Ever thought about ‘survivorship clauses’ in Wills? The ones that go like ‘I gift £200,000 to my wife if she survives my death by 28 days, otherwise it should pass to my children equally’.
However, should the surviving wife now pass away within 28 days, lo and behold, the £200,000 passes to the children. In doing so, the £200,000 doesn’t benefit from the transferable nil rate band which is only available to married couples and therefore results in the estate suffering a higher tax bill.
Survivorship clauses have traditionally been around to stop the double administration of the same wealth following deaths in quick succession; which would effectively mean a double inheritance tax charge (IHT) on 1st death and then soon after on 2nd death. Because of the quick succession of death, there would not have been the possibility to reduce the estate value of the survivor and thus a lower IHT charge.
It used to make sense prior to October 2007, as before this date, you couldn’t transfer any unused nil rate band of the deceased spouse to the surviving spouse and set it against his/her estate on their death. It would make sense to use up the nil rate band on first death by passing it to default beneficiaries if the wife/husband failed to survive them by 28 days.
Furthermore, your choice of beneficiary could have been very different if you knew your first choice of beneficiary was to die soon after you. You may not be happy with your assets passing via their Will to beneficiaries you may not feel as strongly about.
The situation is made somewhat more diffcult when you have simultaneous deaths. In such circumstances Section 184 of Law of Property Act 1925 states that if two or more people die and it is NOT possible to determine the order of death, it is then presumed that the younger predeceased the older. This is known as ‘the rule of commorientes’ – sounds Spanish to me but hey.
But this rule DOESN’T apply for IHT purposes. The relevant IHT rule for simultaneous deaths is found in Section 4(2) of the Inheritance Tax Act (IHTA) 1984 and it states “where it cannot be known which of two or more persons who have died survived the other or others they shall be assumed to have died at the same instant.”
So what are the implications? Consider a scenario where Michael and Jane, having standard wills, but with NO survivorship clauses, which state everything to each other unless one of them predeceases then the estate goes to the children.
Michael and Jane pass away in an accident. Jane is younger. Under the Law of Property Act 1925 she’s deemed to have survived Michael, therefore, she inherits Michael’s wealth. Under Section 18 of the IHTA 1984, it states that where there is a transfer between spouses it’s considered an exempt transfer, meaning no inheritance tax is liable on Michael’s estate – as it’s passed to his surviving wife, Jane.
But Jane has also died, therefore, IHT on her estate needs to be considered and in this instance, under Section 4(2) IHTA 1984 we simply IGNORE what’s happened as a result of Section 184 of Law of Property Act 1925. One law doesn’t impact the other in this situation relating to IHT.
This results in Jane’s personal estate held in her own name is considered for IHT but Michael’s estate escapes for an IHT charge on his death and Jane’s death!
Now, IF there was a survivorship clause things would be different, as Jane wouldn’t have survived the 28-30 days usually stipulated and therefore, his estate would not benefit from spousal exemption (under Section 18 IHTA 1984) and so his executors would only have the standard NRB and potentially the RNRB available to set against his estate to determine his IHT liability.
What to do
Our position is to generally do away with the survivorship clause and on first death put everything into trusts. You can nominate trustees you have confidence in to distribute your wealth to multiple beneficiaries in accordance to your terms.
One of those trustees preferably being a professional trustee who is on call to advise the lay trustees on how best to access trust assets in light contemporary legislation.
Trust planning, offers protection against third party threats to your wealth your beneficiaries may face such as:
- Divorce settlement fees
- Creditor / Bankruptcy Claims
- Generational Inheritance Tax
- Care fees
It also goes without saying having independent professional trustees will also ensure your wealth doesn’t get whittled away by irresponsible beneficiaries!
DISCLAIMER: The content of this blog should not be taken in any way to be deemed applicable to your own personal circumstances. Pick up the phone, drop a suitable professional an email. If they get it wrong, you’ll most probably be covered by their PI cover. You wouldn’t do surgery on yourself, don’t do this…as it could cause you serious health problems and you may need to go into surgery.
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