiaries under the will or an intestacy
• Any moral obligations on the deceased
• The size and nature of the estate
• The physical or mental disability of any applicant or beneficiary
• The duration of marriage in the case of a surviving spouse
• Any other matter which the court regards as relevant, including the conduct of the applicant or any other person.
