Evolution or revolution?

The Law Commission’s consultation paper on Intestacy and Family Provision Claims on Death was published in November 2009. The consultation has now closed and practitioners wait with bated breath to see whether a new set of rules will have to be learnt and applied to an intestate’s estate. A report with recommendations to parliament will be published together with a draft bill later this year.

Societal change

The main aim of the consultation seems to be to reflect changes in society and the reasonable expectations of those who have been bereaved. The review therefore addresses the rights of cohabitants, step-children, the statutory legacy, life-interest trusts for the surviving spouse, and the spouse’s entitlement where there are children and also where there are none.

The manner in which the estate of a person who dies without a will is governed by the intestacy rules, which are set out in the Administration of Estates Act 1925 (AEA). In effect, parliament makes a will on behalf of the intestate and sets out how the estate should be distributed where there is no will, or a partial intestacy arises under a will.

The intestacy rules have been criticised as being out of date in terms of modern family life, as well as failing to reflect rising property values.

The AEA established the principle that a surviving spouse should have priority over all categories of beneficiaries. These rules have continued to this day and are in most cases quite comfortably applied, although there have been various changes to the AEA since 1925 (see box).

The Law Commission’s current consultation paper includes statistical data which is very enlightening and begs the question: is there really a need to change the rules?
Based on figures obtained from grant applications, the average sizes for intestate and testate estates were:

• intestate £56,000;

• testate £160,000.

• One third of intestate estates are worth less than £25,000.

• In 90 per cent of cases where there is a surviving spouse and children, the entire estate passes to the surviving spouse because the estate is worth less than £250,000.

• In 98 per cent of cases where there is a surviving spouse and no children, the entire estate passes to the surviving spouse as the estate is worth less than £450,000.?

There are a number of unanswered questions.

Should the whole estate pass to the surviving spouse where there are no children?

Based on the statistical data, only two per cent of estates share the intestate’s estate between the surviving spouse and other relatives. This is an extremely small percentage. This reflects the usual intention of a childless testator who makes a will leaving the entire estate to his surviving spouse rather than having to share the estate with parents who may be elderly, or siblings to whom he may not have been particularly close. The expectation is really to benefit the surviving spouse solely, except in those rare cases where the estate is substantial and the interests of other family members should be included. While the Law Commission appears to want to reflect the reality of most intestacy, the statistics cast doubt on whether there is actually a need to make a change that affects a tiny minority of cases.

Should the whole estate pass to the surviving spouse where there are children?

Only ten per cent of intestate estates are large enough to pass an inheritance to children. Where children are involved it would seem unfair for them to be denied their inheritance, especially where, in many cases, the family home will be held in joint names and pass by survivorship to the surviving spouse.

If the whole estate were to pass to a surviving spouse who remarried, then the children might not receive anything as the step-parent is likely to inherit all of the estate, which could then end up passing down a different line. This would seem very unfair, unjust and cause conflict and definitely is not what the intestate would have intended.

While most estates are simply not large enough to create separate interests for the spouse and the children, some portion of the estate should, where possible, be set aside for the children. A combination of a statutory legacy, and a division of the residue between children and a life interest, is as sensible a compromise as can be achieved in the absence of a will.

If the position stays the same the consultation looks at whether the family home should be brought into account.

It has been suggested that where a joint tenancy exists between spouses, the deceased spouse’s half share in the family home ought to be brought into account when dividing the estate under the intestacy rules. The current position will, in most cases, leave the children without any inheritance if their parent remarries.

The main problem with bringing a half share into account would be a practical one. If the family home is the main asset, then the surviving spouse may not have sufficient funds available effectively to buy out the children’s inheritance. If the family home is shared between the life interest or the children, there may be problems over who will be responsible for maintenance and upkeep during the survivor’s lifetime.

While it would be a positive change if the intestate’s half share in the family home were brought into account, there would need to be careful safeguards for the surviving spouse to ensure security during their lifetime.

Should a cohabitant inherit under the intestacy rules?

Up to now, cohabitants have had to rely on the Inheritance Act 1975 to bring a claim for limited financial provision. Experience of these types of claims, especially where there is a child from the relationship, highlights many difficulties that can be encountered, in respect of costs of court applications, separate representation for the administrators, claimant and any minor child through a litigation friend. The Law Commission suggests that the commitment of the cohabitants to one another by having a child and living together as a couple in a joint household is strong evidence of a similar commitment as marriage, although without the formal contract. Certainly no minimum period of cohabitation should be required where a child is involved and in this case cohabitants should have the same entitlement as the spouse under the intestacy rules. This should also be the position with a 1975 Act claim.

It is recommended that, if the cohabitants do not have a child, there should be a minimum period of cohabitation to demonstrate commitment to each other. A minimum period of five years should apply and ?in this case the cohabitant should have the same entitlement as a spouse under the intestacy rules. If the cohabitation ?has been continuous for between two and five years the entitlement should only be half of what the spouse ?would receive.

There are obvious concerns in both cases as to how cohabitation can be proved. Perhaps there will be a requirement to sign a declaration or provide evidence of the cohabitation period? However, how many couples who avoid the formality of marriage will undertake a different legal formality?

Surviving spouse and surviving cohabitant

If there is a surviving spouse and also a surviving cohabitant, then it may be that the deceased had continued to provide for the surviving spouse, even though they had not been living together. It cannot be assumed whether the spouse or the cohabitant will have the greater degree of dependency. In this scenario it would be safer to preserve the rule that the surviving spouse inherits the estate, with a provision for the cohabitant to bring a 1975 Act claim to ensure a fair division of the estate based on needs.

Family provision for cohabitants

The definition for reasonable financial provision should be changed to the financial provision that is reasonable in all the circumstances, whether or not required for the cohabitant’s maintenance. The cohabitant should be treated in the same way as the surviving spouse.

Should parents continue to rank above siblings under the intestacy rules?

There is a strong argument here that parents are probably better off, so do not need the money from their deceased child. However, they are the closest relatives and will have brought up the child. It should not be assumed these days that an older person is better off than a younger person. It is probably right that they should inherit and, of course, parents are free to pass the money down to the next generation, whether on death or by gift. Deeds of variation are available where the parent’s estate would otherwise be liable to inheritance tax.

Stepchildren

If a testator makes a will then, in some cases, stepchildren are included where, for example, the step-parent has treated the stepchild as a child of the family. The Law Commission suggests that in this situation the stepchild should be able to bring a claim under the 1975 Act. This seems a wholly sensible approach as the stepchild could feel left out of the family and angry at not having the ability to bring a claim.

Weighing up

The Law Commission’s consultation is a welcome review of the rules of intestacy and family provision. However, any solution creates its own difficulties. The essence of the law of intestacy is that it is inherently imperfect. There is a balance between different interests and different needs. If the scales are weighted too heavily towards the spouse, this may be at the expense of the children; if too heavily towards the children, then the spouse may suffer. Where cohabitants are concerned, should the intestacy rules interfere with the presumption that marriage creates obligations whereas cohabitation does not? We are free to marry and free to arrange our affairs as we wish, subject to the rights of those who are genuinely dependent – as is recognised by the 1975 Act.

Any change in the intestacy rules should also recognise the freedom of any adult to live – or rather, die – in accordance with those rules. No one is bound by the intestacy rules. They are simply there for those who choose not to opt out by a very simple device, the will. n

 

Helen Stewart is head of probate at Thomson Snell and Passmore