Varying the deceased's Will for tax purposes or otherwise to suit the family requirements

Varying a Will of a deceased person as an estate planning tool. Let's  see how it works…

It is not uncommon for the family of a deceased person not knowing what their Will stipulates and when the Will is finally read it may not prescribe what it was expected. Or perhaps circumstances have changed after the testator made their Will which results in the Will no longer  suiting  the requirements or needs of the family at the time of the death. This is when the option of  changing the dispositions of a Will of a deceased person may be a useful exercise, for tax planning purposes or otherwise, to better suit the beneficiaries’ needs or requirements.  

Thus, beneficiaries of an estate may have both tax and non tax reasons for desiring to alter their legacy or share in the residuary estate  and it is important to note that there is a time limit to do so, which is 2 years from the date of death of the testator.

Accepting the gift and then gifting it to someone else has inheritance tax and capital tax consequences for the beneficiary whereas a variation of the Will is written back to the testator’s Will with the advantage that such property is treated as if it has never been in the beneficiary estate for inheritance  tax purposes.

Bearing in mind the 2 year time limit above mentioned,  it is important to take prompt action after the death to ensure that the desired objectives can be achieved. Importantly, when  appreciating assets (e.g. a house ) are  being transferred to a trust  as a result of the deed of variation it is also relevant to assess the capital gains tax situation so taking prompt advice and action gives greater opportunities to achieve  more tax efficient decisions.

Some  examples below illustrate how variations of the deceased’s estate can be useful.  

Marie who is single and have 2 adult children,  is the  beneficiary of her late mother’s estate, which includes a rental property. Marie would like to continue  receiving  the income from the property but would not want the capital to be part of her estate on her death since that will trigger a greater inheritance tax bill. Marie can vary her late mother’s Will to set up a trust on behalf of her late mother of which herself and her  children are the beneficiaries. The trustees may exercise their discretion to pay Marie the trust income during her  lifetime  and on her  death her children  receive the capital, which would not be taxed under Marie’s estate.  

Rebecca is the beneficiary under her sister Anna’s Will, receiving an inheritance of £290,000. Rebecca dies 8 months later leaving her estate now valued at  £500,000 to her son Richard. Rebecca’s estate is, as a result of the gift in Anna’s Will,  liable to 40% inheritance tax above  £325,000.   Richard can, on behalf of her late mother,  vary Anna’s Will to redirect Anna’s estate to himself, and thus  use both estates  nil rate bands to avoid £70,000 inheritance tax.

Another  use of a deed of variation may be triggered by the introduction of the additional inheritance tax nil rate band which applies  since  2017. This additional tax relief requires the residence to be  left  to the testator’s children or grandchildren, so it may be necessary to vary the deceased parent’s Will  which does not take advantage of this  tax relief.  

It is important to note that not only the estate of a person who left a Will can be varied but also the estate of someone who dies intestate (without a Will) or assets that pass to the surviving  joint tenant as a result of the death (e.g. when husband and wife -or partners-  own their residence as beneficial joint tenants as opposed to tenants in common).

Taking all this into account, if you are administering the estate of a family member or a friend,  or perhaps you have received some  inheritance in the past 2 years, you may wish to  explore options to redistribute an estate in a more tax efficient way by using a deed of variation.