Over the summer there have been changes to the rules and regulations surrounding succession and testacy. Two events are of particular significance.
In July a court ruling in the UK cast doubt over the reliability of a will as a tool for bequeathing assets outside of the family lineage.
Then on 17 August Brussels IV regulation came into force, affecting succession planning for those with a connection to an EU country that has adopted the laws.
Both events have a significant impact on succession planning and the measures an individual should consider putting in place to ensure total peace of mind regarding the control they are able to exercise over their financial legacy.
So what do the changes mean for clients?
According to the European Commission, around 450,000 cross-border successions occur in the region every year. For EU member states that have implemented Brussels IV legislation, the law of the country in which the deceased was ‘habitually resident’ will apply to his or her succession. This is designed to provide clarity over the legal jurisdiction applied to cross-border successions, where assets, residences, families and passports are split between multiple EU states.
The UK has not adopted the rules. However, a client could be affected if they have property abroad or spend a significant period of their time in a country which has adopted the rules.
Rules on succession differ across Europe. Many nations employ a forced heirship regime, which requires that some or all of the estate be passed on to direct descendents.
Those that fall resident within a European nation other than the UK under the habitually resident test may therefore be subject to the forced heirship rules.
Should they wish to avoid this in order to retain greater flexibility over the deployment of their wealth on death, it is possible to overrule the habitually resident test through an expression of will, allowing the individual to nominate the UK as the legal jurisdiction in which they prefer their legacy to settle.
For example, a client with dual nationality may wish to elect the law of the UK, allowing them to circumvent the forced heirship provisions in the majority of European civil law jurisdictions.
The certainty provided through an expression of will becomes particularly appealing once the complexity of the ‘renvoi’ principle is introduced. Renvoi is the term applied to a series of referrals that could occur where one state believes the law of another state should apply. It may deem that the individual is habitually resident elsewhere and refer the case to that other state to determine.
If that other state’s conflict of law rules take a different view (that is, the correct law to determine the issue is of the originating state or of a third state), the decision may be referred back to the originating state or onto that third state. This uncertainty can be mitigated through the use of an expression of will.
Ilot versus Mitson
In English law, a testator generally has the ability to leave their estate to whomever they choose through their will, known as testamentary freedom. This means the money is their own to distribute as they wish after they have paid outstanding taxes and debts, and provided for those toward whom they have a legal obligation, such as dependent minors.
This is in contrast to many European states, for example, where forced heirship rules apply.
But the recent judgement in Ilot V Mitson makes it legitimate in the UK to challenge provisions, or lack of provision, for adult children.
Here, Heather Ilott’s mother Melita Jackson left her entire estate of almost £500,000 to various animal charities upon her death in 2004. Ilott subsequently challenged the will under the Inheritance Act (Provision for Family and Dependents) 1975.
Ilott, now 54, had left home with a boyfriend when 17. Jackson had apparently never forgiven her daughter and excluded her in the will, making it clear, through side letters, she did not want her daughter to benefit upon her death.
In July the Court of Appeal ruled that Ilott, who has five children, did not receive appropriate provision from her late mother’s estate for her future maintenance. It also ruled that Jackson had “no connection” with the charities she had chosen to benefit though her will during her lifetime.
Ilott was awarded £143,000 to buy her housing association property and a further £20,000 in cash as “additional income”, representing an increase from the £50,000 a previous High Court judge said she should receive in 2014.
The ruling creates a significant new incentive for clients to consider the use of trusts.
Alongside the tax benefits a trust structure can enable from an estate planning perspective, they offer the opportunity to gain greater control over the distribution of wealth on death. As well as the Inheritance Act not applying to trusts, another useful feature is trusts are confidential, unlike wills that become public knowledge once probate has been obtained, and available for anyone to scrutinise through the Probate Registry.
With no such registry or provision existing for trusts in locations such as England & Wales, Jersey, Guernsey and the Isle of Man, a settlor choosing appropriate trustees can go to their grave with significant confidence.
Rachael Griffin is financial planning expert at Old Mutual Wealth