Legacies in Wills

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    Legacies

    In this month’s CPD we are going to look at the types of legacies which can be given in a will, and ensure we understand the fundamental differences between these types of gifts.

    Historically, the terminology used for such gifts in a will was known as a ‘legacy’ or a ‘bequest’ which is a gift of pure personality, whilst a gift of land was referred to as a ‘devises’. These days, as part of the move towards the use of plain English in legal documents, many draftsmen prefer to express legacies, bequests and devises simply as ‘gifts’ in favour of ‘a beneficiary or beneficiaries’, irrespective of the subject matter these gifts are drafted to be more user friendly for the end user.

    Since 1925, the distinction between gifts of personality and realty has largely disappeared for all practical purposes, but the use of the old terminology has not been entirely lost. An example can be seen in sections 62-64 of the Taxation of Chargeable Gains Act 1992 (i) which refers to a ‘legatee (ii)’, and rule 20 (iii) of the Non-Contentious Probate Rules 1987 (iv) refers to a ‘legatee or devisee’ showing that old terminology has not totally disappeared.

    Technically, a person taking assets as ‘legatee’ (v) or ‘devisee’ (vi) can be someone doing so as a trustee rather than a beneficiary. The reference to a legacy these days is referred to as a beneficiary, unless the recipient is to be held on trust for the benefit of the beneficiary.

    A non-residuary legacy may be classified as one of the following as being either a specific, general or demonstrative legacy (vii). The classification is not just relevant for academic purposes since it can have important practical consequences for both the person drafting the will and also to those who are left to administer the will upon the testator’s death.

    The first type of gift we will examine is a specific legacy which is a gift of a particular item of property which can be distinguished in the will from any other property of the same kind, owned by the deceased. An example of this type of gift is shown below:-

    ‘I give to my son Richard my 1965 Telecaster mustard guitar.’

    A legacy is not specified just because the testator happens to own an item of property which exactly matches the description; there must be words used in the will which distinguish the property in question from similar property owned by the deceased at the time of their death. For example, the testator may own several guitars at the time of his death so therefore the need to distinguish between each guitar becomes vital. If we apply this to the above clause we can see that the description is key to identifying this legacy, i.e. colour and make singles this item out from a collection.

    A specific legacy will fail if the specific subject matter does not exist as part of the testator’s estate at this time of their death. In that case this gift will be adeemed.

    However, a specific legacy will rank after a general legacy for the purposes of abatement and so the property within these types of gifts will be at less risk from having to be used to pay off deceased’s debts.

    A general legacy of property is one which is not distinguished in the will from property of a similar kind. An example of a general legacy is shown below:-

    ‘I give to Brian 100 shares in East Midlands Train Company’

    If the testator does not own property answering the description at the date of death, the legacy is not adeemed and the executors of the will must purchase property of the appropriate description with the estate funds or offer the equivalent in cash to the beneficiary. If there are insufficient funds in the estate to purchase a general legacy, the Personal Representatives must sell estate assets that are not the subject of a
    specific legacy.

    It is important to remember general legacies abate before specific legacies and if there are insufficient assets in the estate to fund the payment of debts, these gifts will fail.

    The key to distinguishing between a specific and a general legacy is the word ‘my’ which establishes between the two types of gifts. An example is shown below;

    ‘I give to Brian my 100 shares in East Midlands Train Company’ (Specific)
    ‘I give to Brian 100 shares in East Midlands Train Company’ (General)

    A demonstrative legacy is by its nature a general legacy but there is a particular fund named from which this gift can be satisfied, as in the example below:-

    ‘I give to my son Richard free of all taxes Five thousand pounds payable from my Nationwide Current Account’

    Demonstrative legacies can never adeem, this is due to fact that if a particular fund does not exist as part of the testator’s estate at death the legacy is still payable, albeit as a normal general legacy. In that sense they are equated with general legacies because if there is not enough in the designated fund the balance is paid out of the testator’s residue.

    However, a demonstrative legacy ranks equally to a specific legacy with regard to abatement and so will not fail for that reason. If a specified fund exists to provide for this legacy then the gift will be settled.

    In practice, there are often no compelling reasons to give advice in favour of a demonstrative legacy as opposed to a general one. However, demonstrative legacies are frequently encountered in homemade wills because testators often think they are obliged to specify the account or fund from which a gift of money is to be paid.

    The next types of gift which we will examine in this paper are known as pecuniary legacies. These are gifts of money, however, as we will see this can take different forms.

    A gift of money can be specific, as to where the money can be found, an example would be ‘the £1,000 I keep in the top drawer of the desk in my study’ (the specific nature is the reference to its location), or it could be demonstrative in nature i.e. ‘£1,000 from my account at Barclays Bank’ (from a particular fund).

    If pecuniary legacy is directed to be paid by instalments, it is usually called an annuity, for example, ‘£1,000 per annum to my wife’, usually a fund will be set aside for this purpose.

    The term pecuniary legacy is defined in section 55(1) (ix) of the Administration of Estate Act 1925 (viii). This section states the following and includes ‘an annuity, a general legacy and a demonstrative legacy so far as it is not discharged out of the designated property, and any other general direction by a testator for the payment of money, including all death duties free from which any devise, bequest, or payment is made to take effect’.

    The importance of this definition lies in the fact that a will should make express provision stating the relevant property in the estate is to be used to pay the pecuniary legacy. A failure to do so can lead to the imposition of statutory rules in the Administration of Estate Act 1925 (ix) which are difficult to apply in some circumstances.

    Whatever the type of gift, a testator has a number of choices when deciding how to achieve their objectives. The simplest gift is one that is absolute, providing the beneficiary with an immediate vested entitlement on the testator’s death. However, a gift may be less than absolute if:

    a) The will imposes a condition or a contingency which must first be satisfied. Typically this might be the attaining of a certain age or status,
    such as marriage. With such a gift, if the condition or contingency is not fulfilled, it will fail unless the testator has contemplated this by making further provision;

    b) The will creates one or more successive interests in the same property, as in the instance where the will gives a life interest to a particular individual (with right to income or enjoyment) either for life or for a lesser period (such as remarriage) before the property ultimately vests absolutely in one or more of the remainder of the beneficiaries.

    If the interest is less than an absolute interest, the property must be held in trust by a trustee until the interest becomes absolute and the beneficiary who is entitled can take their interest.

    The testator can also choose the right of selection or division from a collection they own. In this case the testator decides to leave it up to the beneficiaries to choose which item(s) they would like to take from the testator’s collection. This could be in the form of a provision allowing several persons maybe with an order of preference to select one or more items (possibly up to a maximum value).

    As with any legacy, the terms must be carefully drafted to clarify the range from which the selection can be made, who can select and the manner of selection.

    Selection should be in writing to the executors and notice will be given to those individuals of their right to select.

    The time period needs to be long enough to allow for a decision, but not so long that awaiting the outcome might delay the progress of the administration the estate. I would suggest a maximum time period should not be longer than 6 months.

    As an alternative, the will can provide for division of items among potential donees.

    This task can be entrusted to the executors or a third party, or even to the potential donees themselves to administer. Again, the intended beneficiaries must be clearly expressed and there may be a need to establish clear rules as to how this will be conducted.

    Regardless of how the legacy is structured or expressed, it should make a provision for failure of the selection or division process. Items not selected should be specifically disposed of because otherwise they will go into the residue. In cases where it is left for a pool of donees to divide up a collection, provision should be made for a dispute and commonly the executors are required to have the final say. An example of such a clause would be as below:-

    ‘I give to my children living at my death free of all taxes a choice of my jewellery not otherwise specifically gifted by my Will or any Codicil to be selected within three months of my death and, if more than one, in equal shares. In the case of any dispute or disputes as between the said legatees concerning one or more items I direct that my Trustees shall have absolute discretion to resolve such disputes by making a final decision as to the destination of any kind of item or items and their decision shall not be contested in any manner.’

    This clause allows the trustees to have the final say over any dispute which is essential, as otherwise any disputes could end in litigation which could mean that the estate would suffer the burden of costs from such litigation.

    A dilemma for some testators is that a house or land they own represents a substantial part of the estate and giving it to one beneficiary often means there is insufficient funds elsewhere to fund similar provisions in terms of value for the other beneficiaries. This is typically the case if the testator is a farmer and he wants to pass on the farm to one of his children, who is primarily managing and working the farm, but there is not enough in the rest of the estate to provide an equal inheritance for his other children.

    In this case a testamentary option in favour of one individual to buy the property at a low value can produce the necessary liquid funds to provide for other beneficiaries in a will. The difference in price between the full market value and the option to purchase, represents a legacy in favour of the guarantee. Any inheritance tax applicable to it will be paid by the residue unless a contrary intention is expressed in the will.

    Great care needs to be taken when drafting these terms. When determining the terms of the option to purchase clause you will need to ensure that the will successfully fulfils its purpose. Factors that must be considered when drafting include:

    a) What property is the subject of the option?

    b) Is the price to be fixed by the testator in the will by the trustees or by a professional valuer?

    c) Whether the valuation is to be by a named person or made in a specific way.

    d) If the price is to be determined after death, what is the basis for the valuation? Is it to be based on the agreed probate value for inheritance tax purposes (assuming there is one) or an open market valuation which might not necessary produce the same figure? Should it take account of any existing right of occupation?

    e) Within what time period must the option be exercised and in what manner?

    The problem here is establishing whether any time limits must be complied with, to be part of the offer.

    So many problems can arise in relation to options to buy clauses (not just one given by the will) it is essential, therefore, to use an established precedent or to instruct counsel to draft an appropriate clause to avoid the potential pitfalls.

    Conclusion

    It can be seen from this month’s CPD that there are many types of gifts a testator can make in their will and we as a will writer need to understand the effect of each type of gift. This knowledge will allow us to understand the priority of gifts and by there nature each work, for example which will adeem and which will not and what order these are seen to adeem.

    Also we have seen clauses which can be drafted within a will to allow the onus of choosing the gifts to actually fall on the beneficiaries. However, be aware of the problems which can fall on such estates if these clauses are badly written.

    Note the last point where the only asset in a testator’s estate is property, you can actually design a right-to-buy clause. This may allow one of the beneficiaries the right to choose, if they wish, to keep such property by having the option to buy. However as we have seen these clause need to be well constructed.

    i http://www.legislation.gov.uk/ukpga/1992/12/section/62/enacted
    ii http://www.legislation.gov.uk/ukpga/1992/12/section/64/enacted
    iii http://www.legislation.gov.uk/uksi/1987/2024/article/20/made
    iv http://www.legislation.gov.uk/uksi/1987/2024/introduction/made
    v Dictionary of Law, Oxford University Press, 7th Edition, pp322
    vi Dictionary of Law, Oxford University Press, 7th Edition, pp169
    vii Dictionary of Law, Oxford University Press, 7th Edition, pp 320
    viiihttp://www.legislation.gov.uk/ukpga/Geo5/15-16/23/section/55
    ix http://www.legislation.gov.uk/ukpga/Geo5/15-16/23/contents

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