Update: wills and probate

Inheritance tax

HMRC's August 2010 newsletter contains guidance about the valuation of land and buildings, demonstrating yet again its conviction that many probate applications contain unrealistically low valuations of real estate.

HMRC has stopped short of insisting on a professional valuation in all cases where an IHT charge arises on land, but executors are 'strongly advised' by the revenue to use a professional valuer in this 'complicated area'. (As noted in the January update, HMRC recommends that executors should obtain valuations from three estate agents or from a chartered surveyor.)

The valuer must take into account the state of repair of the property and any special features, such as large grounds or development potential. Furthermore, executors should notify HMRC if they receive offers above probate valuation. The revenue's newsletter warns practitioners: 'Valuing the property in this way will help prevent the risk of substantial undervaluation and HMRC charging penalties as a result.'

In its current consultation about excepted estates, HMRC reveals another concern: that the IHT exemption for gifts made regularly out of surplus income is being exploited. The revenue proposes that an estate where such gifts exceed the £3,000 annual exemption will no longer qualify as excepted estates, even if the value of the estate is within the nil-rate threshold and it complies with all other conditions. In such cases the personal representatives will have to complete a full IHT 400 including details of all assets and all lifetime gifts.

Solicitors' liability

In Vinton and others v Fladgate Fielder [2010] EWHC (Ch) 904, Norris J considered the extent to which solicitors can be liable to the executors and the beneficiaries of the estate of a deceased client for negligent advice given to the client before her death.

The case concerned a failed estate planning exercise. The family business was owned by an elderly lady and her daughters. The family's objective was to reduce the expected inheritance tax liability on the mother's death by increasing her stake in the company qualifying for business property relief. The solicitors arranged for the mother to increase her investment in the company via a rights issue and in a subscription for extra shares. The subscription shares failed to qualify for business property relief because the mother had not owned them for the requisite two years. The family sued the solicitors. The case came before the court as an application by the solicitors to strike out the family's claim.

One difficulty for beneficiaries in such cases is that there is no loss to the client herself as a result of the negligent advice. The Court of Appeal has rejected an executor's claim in respect of unsuccessful tax planning advice on this ground (Daniels v Thompson [2004] EWCA Civ 307).

In this case, the mother had paid her money and got her shares. Neither she nor the company suffered any loss from the failed estate planning unsuccessful attempt to save IHT. Nevertheless, the beneficiaries of her estate claimed against the solicitors on the principle in White v Jones [1995] 2AC 207.

That case established that the solicitor who prepares a will has a professional duty not just to the testator client but also to the intended beneficiaries.

In Vinton, counsel for the solicitors contended that this right of action only arises in the context of will making. The judge disagreed, noting that White principles have already been extended beyond will drafting, to the severance of a joint tenancy, life assurance and family trusts. The judge concluded that this is an area of law which is still developing, and declined to strike out the beneficiaries' claim.

The court attached importance to the fact that these were 'the family solicitors' who provided advice on a wide range of issues to the family as a whole, including individuals, executors, trustees, and family companies.

The company reorganisation was handled by the firm's corporate department, who argued that their clients were the company and its directors, who were bound to act in the interests of the company and for proper business purposes; they argued that their retainer did not include personal IHT planning. Had this argument been substantiated, the executors' claims founded on breach of contract and the beneficiaries' claim based on White would fail. But the evidence (in particular, the solicitors' bills) showed that they had provided, and charged for, a wide range of advice to the family, who were fully justified in contending that IHT planning was part of the retainer.

Firms that proudly offer a full range of legal services to private clients, and advisers who aspire to the traditional role of the 'homme d'affaires', should take heed: even when advising on corporate or real property issues, you will take into consideration any relevant succession and tax issues as clients may be entitled to regard these as part of the family solicitor's retainer unless expressly excluded.

Rectification

Another unsuccessful attempt to mitigate IHT came before the court in Ashcroft v Barnsdale [2010] EWCH 1948 (Ch) but on this occasion the court saved the day.

The deceased's will gave her farm to her husband and her residue to her children. To reduce IHT, the will was varied to give the farm to the children, utilising agricultural property relief, plus a cash legacy, while the husband received the residue. An error in the deed of variation meant that the tax on the cash legacy was payable from residue and not out of the legacy as intended.

The court agreed to rectify the deed as it did not embody the true intentions of the family members. The judgment makes clear, however, that 'the court cannot rectify a document merely because it fails to achieve the fiscal objectives of the parties to it'¦ if the parties' rights will be unaffected and the only effect of the order will be to secure a fiscal benefit for one or more of them'.

Statutory and mutual wills

Two recent decisions about wills make a noteworthy contrast. In Re D, VAC v JAD [2010] EWCH 2159 (Ch) the Court of

Protection, albeit with some hesitancy, approved a statutory will for a person who lacked mental capacity. In Charles v Fraser [2010] EWHC Civ 2124, the High Court set aside a will as invalid notwithstanding that the testatrix had testamentary capacity when she made it.

Re D was an appeal from the refusal of District Judge Ashton to make a statutory will effectively reinstating a will made in 1995 and scrapping two subsequent wills made when the testatrix allegedly lacked capacity.

The judge had expressed concern that if the court agreed to make a statutory will for this testatrix it would open the floodgates for similar applications in a large number of cases where there were concerns about the capacity of the testator at the time the will was made. The Court of Protection has no jurisdiction to rule on the validity of a will, and it is impractical and inappropriate for it to embark on investigations into issues of validity.

On appeal, however, the court decided that its primary duty under the Mental Capacity Act 2005 is to evaluate what is in the protected person's best interests, having considered all relevant circumstances, including the wishes previously expressed by him. Since the court attaches importance to the person being remembered for having done the 'right thing' by his will (see Re P [2009] Ch 33) it may be part of the court's duty to order the execution of a statutory will rather than allow the person to be remembered as started acrimonious and expensive family litigation. The court authorised a statutory will in terms agreed between all the family members.

Mutual wills are comparatively rare and it is hardly surprising that the nature of the obligations of testators who make mutual wills are sometimes misunderstood, as in the case of Charles v Fraser.

Mutual wills involve a binding contract between two testators that the survivor of them (whichever it may be) will not alter his or her will after the first testator has died. Usually the first testator leaves his or her estate to the survivor, having mutually agreed how the combined estate should ultimately devolve after both of them have died.

'Mirror' wills of married testators may contain similar provisions taking effect on the death of the surviving spouse, but these are not usually mutual wills as there is no contractual agreement precluding the survivor from altering his or her will.

This case involved two elderly sisters who agreed to leave their estates to one another and that both wills would contain identical gifts taking effect on the death of the survivor. The agreed list of beneficiaries included each sister's own friends and in-laws. In the event of any of the chosen beneficiaries predeceasing, his share would go to the other beneficiaries. Crucially, the court found that the sisters agreed that neither will was to be altered after the death of one sister.

The mutual wills were executed in 1991, so the court had the difficult task of sifting evidence of the parties' intentions nearly 20 years afterwards, and after both had died.

The first sister, Mabel, died in 1995. The second sister, Ethel, signed new wills in 2003 and 2006. There were strong doubts about Ethel's testamentary capacity in 2006, but the evidence showed clearly that Ethel had capacity in 2003 and that she had not forgotten her agreement with Mabel but believed it was permissible to amend her will to change the beneficiaries of 'her' share, as long as she made no alteration to Mabel's chosen beneficiaries.

However, the court held that Ethel was bound by the agreement for mutual wills not to make any changes to her will after Mabel's death. Probate of her 2006 and 2003 wills was denied; the 1991 will was upheld.

Important lessons can be drawn from this case. It is always worth asking mirror will clients whether they intend them to operate as mutual wills, explaining what this entails. Mutual wills may guarantee that both testators' chosen beneficiaries will ultimately inherit, but the price of this is inflexibility '“ between the first and second deaths (more than ten years in this case) no changes can be made to cater for new circumstances or tax rules. If, nevertheless, the clients' intention is to create mutual wills, this should be set this out in clear terms in both wills. If the wills are not intended to operate as mutual wills then a prudent practitioner will make a note to that effect on the file and store a copy with the wills themselves as a permanent record of the basis on which the wills were signed.