Tips for Private Client Advisers to add value to the Probate Process
A death in the family
One of the joys of being a professional adviser is that many clients become trusted and supportive friends. The death of such a client can be a shocking experience. Hopefully the client will have a well drafted will, but even so there are ways in which financial advisers can add real value to the probate process, either by putting forward ideas that have not been considered or sometimes just by being another knowledgeable point of contact for the executors and family.
There are some matters that should not wait until after the funeral service. The most important for an executor to consider is the insurance position of houses and their contents. A contract of insurance was one of utmost good faith: that meant volunteering to the insurance company anything that could affect the risk being covered. That rule has been modified by the Consumer Insurance (Disclosure and Representations) Act 2012, which came into force on 6th April 2013: until this new Act plays out in practice it is sensible to remain cautious –see Box 1 for two of the important sub-clauses.
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Obviously the death of the sole occupier is relevant. On being told a property is not occupied in most cases the insurance company will impose conditions concerning regular visits to the house, its heating and often the draining of the water system. Those conditions are usually fundamental terms and should be carefully observed: if they are impracticable they should be discussed with the insurance company to achieve workable amendments. See the flowchart in Box 2. Keep in mind that burglars do read obituary notices and will break into empty houses where the occupant has just died.
An immediate interest
There are two other matters that advisers should consider straight away. The first is the common sense point that most wills are drafted so that on death the will gives an immediate gift to the named beneficiary. What if that beneficiary was to die unexpectedly soon afterwards? This will bring into play consideration as to whether the beneficiary has a will, lasting power of attorney and how the inheritance slots into that beneficiary’s personal position. It is always surprising how many beneficiaries will want to put off these considerations until after the inheritance has been received.
The second matter is time limits, the most important of which is for deeds of variation – not where the beneficiary wants to redirect for his or her own IHT arrangements, but where the deceased has received an inheritance within the two year period prior to that deceased’s death. If our client’s death gives rise to a charge to IHT and the client’s estate includes an inheritance from someone who died with two years prior to the client’s death, it is possible to take that inheritance out of the client’s estate to reduce the IHT due on the client’s death. The deed of variation must be completed within the same two year period starting with the date of death of the provider of the inheritance.
This variation can be made even though the beneficiary had received everything and that estate’s administration has ended or if nothing had been received. It can also apply to an estate of a foreign domiciled deceased. The most important consideration is the observation of the two year time limit. As it is a variation to the will/intestacy provisions of the provider of the inheritance, not to our late client’s will, the beneficiaries can still be the same –but specialist legal advice is essential.
Running alongside whether to put in place a deed of variation should also be a consideration of the application of any quick succession relief, which is designed to reduce IHT where property has been received from an estate taxable on a death within five years of the client’s death. Often within that first two year period a deed of variation will save more IHT.
The will and executors
Frequently overlooked is whether “the Will” is a valid last will. It can be surprising how often a client can sign a will before one witness and then walk down the road to get a second witness’ signature: if that is done the will is invalidly executed because the testator and both witnesses were not all together throughout the whole procedure. There is sometimes (but not inevitably) a clue if witnesses have different addresses, but often the only way to be sure is to contact the witnesses and ask about the details of execution.
It is always useful for any professional adviser involved with an executor of or beneficiary under a will to consider carefully the terms of the will and the circumstances of that will’s execution. All the more so if the client is a disappointed beneficiary or reasonably expected to benefit and does not do so. A good starting point is to read the article “How to assess capacity to make a will.” by Professor Robin Jacoby and Peter Steer published by the BMJ in 2007.
This gives a very readable and short summary of what should be done by a professional adviser, usually a solicitor, when preparing a will for an aged client or a client who has suffered a serious illness. The article contains a very practical explanation of the problem and of the “Golden Rule” solicitors and doctors should follow in such circumstances.
If there appears to be a serious issue surrounding the circumstances of the preparation or execution of the will, then it is usual to raise detailed enquiries of the solicitor who prepared that will using the principles set out in the case of Larke v Nugus. The purpose of such detailed enquiries at an early stage is “to prevent money being spent on futile litigation by the provision of early preaction disclosure.” The Law Society issued a helpful updated practice note on the 11th October 2011 –“Disputed Wills.” Any such queries will almost inevitably mean taking specialist legal advice.
Another point to consider is whether the disappointed beneficiary is entitled to a share of the estate despite the provisions of the will, for example because of a principle of trust law or due to having a claim under the Inheritance (Provisions for Family and Dependants) Act 1975.
One particular difficulty can appear where a will of a man refers to his “children,” and does not further identify them (e.g. by name or say “the children of my marriage to X”). For some years the legal definition of “children” in documents has included illegitimate children. If the will does have this drafting problem, then executors need to be particularly careful.
Costs of probate
There are two strands to probate administration: advising on the taxation implications – IHT, capital gains tax and income tax – and the administrative process of finding and valuing assets, obtaining probate itself and then collecting in and dealing with assets and liabilities in accordance with the provisions of the client’s will. It is sometimes worthwhile to separate these two strands. Some executors now seek professional help on the taxation issues and undertake the administrative work themselves: others will seek help to obtain the grant of probate and then take over the estate’s administration from that point.
Most probate administration will be undertaken by solicitors. It is a regulatory requirement for solicitors to give cost information as soon as possible. Cost quotations can vary. Many solicitors will no longer charge for their time plus a percentage based on the value of the estate and an additional percentage if the solicitor is an executor, but it is quite proper to do so. It can be beneficial for executors to seek more than one cost quotation: or to request a quotation for obtaining the grant of probate and to review the cost position at that stage. Some solicitors will offer a choice between a fixed price and time estimate quotation.
The Law Society issued another practice note on 11th October 2011 entitled “Appointment of a professional executor.” If a solicitor or a firm of solicitors is an appointed executor and there is any concern about proposed fees, this practice note should be considered . Paragraph 3 directs solicitors – “..if the estate is small or straightforward, it might not be appropriate to encourage the client to appoint you or your firm as the executor.”
Paragraph 4 of the Note states – “Information about fees should be provided upfront so the client is made aware of potential charges before deciding who to appoint” (as an executor). If the proposed costs of a professional executor are being queried, it can assist a challenge to ask if this guidance was followed when the client was giving instructions for the preparation of the will. On solicitors’ cost issues generally see Box 3.
If the client’s death will give rise to a charge to IHT it can be worthwhile as well to seek a second opinion on how the Inland Revenue Account has been prepared and before that account is submitted to HMRC. Exemptions and reliefs can be overlooked.
An executor’s duties
Acting as an executor can be onerous and, like acting as an attorney, carries a personal liability for losses caused by below standard behaviour. As part of keeping up to standard there are three actions that should always be considered and usually undertaken.
Firstly statutory advertisements for unknown creditors of the estate should be arranged as soon as possible. This is in accordance with section 27 of the Trustee Act 1925. The effect of the section is that if an executor distributes an estate after the two month period referred to in the advertisement, the executor is not liable personally if a claimant subsequently appears. But such a claimant can still seek payment from the receiving beneficiaries, subject as always to the limitation rules. If the executor is also a beneficiary that individual will still be liable, so the only real point of a statutory advertisement in those circumstances is to try to flush out unknown claimants and to protect the executor/beneficiary from personal liability if the claim exceeds an executor’s partial entitlement from the estate.
Secondly before any payment is made from an estate the executor should make a statutory search to check the beneficiary is not in bankruptcy proceedings. Most professionals involved in estate administration will have encountered a positive bankruptcy search, often in surprisingly innocuous circumstances – for example a beneficiary who is also a co-executor’s spouse. If an executor pays a legacy to a bankrupt beneficiary and not to that beneficiary’s trustee in bankruptcy, the executor is liable to find the legacy again from his own pocket. These searches should be made every time a payment is proposed.
Finally executors need to keep in mind the possibility of claims under the provisions of the Inheritance (Provision for Family and Dependants) Act 1975. Here there is a six month time limit from the date of issue of the grant of probate: note the period does not start from the date of death. A claimant can still apply after this six month period but in those circumstances would need the Court’s permission to proceed. This can be a particularly difficult area to explain to beneficiaries as they invariably believe there is no problem.
Once probate has been obtained, the executors will have confirmed the legal authority to collect in the assets of the estate and pay liabilities. There are opportunities during the administration of the estate to plan to reduce tax liabilities, particularly IHT. Most useful is the loss on sale relief for securities, but it does need proactive monitoring and is an area where a financial adviser can add real value.
Acknowledgement: With thanks to Money Management, an FT publication where this article appeared in the May 2013 edition. www.ftadviser.com/mm
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