Update: wills and probate

Probate practitioners have welcomed the announcement on 14 October 2009 of the European Union's proposals to simplify estates with an international dimension (see solicitorsjournal.com, 16 October 2009). The European Commission estimates that 450,000 European estates involve cross-border issues annually, with a total value exceeding EUR 120bn. The EU report identifies problems which arise as a result of the legal complexities to which these estates are currently subject:

• Uncertainty for those wishing to organise how their estate will pass on death.
• Delay, worry and confusion for the beneficiaries.
• High costs in both pre-death planning and post-death administration.
• Assets in different countries may be subject to different inheritance rules, even within a single estate.
• Beneficiaries who were intended to share equally may, in practice, receive widely different amounts because of the arbitrary operation of the rules.
• Different member states apply different criteria for determining which inheritance rules apply '“ the domicile, habitual residence or nationality of the deceased may be relevant. If nationality is the criterion, a 'tie-break' is needed for those holding dual nationality.
• Formal documents regulating succession rights in one member state (such as a grant of probate) may not be recognised in other member states.
• Similarly, procedures for claiming inheritances differ from one member state to another.

In the hope of reducing this confusion and complexity, the European Commission has put forward a draft regulation to resolve conflict of law issues within Europe. The regulation provides that, when somebody dies, the inheritance laws of the state of his or her last habitual residence would apply to the estate, unless the deceased had elected in their will that the law of their nationality should apply. It also proposes the introduction of a European Certificate of Succession which will be evidence of the identity of the heir and/or administrator throughout Europe.

Each individual member state will continue to have its own laws concerning gifts and inheritance. States will be able to continue imposing compulsory inheritance rules applying in many civil law systems, which provide that close relatives must inherit a fixed portion of the estate. Taxes on death will still be a matter for individual member states to determine, so long as the tax system provides a level playing field in respect of assets or entities within Europe.

Step in the right direction

Any measure which reduces the complexities and delays of cross-border estates will be welcomed by UK practitioners, but the magnitude of the task should not be underestimated. These proposals are a step in the right direction, but in emphasising the rights and requirements of heirs rather than the difficulties and responsibilities faced by personal representatives; the underlying approach is still geared to civil law rather than our common law system.

The recent case of Estate of Loucas Haji-Ioannou, Haji-Ioannou v Frangos [2009] EWHC 2310 (QB) illustrated some of the problems that arise with cross-border estates. Loucas Haji-Ioannou was the successful claimant in a EUR 49m dispute. The Greek Appeal Court ruled in his favour in May 2008. Mr Haji-Ioannou applied to register that judgment for enforcement in England and Wales on 15 December 2008, but died two days later, intestate. In January 2009, the deceased's widow and children, as his heirs, applied to take over the registration. The defendant successfully appealed against this substitution.

The crucial issue was when the heirs had inherited the deceased's right to the benefit of the judgment, which constituted a moveable asset of his estate. Several jurisdictions were involved, each with its own rules about timing and procedure. The deceased was born in Cyprus and had British nationality, but acquired a domicile of choice in Monaco in 1990. Towards the end of his life, he went to Greece to receive medical treatment; he was resident there when he died. Hence the court had to decide whether Greek, Monegasque or English law applied to his estate.

The defendant contended that Mr Haji-Ioannou had died domiciled in Greece. Under Greek law, there is no direct equivalent of a grant of probate or an administration process; the estate passes direct to the heirs but they have four months after the death to decide whether or not to accept it. However, the court held that the deceased was domiciled in Monaco, not Greece, when he died.

Monegasque law refers succession matters to the law of the deceased's nationality. Hence English law applied the law of Monaco (his domicile) to the movable assets of the estate, while Monaco applied the law of England (his nationality) to the whole estate '“ the classic circularity of renvoi. Happily, Monaco provides a tie-break in this situation, by applying Monegasque law. Under the legal system of Monaco, like Greece, the estate passes direct to the heirs, who have the option of accepting or rejecting their inheritance. The court determined on the evidence that the heirs had formally accepted the estate in May 2009, and only then acquired an interest in the judgment originally obtained by the deceased. Consequently, they were not entitled to be substituted for the deceased as early as January 2009.

A Certificate of Succession with Europe-wide validity would have made matters considerably simpler for this estate. It would have enabled the heirs to avoid the pitfall into which they fell, and the costs and delay which resulted.

Meanwhile, progress is being made to remove discriminatory inheritance taxes across Europe. The revenue's website now confirms that UK inheritance tax agricultural property relief applies to farm land and property anywhere in the European Economic Area. On 9 September 2009, the Brussels Appeal Court ruled that the tax rate applying to a Belgian legacy given to a UK charity (the Great Ormond Street Hospital children's charity) should be the same rate as for a Belgian charity '“ 8.8 per cent, rather than the rate of 80 per cent which would otherwise have applied.

Probate and administration

The Law Society and the Society of Trusts & Estates Practitioners (STEP) have announced protocols with HSBC and Nationwide which should speed up the processing of pre-probate enquiries and post-probate administration. Lloyds TSB led the way with the first such protocol some time ago. Interestingly, there are differences between the original and the new protocols. Both HSBC and Nationwide expect practitioners to tell them the approximate value of the estate, as well as whether or not there is a will, and the names of the executors. It is unclear how probate lawyers are supposed to know the size of the estate before they have been supplied with information about the deceased's bank balances! In all cases, the bank will need to verify the status of the solicitor or STEP member, which should safeguard the confidentiality of the information to be given.

An interesting and probably not uncommon point arose in Parkinson v Fawdon [2009] EWHC 1953; the deceased made a mistake in his will as to the name of one of the family. The will referred to a 'nephew, Mark Parkinson'. No such nephew existed. A great-nephew, Justin Parkinson, lived at the address appearing in the will. The court held that it was clear that he was the intended beneficiary and rectified the will accordingly.

Testamentary capacity, and the rule in Parker v Felgate [1883] 8 PD 171, were examined in the case of Perrins v Dooney [2009] EWCH 1945 (Ch). Robert Perrins gave instructions to his lawyer to prepare a new will in April 2000, but it was not signed until 26 September 2001. On the evidence, the court found that Mr Perrins had testamentary capacity when the instructions were given to draw up the will, but no longer had capacity when he executed it. At that stage, however, he understood he was executing a will drawn up in accordance with instructions previously given, and his testamentary instructions remained unchanged. The will was upheld as valid.

Jointly owned assets

People own assets in joint names for many reasons: inertia in updating ownership records, administrative convenience, or to reflect complex ownership arrangements. One common misconception is that joint assets which can be realised without a grant of probate are not subject to inheritance tax. That was exposed as a fallacy by the ruling in Smith v HMRC Commissioners [2009] SPC 00742 (see 'Update: wills and probate', Solicitors Journal 153/30, 4 August 2009).

Heath v Heath [2009] EWHC 1908 concerned a house which was in the names of the deceased and his first wife. Following his death intestate, the deceased's estate passed to his second wife. The second wife sought to rely on an agreement signed by the first wife some years earlier in which she agreed to sell her interest in the property to the deceased, while he declared: 'If anything happens before the contracts are completed everything goes to my son as beneficiary of my estate.' The court held that this statement had been a significant inducement to the first wife in signing the agreement. The statement was incorrect, because the son did not inherit the property. There had also been delay, because the deceased himself had not tried to enforce the agreement before he died. The court declined to order specific performance of the agreement.

Sillett v Lowe [2007] EWHC concerned another fairly common situation: where someone puts a bank account into joint names. Unless there is evidence that a gift is intended (such as a deed of gift), the joint account is presumed to remain the property of the original account holder.

This case concerned an offshore bank account in the joint names of the deceased Miss Whittaker and a friend, Mrs Meek. There was no evidence that a gift had been intended, but there was evidence to suggest that the account had been put into joint names for administrative convenience '“ to avoid the need to obtain a grant of representation abroad. The court held that the account was an asset of the deceased's estate on her death and had not passed to the surviving owner. The judge observed that had the evidence been inconclusive; the outcome would have been the same because of the presumption of a resulting trust for the donor.

In Frear v Frear and Nicholson [2008] EWHC 1320, the Court of Appeal considered the doctrine of election. The case concerned a property in Keighley which was in the sole name of the mother of the claimant when she died. By her will, the mother left the claimant half her estate.

The judge at first instance held that the claimant did not own a beneficial interest in the property himself, but merely the right to inherit half of it. The Court of Appeal considered that this was contradicted by evidence that the claimant had paid for the family's original home. As a result of this, the claimant was beneficial owner of a half share of the house; the mother owned half beneficially and half as trustee for him.

The court decided that the doctrine of election applied in these circumstances. Where a testator's will purports to give away an asset which the deceased does not own, and the true owner of the asset is a beneficiary under the will, the true owner has a choice ('election'). He must either cooperate in giving effect to the will by contributing the asset which he owns, or he must accept a reduced share of the estate '“ taking into account the value of his own property.

Because the will purported to give away the whole house, but 50 per cent of it already belonged to the claimant, the Court of Appeal held that he had to make an election between: retaining his existing 50 per cent interest, but renouncing the bequest of half the estate (a further 25 per cent); or contributing a 25 per cent share (half his own interest) in the property to the other beneficiaries of the estate, but retaining the 25 per cent share left to him under the will. Either way, the claimant's share was restricted to 50 per cent of the property.

The court rarely has to consider the doctrine of election; only one of the decided cases cited to the Court of Appeal was less than 100 years old, and that dated from 1920. Family ownership structures are becoming more complex: Frear confirms the importance of establishing clearly what assets are owned by each member of the family. Failure to do this can result in a beneficiary forfeiting either his own property, or his share of the rest of the estate.