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Case Study: Converting intestacy trust income to a lump sum

When a husband or wife dies intestate the survive partner is entitled to income for half the estate for life but this can be converted into a lump-sum payment.

Pearson-Jeremy-Canada Life-2013

The problem: The client, aged 57, has just become a widower. Under the intestacy rules, the husband and the two children shared the estate. His wife left an estate worth £450,000 plus personal effects. The husband was entitled to £250,000 plus the personal effects, along with a life interest in half of the balance of £200,000. This life interest was arranged by a statutory trust being established, with him as the life tenant. The children, who were both adult, received the other half of the residue (that is, £100,000).

The widower did not need income and was not impressed by the thought of receiving trust income of a few thousand a year for the rest of his life. He wants to know if he could put the capital to good use, such as funding his retirement at age 60?

The solution:

The answer is yes. A life interest arising under an intestacy can be capitalised and a lump sum paid to the surviving partner. But because the income was payable in the future, he does not simply receive £100,000. He receives the discounted value of the future income.

So what are the procedures for facilitating the payment and how do you calculate the amount due?

Where a statutory trust is created on intestacy, section 47A of the Administration of Estates Act 1925 allows a surviving spouse or registered civil partner to exchange their right to an income for life for a lump sum payment. However, there is a time limit. The survivor has to elect for the lump sum within 12 months of the date on which letters of administration are granted. (Although the time limit could be extended by direction of the Court if the survivor can satisfy the Court that it would operate unfairly in certain circumstances.)

The election is made by the survivor giving notice to the legal personal representatives in writing. But in many cases, the survivor is actually the sole personal representative themselves; in this case, notice must be given to the Senior Registrar to the Family Division of the High Court.

Then there is the question of how to calculate the lump sum payment. This is done by using a set of ‘official’ tables, included in the Intestate Succession (Interest and Capitalisation) Order 1977. The calculation is based on the future income that the survivor is likely to receive and is expressed as a proportion of the amount destined for the statutory trust (£100,000 in this case). So you will appreciate that the younger the survivor, the higher the proportion they will receive.

The amount varies according to the age and gender of the survivor – gender equalisation not having reached intestacy orders yet!

The table of values is also based on the average gross redemption yield on medium coupon 15-year Government stocks; but as the minimum figure is ‘less than 8.50 per cent’ it is not difficult to work out which column to use.

The table stretches from an age last birthday of 16 to 100 and over, so most situations should be covered. For our widower aged 57, the factor is 0.580 meaning that a capitalised lump sum of £58,000 is available as an alternative of a life income (of an unspecified amount). If that was taken, the remaining £142,000 of the residue would be payable to the two children.

It should also be noted that the children’s entitlement is a chargeable transfer by the deceased mother, using up 43.7 per cent of the nil rate band, leaving 56.3 per cent which could be claimed by the legal personal representatives after the death of the widowed client.

To state the obvious, this problem could have been easily avoided if the client’s wife had made even just a simple will.

Jeremy Pearson is technical support manager at Canada Life



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Matthew Worthington 3rd December 2013 at 12:03 pm

    Excellent article, more like this please MM.

  2. Geoffrey Bernstein 7th May 2015 at 4:09 pm

    Just a heads up. The 1977 regs have been updated by SI 2008/3162.

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