Will Writing CPD review 2012

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    Business in Wills
    Business in Wills

    1 Duty of Care issues

    The law of negligence is constantly evolving and nowhere is the pace faster than in the area of negligent Will preparation. Until recently, lawyers preparing a will have been exempt from the consequences of their mistakes and could not be sued for issues arising from a negligently drafted will.

    The historical position had been established in the Victorian case of Robertson v Fleming i which was held as good law right up till 1969 and used as an authority in relation to Will preparation in regards to negligence. This case stated; “Mistakes in the preparation of a Will give no cause of action to the intended beneficiary since the solicitor owes no duty to anyone other than his client, the testator” Therefore this position seemed to be unfair and unjust, but it was founded on the solid legal principles which adhere to the concept of Privity of Contract. In simple terms, the law said the contract for the service of preparing the Will was made between the client (the testator) and the solicitor or the will writer.

    The above principle only allowed the testator the right to sue for any negligent acts which had been committed. Therefore if a client died and a negligent error came to light they were no longer in a position to pursue a claim. The rule of Privity of contract as we have seen only extended to the testator as opposed to his beneficiaries who had suffered the actual loss. As a result any claim of negligence would die with the client which leaves the will drafter with no potential negligent claims.

    While this position may have satisfied the academic law purist, most people regarded it as highly unsatisfactory. Beneficiaries were missing out and the negligent lawyers were getting away scot free. However, it wasn’t until the late 1970’s that the court Judges began to acknowledge and consider extending the duty of care to the will beneficiaries as they are “so directly affected by the negligent act” in which is created by a Will drafter.

    The breakthrough came in 1979 with the land mark case of Ross v Caunters ii. The facts involved in this case are the solicitor failed to warn the testator that their spouse (who was also a beneficiary) was not to witness the Will. The act of not informing the testator of this basic rule meant a duty of care which was owed to the testator had been breached. The result was the rule of Privity of Contract should not prevent an intend beneficiary from taking legal action to recover losses they had suffered as a result of a will being negligently prepared and without the correct information on how it should be executed.

    The result of the above case is important as this show a move away from the right of privity of contract and the extension of duty to will beneficiaries finally being recognised as being owed a duty of care by the will writer. The effect was the will drafter needs to ensure that
    they undertake their role correctly to ensure they fully discharge their duty of care not just to the clients, but also to beneficiaries.

    The idea of duty of care was further developed in White V Jones iii, which was a decision about a solicitor’s failure to prepare a Will for an elderly testator. In this specific instant there had been an excess of 40 days between when the will instruction was taken to when the actual draft of the document was sent. In this specific case the solicitor failed to draft the amendments to the will document before the testator died.

    The result of the above case showed no direct loss to the estate, but it did result in a loss to the intended beneficiaries, which in this case were the testator’s daughters as no provision was made for them in the testators existing will. The House of Lords in this case concluded by a bare majority that the claimants should be able to recover the loss from the negligent solicitor.

    This decision enforced the rule in Ross v Caunters iv and White v Jones v further establishes any loss caused by negligence of behalf of a will drafter, which cause loss to a disappointed beneficiaries, will allow these beneficiaries to take legal action on the grounds of breach of
    duty against those who are owed a duty of care.

    It is therefore preferable that any will preparation is undertaken in a structured process, which needs preparation to avoid any potential problems as mentioned above. The best way to combat this and mitigate any issues is to ensure good client service and avoid the pitfalls which are listed below;

    1) The duty of Care,
    2) Time taken to prepare a Will,
    3) Retainers and terms of business,
    4) How to manage risk.

    2 Effects post 2006 and transfers

    The Financial Act 2006 introduced the ‘Immediate post-death interest’ (IPDI) vi. For completeness, the words ‘in possession’ should be added, since what is involved is the creation on death of an interest in possession in settled property. An IPDI is to ‘qualify’ for interest in possession for IHT purpose: i.e. the beneficiary is treated ‘as beneficially entitled to the property in which the interest subsists’ vii.

    To qualify as an IPDI a person must become a beneficiary entitled to an interest in possession created on death and they must continue to have such an interest at all times since the time of death (IHTA 1984 S49A viii).

    When making transfers to either an individual or a trust we need to understand the impact it has on the transferor. If an individual gives money to another, this is known as a Potentially Exempt Transfer (PET). An example would be if X gives his son 50 thousand pounds this will be a PET to the son. A PET can be of any amount as was seen several years ago when Bernie Ecclestone gave his daughter (Tamara) 68 million to avoid paying IHT charges, provided he survives the required seven years period for tax mitigation this will successfully reduce his inheritance tax problem.

    In regards to transfers made to a trust what are known as a Lifetime Chargeable Transfer (LCT). The rules of an individual transferring to a LCT are more rigid than those imposed on those who make transfers to an individual. If an individual exceeds their Nil Rate Band allowance which is currently 325 thousand pounds. The settlor needs to pay what is known as lifetime tax on anything over which is taxed at 20%. An example is Mr. X transfers 500 thousand to a lifetime trust he would have to pay the following life time tax.

    Trust settled with 500 thousand pounds in settlor’s life Minus NRB 325 Leaves 175 taxed @ 20% = 35 thousand to be settled In making any of the above gifts the Will Writer should always consider 2 things. The first is the amounts the transferor has settled by any other amounts over the previous 7 years, i.e, either by making ‘PET’s’ or by making ‘LCT’s’. Secondly if the amount is over the NRB will this have adverse consequences on the settlor? in regards to life time tax or on death.

    3 Business Property Relief

    The relief we are examining in this paper is only available in respect of a client’s business interests. In understanding what will qualify for business relief, we must examining what is identified as ‘relevant business property’ ix. The terminology of relevant business property will fall within the following six categories:-

    1) Property consisting of a business or interest in a business x,
    2) Unquoted securities xi,
    3) Shareholdings in unlisted companies xii,
    4) Shareholdings in a listed company which gives the shareholder control xiii,
    5) Land or buildings, machinery or plant used before the transfer wholly or mainly for the purpose of the company, controlled by the transferor, and
    6) Land or buildings, machinery or plant used before the transfer wholly or mainly for the purpose of a business, carried out by the transferor xiv.

    The above categories all qualify for business property relief at different rates. The first three will receive 100% Business Relief, whereas the latter three will only receive 50%.

    It used to be thought that business property relief was only available where the taxpayer transferred “a business or an interest in a business” and that no relief was available, for example, on the transfer of a single field or business asset, however this view was seen by the courts as incorrect xv. It is clear there is no need for the transfer to be of a business; all that is required is the transfer must be a ‘transfer of value’, which is attributable to the value of the business, therefore relief is available on transfers of single items xvi.

    Businesses which consist wholly or mainly dealing in either, securities, stocks, shares, land or buildings, or holding investments are excluded from this relief xvii. It has been argued by commercial landlords who have attempted to say that they are entitled to relief because of their active management of the land, rather than mere passive landlords, however, they have been unsuccessful in proving such a claim through the courts xviii. Your priority is to determine what your client’s main business activity are, and establish if it falls under the rules to obtain business relief. Also to assess whether or not they are undertaking any of those activities mentioned earlier in this paragraph.

    It is important to understand that business property relief will only be applied to the net value of the business property. This means deducting any liabilities from the business thus establishing the net value of the business. An example of this would be any loans or mortgages on the property should be deducted from the business’s overall value so an accurate picture of the business value can be ascertained.

    Note that the value of a business which qualifies for relief cannot be increased by charging business debts to a non-business property. The fact that a guarantee in support of a business has been charged over a particular asset does not mean that the asset is a business asset xix.

    You will also need to establish if a client (or the transferor) has owned their business or their business interest for a minimum period of two years before the transfer xx. Also, if a business asset is replaced by another item which is not owned for the two year time period it will still
    qualify as relevant property, as this would still meet the time period that is needed to qualify for business property relief xxi. An example of this is where a piece of machinery, which is used in the daily business operations, is replaced by a new machine. This new piece of machinery has only been owned by the transferor for a period of 6 months but it will still be classed as relevant property.

    Another practical point which the estate planner needs to consider when creating a Business Property Relief trust is to establish if there are any conflicting documents which set out how a client’s business interest is to be dealt with under certain circumstances, i.e. death or loss of mental capacity. Therefore we need to ask if such documents are in place and how they work. The main documents we can gather this information will be either through a ‘Partnership Agreement’ or through a company’s ‘Articles of Association’.

    These documents will outline how the business operates and can often provide very detailed information with regard to how a business interest is to be distributed on death, i.e. through cross share agreements or pre-exemption rights to existing shareholders.

    It is therefore important that when we look at any business interest and we take these documents into account, as the trust in a Will does not mean this is how the business interest will be dealt with on the testator’s death.

    4 Family Provision laws

    The English legal system allows any testator to leave their estate in any manner they see fit. However there are statutory guidelines to ensure that a testator is acting reasonably to the members of their family they leave behind, especially when it comes to ensuring they are providing for those who rely on them.

    The Inheritance (Provision for Family and Dependant) Act 1975 xxii brings a right for certain classes of applicants to be able to bring a claim to an estate either through a Will or Intestacy. The use of the Inheritance (Provision for Family Dependants) Act 1975, allows an applicant to ask for the redistribution of the estate to include themselves along with other beneficiaries xxiii.

    The court will also consider other various aspects when examining an applicant’s case. In section 3 of the 1975 Act xxiv, it brings different tests which can be used in regards to accessing the applicant case. These are considerations which the court will examine such as what are the needs of an applicant. The court will look at the financial resources and the financial needs which the applicant will have in the foreseeable future and grant an award as they see match the applicant’s needs.

    The court will also look at what obligations or responsibilities the deceased owed the applicant. There will be other considerations which the court may use to establish if an award should be made, i.e. the size of the deceased estate and if the applicant has any physical or mental disabilities, along with any thing else the court may consider relevant to the case in hand in determining if a possible award should be made.

    The 1975 Act xxv is primary concerned with establishing relationships to the deceased estate and ensuring that those who should be provided for are fairly treated. Once this is done it allows the court to see who is dependant on the deceased. Therefore allowing the court to ensure fairness to the applicant, who would be seen to have a legal entitlement to the deceased estate.

    5 Lasting Power of Attorneys

    In today’s will writing one of the most important documents a Will Writer can provide their client is a Lasting Power of Attorney (LPA) document. These documents come in two forms 1) Property and Finance or 2) the Health and Welfare document.

    Before the new LPA document came into place on the first of October 2007 and formally replaced the Enduring Power of Attorney (EPA) document which can no longer be created.

    However you may find many of these documents in your client’s possession, as these documents unlike the LPA which can be registered at several different stages, i.e. when the donor has mental and when they do not, whereas the EPA can only be registered when the donor (person making the document) is losing or has lost their mental capacity.

    The first document involved in the registration we need to examine is known as the LPA001.

    This form is the ‘Intention of notice to register the Lasting Power of Attorney’. This document gives notice to the person elected by the donor that the lasting power of attorney is going to be registered with the Office of the Public Guardian. This is a very straight forward form and you get it from the Office of Public Guardian website and it actually allows you to edit the form online.

    The person you will be notifying is the individual in Part A of the LPA who is named on page 7 of the document. This gives the nominated person the period of 5 weeks to object to the registration of the LPA document. The important part here is to ensure that all the information is entered correctly and the donor or the attorney/s (who ever is registering this document) sign/s the last page, once this is complete this can be sent or given to the nominated person.

    i Robertson v Fleming (1861) 4 Macq 167
    ii Ross v Caunters [1980] Ch. 297; [1979] 3 W.L.R. 605; [1979] 3 All E.R. 580 Ch D
    iii White v Jones [1995] 2 A.C. 207, [1995] 2 W.L.R 187 HL
    iv Ross v Caunters [1980] Ch. 297; [1979] 3 W.L.R. 605; [1979] 3 All E.R. 580 Ch D
    v White v Jones [1995] 2 A.C. 207, [1995] 2 W.L.R 187 HL
    vi Inheritance Tax Act 1984 section 49A inserted by the Finance Act 2006
    vii Inheritance Tax Act 1984 section 49(1)
    viii Inheritance Tax Act 1984 section 49
    ix Wills, Administration and Taxation Law and Practice, John Barlow, Lesley King and Anthony King, 10th Edition
    2011, pp 97 and Inheritance Tax Act 1984 section 105
    x Inheritance Tax Act 1984 section 105(1)(a)
    xi Inheritance Tax Act 1984 section 105(1)(bb)
    xii Inheritance Tax Act 1984 section 105(1)(cc)
    xiii Inheritance Tax Act 1984 section 105(1)(d)
    xiv Inheritance Tax Act 1984 section 105(1)(e)
    xv Nelson Dance Family Settlement Trustees v Revenue and Customs Commissioner; sub norm. Revenue and
    Customs Commissioners v Nelson Dance Family Settlement Trustees [2009] EWHC 71 (Ch); STC.802; 79 T.C.
    605
    xvi Wills, Administration and Taxation Law and Practice, John Barlow, Lesley King and Anthony King, 10th Edition
    2011, pp 99
    xvii Inheritance Tax Act 1984 section 105(3)
    xviii This principle can be seen in the following cases: Powell v Inland Revenue Commissioners[1997] 1 F.L.R.
    1001; [1993] 1 F.C.R. 797 CA (Civ Div) and this principle was shown in Martin v Inland Revenue Commissioners
    [1995] S.T.C. (S.C.D.) 5p Comm
    xix Mallender v Inland Revenue Commissioners; sub norm. Inland Revenue Commissioners v Mallender [2001]
    S.T.C. 514; B.T.C. 8013 Ch D
    xx Inheritance Tax Act 1984 section 106
    xxi Inheritance Tax Act 1984 section 107
    xxii Inheritance (Provision for Family and Dependant) Act 1975
    xxiii Inheritance (Provision for Family and Dependant) Act 1975 section 1 (1) and (1A)
    xxiv Inheritance (Provision for Family and Dependant) Act 1975, section 3
    xxv Inheritance (Provision for Family and Dependant) Act 1975

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    Matt Walkden Will Writer

    About Matt Walkden

    I am a Professional Will Writer and I offer a small number of other products that complement my Will Writing such as Lasting Power of Attorneys (LPA’s), Fixed Price Estate Administration, often called Probate and some Property Products such as changing a family home from Joint owners to Tenants in Common.

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