It is generally well known that to ensure that your affairs are managed in accordance with your wishes when you die, you should have a properly drafted will in place.
However, it is arguably less well known that it is possible for a beneficiary of a will to vary the terms of their inheritance, essentially changing the terms of the will that a person put in place during their lifetime. It is also possible for a beneficiary to vary their inheritance when somebody dies without a valid will in place, known as intestacy.
The legal document that varies a person’s inheritance is known as a Deed of Variation. The terms of the deed take effect as if they were written into the will of the person who has passed away, or in the case of them having no will, as if they had made a will in the first place.
Some of the most common reasons a beneficiary may want to redirect their inheritance are:
To save inheritance tax
Spouses and charities are exempt from paying inheritance tax and a deed of variation can be used to redirect additional assets to those beneficiaries to reduce the inheritance tax payable. A particular benefit occurs when 10% or more of an estate is gifted to a charitable beneficiary which will allow the estate to benefit from a lower rate of inheritance tax . This saving could be achieved by a deed of variation if provision wasn’t made for this in a deceased person’s will or under their intestacy if they didn’t make a will.
In addition, since April 2017 the government have begun introducing a new inheritance tax benefit called the residential nil rate band. The rules surrounding the availability of this tax benefit are complex and not everybody has made will arrangements to fully utilise it. In these cases, the inheritance can be varied by way of deed of variation to ensure the estate has the full benefit of this valuable tax allowance.
To resolve a dispute or achieve fairness
It may be that when a person has passed away a dispute arises over the distribution of their estate. For example, a family member may feel that they have not received a fair share of the person’s estate. Bearing in mind the cost, stress and delay caused by litigation, the beneficiaries may wish to alter the terms of the will to make provision for that person through a deed of variation.
It could also be the case that the beneficiaries all feel that a testator would have made provision for a certain person if they had had the opportunity to do so, and wish to enter into a deed of variation to make provision to achieve fairness and maintain family harmony.
A beneficiary may also wish to provide for others who are in greater need of funds or other resources, such as housing.
As part of their own tax planning
A beneficiary may be in the enviable position of having a taxable estate, meaning that when they die they will pay inheritance tax to the government. Receiving a large inheritance could make that tax bill even higher. Those beneficiaries sometime consider gifting’ away their inheritance to their beneficiaries during their lifetime. The difficulty in them receiving their inheritance for them to gift it on is that the government will consider that to be what is known as a ‘potentially exempt transfer’ or PET and will tax that gift if the person giving the gift dies with 7 years of making it. However, if the beneficiary enters into a deed of variation, varying their entitlement so that their beneficiaries receive the inheritance intended for them, then it is deemed to be a gift from the person who has passed away and not a direct gift from the beneficiary meaning that it will not impact on the tax position of the beneficiary on his death.
In order for a deed of variation to be effective it must be made within two years of the date of the person passing away, so relatively prompt legal advice is essential. It must also be signed by all beneficiaries who would be negatively affected by the variation. If those beneficiaries are under the age of 18, then approval of the court is also required.
It is essential that the deed of variation is clear about what is being varied and who benefits from the variation and requires some prescribed legal wording to be effective. They are easy to get wrong and the government do not allow for a variation to be varied again. It is therefore crucial that appropriate legal advice is sought at the outset.
Finally, although deeds of variation are a useful tool at our disposal, they shouldn’t be relied upon as an alternative to making a will or reviewing a current will in your lifetime. Deeds of variation are frequently under review by the government and it may be that in the future they are abolished.