Topic 16 Wills, intestacy and trusts Flashcards
- Explain what is meant by a testator’s mental competence.
In simple terms, mental competence means that the testator must know what a will is, the property they are leaving (in general terms), to whom they are leaving it and how it will be distributed.
- What is the legal position regarding wills and marriage?
If the testator marries after making a will, the will is automatically revoked unless the will makes it clear that it was written in anticipation of marriage. On divorce, once the divorce is final, gifts to an ex spouse in a will are no longer valid unless the will specifically says the gifts should be valid even in the event of divorce.
- Leilani wants to make a few small changes to her will but does not want to write anew one. How can she do this and what requirements apply?
Changes or additions to a will can be made through a codicil, which must be signed by the testator and witnessed by two people.
- Explain the difference between mirror wills and mutual wills.
Mirror wills are very commonly used by couples. Each partner makes an almost identical will, typically leaving everything to each other first. If they die together the estate is left to their children or named beneficiaries.
With a mutual will, the parties make similar wills, with the same broad terms. Both wills contain an agreement that, on the death of the first party, the survivor cannot revoke their own will having accepted benefits given by the partner’s will; this forms a legal contract between the parties.
- Marek died leaving a wife, Mirka, and two children, Karol (19) and Elena (15), but novalid will. His personal estate was valued at £650,000, and he owned his property,worth £500,000, on a joint tenancy basis with his wife Mirka. How will the estate bedistributed?
Mirka will automatically take ownership of the house. Marek’s personal estate of
£650,000 will be divided thus:
Mirka will receive £450,000 absolutely, which is £250,000 and £200,000 (50 per cent of the balance).
Karol will receive £100,000 absolutely now.
The remaining £100,000 will be held in trust for Elena until she reaches the age of 18, when she will receive it absolutely.
- Keith and Linda are beneficiaries of a trust set up by their father. The trust containedno specific powers of investment. Explain the relevance of the Trustee Act 2000 inrelation to investment of trust assets.
As the trust deed does not confer specific powers of investment, the Trustee Act 2000 allows the trustees to invest the assets as if they owned them themselves, providing that they adhere to three key requirements. They must:
be aware of the need for diversification and to select suitable investments;
obtain and consider proper advice when selecting or reviewing investments;
keep investments under review.
- Explain the three ‘certainties’ required when establishing a trust.
In Knight v Knight (1840) the court ruled that in order for a trust to be valid, there must be three ‘certainties’.
Certainty of intention: it must be clear that the settlor intended to create a trust.
Certainty of subject matter: the trust document must make clear which property is to be the subject of the trust.
Certainty of object: the beneficiaries (the object) of the trust must be clear.
- What do the terms ‘life tenant’ and ‘remaindermen’ refer to?
A life tenant is the initial beneficiary of an interest in possession trust, while the remaindermen are the beneficiaries who will receive the trust assets on the life tenant’s death.
- What are the main differences between an immediate post death interest in possessiontrust and a discretionary trust?
A discretionary trust can be set up during the settlor’s life or on their death through a will. The trustees of a discretionary trust have the discretion to appoint any beneficiaries from a specified category or categories set out by the settlor, and to decide whether to pay income or capital to any of the beneficiaries, or not to pay any benefits, as they see fit.
An immediate post death interest in possession trust is set up, or funded, on the settlor’s death. It must provide an income from the trust assets for a specific beneficiary for life (a life interest), with the assets passing to other beneficiaries on their death.
- Explain, in summary form, how a gift and loan trust works.
The settlor makes a small gift into a trust – typically £3,000 to use the annual gift allowance. They then make a further payment into the trust, but this time as an interest free loan – perhaps £100,000 or more – repayable on demand. As the second payment is a loan rather than a gift, it is not a transfer for inheritance tax purposes.
The trustees use the gift and loan to arrange investment bonds, usually on the lives of the settlor and the beneficiaries but owned by the trustees.
Any growth on the bond will be outside the settlor’s estate, although the original capital to fund the investment will remain in the estate.
The trustees use the 5 per cent annual bond withdrawal allowance to make annual partial loan repayments to the settlor; in effect this gives the settlor an annual income from their initial capital.
Each time a repayment is made, the outstanding loan is reduced by 5 per cent, also reducing the initial capital by the same amount. Assuming the settlor spends the payments received, their estate will be reduced by the repayments made.
Once 20 annual repayments have been made, the loan has been repaid and the original investment is out of the estate; no further payments can be made. Any growth made on the bond belongs to the trust and will not be subject to IHT.
If the settlor dies before the loan has been repaid, the outstanding loan will be added back into the estate for IHT purposes. If the bond has been written on more than one life, it will continue. If it has been written on the life of the settlor only, or has to be cashed in to repay the outstanding loan, there may be an income tax charge.
- What is the ‘discount’ on a discounted gift trust?
The discount is the value of the settlor’s retained rights, which is the total of withdrawals expected to be made until the settlor’s death. The discount is deducted from the initial investment when the bond is set up to calculate the value of the gift for IHT purposes.
- Abby, a higher rate taxpayer, set up a designated account for her children with a giftof £4,000 each, producing interest of 4 per cent. What is the tax position?
Each account will produce interest of £160 (£4,000 x 4%). This is over the £100 limit for each child, so the income will be treated as Abby’s for income tax purposes, resulting in tax of £64 on each account (£128 in total) unless it can be included in her personal savings allowance of £500. CGT does not apply to deposit accounts, so there will not be a CGT charge.
