In 2008 the Law Commission began work on a project considering two areas of the law of inheritance and certain aspects of trustees’ powers. Following consultations in 2009 and 2011, the Law Commission published a report entitled “Inheritance and Family Provision Claims on Death” in December 2011. This set out recommendations for reform of the law and included the draft Inheritance and Trustees’ Powers Bill.

On 21 March 2013 the Government announced that it had accepted the Law Commission’s recommendations contained in the 2011 report in relation to the draft Inheritance and Trustees’ Powers Bill (the “Bill“) and published it for consultation. The Bill seeks to amend existing legislation related to the laws of inheritance (as well as certain aspects of trustees’ powers).

The consultation period closed on 3 May 2013 and the results are expected to be published by 30 June 2013. Mishcon de Reya submitted a response to this consultation.

The proposals contained in the Bill, which are examined in this article, are of significance for all residuary beneficiaries, including charities. As currently drafted there appears to be an inherent risk of expanding the categories of potential claimants seeking provision under the Inheritance (Provision for Family and Dependants) Act 1975 (the “1975 Act”) and thereby increasing the number of overall claims. Furthermore, that the proposals may not only not reduce the existing burden on parties of engaging in preliminary litigation over the domicile of the deceased, but may operate so as to create another source of preliminary litigation in relation to the Court’s juridisdiction to hear 1975 Act claims. In such circumstances, the additional legal costs of jurisdictional arguments risk further reducing the value of the estate and, thereby, the size of the legacy to the residuary beneficiary.

The inheritance law issues covered by the Bill are:

The intestacy rules i.e. the rules that govern the distribution of a deceased’s estate among surviving family members when that person dies without leaving a valid will disposing of the whole of his property; and

Claims made, irrespective of whether the deceased left a will, by family members and dependants for reasonable financial provision under the 1975 Act.

It has been felt for some time that the intestacy rules do not reflect modern-day family set-ups and so cannot meet their needs and expectations. Further, given that it is estimated that between a half and 2/3rds of the adult population do not have a will, this is an area of the law that affects significant numbers of families at a time when they are vulnerable, not only emotionally but financially.

Whilst it is true that the intestacy rules (which date back to 1925) have not been comprehensively reviewed for over 20 years and that the 1975 Act has never been fully reviewed since its enactment, what is much less clear is whether some of the proposed amendments will achieve the desired outcome of improving the current legal position in relation to 1975 Act claims and intestacy.

Proposed Changes to the Intestacy Rules

Surviving Spouse

The Bill amends the current position of a surviving spouse under an intestacy as set out in S46 of the Administration of Estates Act 1925 (the “AEA“). Currently, if the deceased leaves no children the surviving spouse shares the estate with the deceased’s parents and siblings. The proposed changes cut the deceased’s parents and siblings out of the intestacy so that the whole estate would pass to the spouse. Where the deceased does leave children, then the Bill proposes that the spouse will still receive the statutory legacy (£250,000) and personal chattels. In relation to the remaining estate (the residue), the spouse’s life interest will be abolished and instead make an outright gift to the spouse of half of the residue, with the other half still passing to the children as is the current position.

Personal Chattels

There is also a proposal in the Bill to amend the somewhat outmoded definition of “personal chattels” under s55(1)(x) of the AEA. The definition in the AEA refers includes arcane items such as carriages, horses, stable furniture and scientific instruments. It is proposed that there now be a simplified definition of personal chattels as “tangible moveable property other than any property which (i) consists of money or securities for money; or (ii) was used at…death…..solely or mainly for business purposes; or (iii) was held at…death…. solely as an investment“.

Whilst an updated and simplified definition is to be welcomed, it carries the inherent risk of increasing argument over what is and is not covered by the definition. For example, in certain cases could it be argued that a wine or watch collection was held solely as an investment? If so, an argument could arise between the widow and children of the deceased – particularly in a second marriage – about whether or not such assets fall within the definition of personal chattels (and pass outright to spouse) or fall into residue (and half passes to children). The proposed amended definition also does nothing to clarify whether certain types of intellectual property, such as manuscripts, might fall into the definition of personal chattels under the new definition. Any amendment which adds uncertainty, inevitably carries with it the risk of additional litigation and concurrent legal costs which will reduce the value of the residuary estate.

Proposed 1975 Act Changes

The proposed changes to the 1975 Act are set out in Schedule 2 of the Bill. The three principal amendments relate to (i) jurisdiction to bring 1975 Act claims; (ii) the definition of a “child of the family” applicant; and (iii) what it means to be a person “maintained” by the deceased.

Jurisdiction

As the 1975 Act presently stands, claims cannot be brought against estates where the deceased died domiciled abroad. It is generally accepted that this restriction can lead to costly and time-consuming preliminary litigation seeking to establish the deceased’s domicile. Domicile is a highly technical and complex concept which can produce unpredictable results. It is also a matter that is often in the hands of the deceased and is therefore open to abuse by individuals who wish to defeat 1975 Act claims against their estate, even if they have valuable assets in the UK and have been living here for many years.

The Bill proposes 4 options, Option 1 is the preferred option set out in the Bill. The 4 options are as follows: -

  • Option 1: that claims can be brought against the estate of a non-domiciled deceased where English succession law applies to any part of the deceased’s estate;
  • Option 2: that claims can be brought against the estate of a non-domiciled deceased where English succession law applies to any part of the deceased’s estate, but with the restriction that the Court would only be able to make provision for the applicant out of property located within the jurisdiction of England and Wales;
  • Option 3: that claims can be brought in all cases where the deceased’s estate includes property in England and Wales (regardless of the deceased’s domicile) and the Court would make provision out of such property; and
  • Option 4: that claims can be brought where the applicant (as opposed to the deceased) was habitually resident in England and Wales.

The principal concern with Option 1 is that it may well operate to add a further hurdle to any potential applicant seeking to establish a claim under the 1975 Act i.e. by requiring the Court not only to consider domicile but also to assess whether or not English and Welsh succession law applied to the deceased’s assets and, if so, to what extent.

The question of the applicability of English and Welsh succession law would arguably require detailed discussion, and possible litigation, not only with lawyers in the jurisdiction of domicile but also wherever the deceased’s assets are located.

There is also a risk that, if the whole of the deceased’s estate was found to be subject to English and Welsh succession law but the deceased held no assets in the jurisdiction, the courts will have been charged with jurisdiction over an estate with a very limited connection to this country.

Furthermore, any award under the 1975 Act might turn out to be a pyrrhic victory for the applicant given the difficulties they will face in seeking to enforce an English judgment in foreign jurisdictions.

In addition to the above issues, there are other potential practical difficulties, including:

  • the ease of obtaining relevant evidence to support 1975 Act claims against estates principally comprised of foreign-held assets;
  • an increased potential for conflicts between courts in different jurisdictions making orders in respect of the same property; and
  • questions for personal representatives based out of the jurisdiction as to whether they would agree to submit to the jurisdiction of the English and Welsh courts dealing with 1975 Act claims.

Overall, the preferred option may not give practitioners a very sure footing when it comes to advising parties, whether bringing or defending claims, on the strength of any application under the 1975 Act. Indeed, there is a risk that the Bill not only does nothing to eliminate preliminary litigation regarding domicile but in fact embroils parties in additional preliminary litigation to establish whether English and Welsh succession law applies to any of the deceased’s assets.

Of the 3 options, it would appear that Option 3 (providing that claims can be brought as long as the deceased’s estate includes property in England and Wales (regardless of the deceased’s domicile) and that the Court would make provision out of such property) gives practitioners the most certainty in terms of advising as to the applicability and scope of 1975 Act claims, whether in drawing up a Will or advising a potential claimant or defendant to such a claim.

However, whichever Option is adopted in due course, it will be necessary to ensure that the revised 1975 Act makes clear that anyone seeking to avoid meeting the amended pre-conditions, for example by transferring assets out of the jurisdiction, will be caught by the 1975 Act.

The consultation has sought feedback on the 4 different options proposed and it will be interesting to judge from the responses where it is felt the balance should lie between opening up the 1975 Act to a greater number of claims and not exposing the courts to dealing with claims that may have only a very limited connection to England and Wales.

Child of the Family

The Bill extends the definition of those who can claim to have been maintained by the deceased, reflecting the fact that the nature of familial relationships has changed considerably since 1975.

The Bill proposes that an applicant claiming to have been treated as a child of the family by the deceased need no longer show that this treatment was in relation to a marriage or civil partnership of the deceased, but simply that the nature of the treatment was akin to that between a parent and child.

In these times of extended familial relationships, such a widened definition is to be welcomed as claims will focus principally on the quality of the relationship between the deceased and the child. However, the Bill also proposes that an applicant will be able to bring such a claim if in relation to any family the deceased stood in the role of a parent “at any time“.

The inclusion of such a wide timeframe could arguably open estates up to claims being brought by a much greater number of individuals seeking to argue that the deceased had a “parental” relationship with them at some time during the deceased’s lifetime. Any such additional claims that are successful will of course be paid out from the estate, so reducing the interest of the residuary beneficiary or beneficiaries.

Whilst the actual impact on the number of 1975 Act claims of adopting this revised definition of “child of the family” cannot be known, it will be interesting to see if the results of the consultation lead to clarification in order to manage any perceived risk of opening the floodgates to many more such claims, which would be a very real concern for residuary beneficiaries.

Maintained by the Deceased

Under the current provisions of the 1975 Act, an applicant who claims to have been maintained by the deceased immediately before his death must prove that the deceased assumed responsibility for their maintenance and, furthermore, that the deceased contributed more financially to the relationship than the applicant.

The position adopted under the Bill makes it easier for applicants to pursue a claim based on maintenance. It suggests that it will no longer be necessary for the applicant to show that the deceased contributed more to the relationship in financial terms or that the deceased assumed responsibility for their maintenance. It is suggested that these simply be factors to be taken into account by the Court in determining whether an award should be made, rather than the current position where these issues can operate as a bar to a claim being brought in the first place.

The removal of a “Balance-Sheet” approach to such claims, whereby the applicant has to tot up all of the contributions made by him and the deceased, is to be welcomed.

However, the Bill proposes (clause 4 of Schedule 2) that subsection 1(3) of the 1975 Act be revised so that a person will be found to be maintained “only if the deceased was making a substantial contribution in money or money’s worth towards the reasonable needs of [the applicant], other than a contribution made for full valuable consideration pursuant to an arrangement of a commercial nature” (emphasis added).

The phrases “contribution made for full valuable consideration” and “an arrangement of a commercial nature” are not defined in the proposed Bill. Without further clarification or a formal definition, there is inevitably a risk of disputes arising over whether certain arrangements fall within the revised subsection 1(3) of the 1975 Act. One example might be a non-professional carer receiving “pin-money” and/or free board and lodging in return for their services. Would the deceased be held to be making a contribution to the carer for full valuable consideration pursuant to an arrangement of a commercial nature so that a 1975 Act claim could not be brought by the carer? Or would the free board and lodging be seen as a substantial contribution towards the carer’s needs, meaning that the carer could bring a claim as a person maintained by the deceased? Again, any lack of clarity as to the scope of who may bring a claim under this category risks argument between the parties and, thereby, a negative impact on the size of the residuary estate.

Conclusion

Whilst the aims of the Bill are laudable, it is not at all clear whether those aims can be met by the existing drafting or whether in fact, if the Bill is adopted into statute as currently drafted, it will in fact result in opening the floodgates to more 1975 Act claims, many of which may be of limited merit and have only a tenuous connection to the jurisdiction, and also create additional preliminary litigation as to jurisdiction for such claims. For residuary beneficiaries, such outcomes are not to be welcomed.

The results of the consultation are due to be published by 30 June 2013.

Source: Insitute of Legacy Management. To read the article on the ILM's web page, please click here.