Charities and internal investigations
How do you avoid 1975 Act claims against your estate?
The Court of Appeal decision in the case of Illott v Mitson made headlines in 2015 as many people feared it represented an attack on testamentary freedom. In that case, Melita Jackson left her entire estate to animal charities to the exclusion of her estranged daughter Heather, who had not been in contact with Melita for 26 years.
Heather issued a claim for financial provision under the Inheritance (Provision for Family and Dependants) Act 1975 (“the 1975 Act”) and a string of court battles ensued. In 2015 the Court of Appeal awarded Heather £164,000 – almost a third of her mother’s estate. However, the charities have now obtained leave to appeal to the Supreme Court, with an appeal expected to be heard later this year.
Many people are still asking, what caused the Court of Appeal to depart so far from the clear intentions of the testator in the first place? Don’t testators have the freedom to leave what they want to whom they want? Many practitioners await the Supreme Court’s decision in Illott with interest, which may further clarify the approach the courts will take in cases of this type. If, in the meantime, you are concerned about an Illott style challenge to your will once you are gone, there are some practical steps testators can take that might reduce the risk.
1. Understand the Intestacy Rules
Statistics show that over one third of the UK population will die without a valid will in place. Where there is no valid will, an estate is distributed in accordance with what are known as the ‘Intestacy Rules’. Prior to October 2014, where someone died leaving a spouse and children, the spouse would receive all personal belongings, a tax-free legacy of £250,000, and a life interest in half of the remaining estate, with the children inheriting the other half between them. For deaths after October 2014, new rules have improved the position of surviving spouses, as they now inherit half of the residuary estate outright as opposed to receiving a life interest only.
It was thought that the recent changes to the rules would reduce the number of 1975 Act claims brought by spouses in intestate estates. Ironically, however, there may now be an increase in claims brought by adult children, who will now receive a smaller share of their parents' estate. The Intestacy Rules can be complicated and it is important that you fully understand the potential consequences for your loved ones if you were to die without having made a will.
2. Consider a small gift
If you are thinking about excluding a close family member from your will and have concerns about how they will react, then you may consider leaving them a small gift as opposed to nothing at all. This might be accompanied by what is known as a 'no contest' clause. Such clauses are designed to discourage disgruntled relatives from contesting your will and provide that if a beneficiary challenges your will and loses, he or she will receive nothing. They may think twice before risking their inheritance. However, you should ensure that the gift is enough to make them walk away without a fight, which might be an unattractive option where the relationship has broken down completely, as in Illott.
3. Give extra thought to specific gifts
It is common for people to make specific gifts in their will. Perhaps you want to leave the family home to one child, with the rest of your estate to the other. This might seem like a good idea and fair on the figures at the time of making your will, but the value of specific assets can fluctuate dramatically over time.
Imagine that, on your death, the residue of your estate has been wiped out by care home fees, or the value of the family home has fallen. The potential consequences for the beneficiaries are often difficult to predict and it is easy to see how disputes can arise if inheritance is tied to the value of specific assets. So, if you have particular reasons for wanting to leave specific assets to certain beneficiaries then you should take careful advice on how best to do so.
4. Leave a detailed letter of wishes
When making a will you may also consider preparing a detailed letter of wishes. Whilst not legally binding, it is a useful tool for guiding your executors and trustees in how to carry out your wishes once you are gone. It is also the ideal opportunity to explain why you have excluded someone from your will. If your will is challenged, the Court will have your letter of wishes as evidence of your intentions at the time and the reasons behind them.
In Illott, the Court did not give much weight to the deceased’s letter of wishes as it was too focused on the reasons why Heather should receive nothing and contained no evidence as to why the charities should receive everything. It is hoped that the Supreme Court decision will provide further guidance on this point. In the meantime, best practice is to give detailed reasons for any arrangements that might be seen as controversial. The more arguably controversial your decision, the more detailed your explanation should be.
5. Build links with charities now
It is not uncommon for people to want to leave charitable gifts in their wills, often because of favourable tax consequences. For example, gifts to charities aren’t subject to inheritance tax. Rules introduced in 2012 also mean that you can cut the inheritance tax on the rest of your estate from 40% to 36% if you leave at least 10% of your net estate to charity.
However, charitable legacies are not immune from attracting controversy. Indeed, charities are often at the receiving end of 1975 Act claims brought by disinherited family members.
A common reason why charities sometimes fail to successfully defend such claims (whether wholly or in part, as in Illott) is that they are unable to demonstrate a sufficient link between the deceased and the charity. The Courts appear to have a certain degree of distaste for upholding wills that exclude family members in favour of charities that the deceased had no links to during their lifetime.
If you are considering making bequests to charity to the exclusion or detriment of other potential beneficiaries, you might consider making links with your chosen charities now, such as setting up small monthly donations or getting involved in fundraising initiatives.
6. Exclusion is not the only option
It is wrong to think that people only exclude beneficiaries from their wills because they have fallen out or do not wish them to benefit for some other reason. Sometimes people have concerns about the ability of their loved ones to manage the inheritance, whether large or small. This might be because of age, mental capacity, financial difficulties, or other reasons making it unsuitable for them to receive a lump sum. However, excluding them from your will entirely is not the only option.
The most common method is to set up a ‘discretionary trust’ as part of your will, which is, in practice, a more flexible way of providing for a beneficiary or group of beneficiaries with as much or as little supervision as necessary. A letter of wishes can set out how you wish the trust to be managed under the supervision of the trustees. Testators are recommended to take legal advice on the many ways of structuring your will to ensure that your wishes are met.
7. Lay it on the line
Try to have any awkward conversations about your will with family members before it is too late. If you think that someone is going to be upset or angry once they are aware of the will’s contents, then it might be worth forewarning them. The combined effect of grief and disappointment should not be underestimated and if there is a chance of avoiding a dispute by explaining your will whilst you are still alive, it could save a lot of time, money and heartache for all involved once you are gone.
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