Under Scots law there is the general presumption that each of us is free to leave our assets to whom we want but only a relatively small proportion of the population have a Will.
Anyone can have a Will to direct what is to happen to their assets subject to two conditions:
- You need to have legal capacity, which in this context means being of sound mind, and in terms of age, there are specific rules for Wills which state that the age of legal capacity is 12.
- Even if you have legal capacity, your Will cannot prevent spouses/civil partners and children claiming legal rights over certain assets.
The law dictates what happens to your assets in the event of you dying without a Will – dying"intestate".
The cost involved in dealing with the legal and administrative process is usually greater if you die without, rather than with, a Will. For example, it is necessary to go to court to have someone appointed as your Executor. In addition to the cost implications, this also creates delay.
There is also a loss of control – you are dictated to by the law as to how your assets are going to be divided up. Not only will this influence who receives what, but it can lead to missed opportunities in terms of tax planning, and it can also lead to assets passing outright to beneficiaries when it might have been preferable under a Will to incorporate a trust for asset protection, so that, for example, beneficiaries do not inherit too young.
The current provisions as to how assets are divided up in the event of an intestacy are included in legislation dating back to 1964, albeit with various minor modifications having been made, principally to remove the distinction between children born in or out of wedlock, and also to give the same rights that spouses have to civil partners. However, an important point to note is that cohabitants have no absolute entitlement to share in the estate, albeit there are limited rights to apply to the court to claim an element of financial provision.
The legislation sets out that in the event of an intestacy the estate is looked at in three parts. Firstly, where there is a surviving spouse or civil partner, certain assets form the"prior rights". This currently includes one house up to a value of £473,000. There is then the furniture up to the value of £29,000. Finally there is an entitlement to a cash sum of up to £50,000 if there are surviving children, or £89,000 if there are no surviving children.
The next element is"legal rights". These rights apply where there is a Will, but also in the context of an intestacy.This is a right to a share of the moveable estate only (i.e. excluding any landor buildings). A surviving spouse is entitled to either a one-third share if there are surviving children or a one-half share if there are no surviving children; and any surviving children are entitled to a one-third share amongst them if there is a surviving spouse or a one-half share if there is no surviving spouse.
Finally, after satisfying the prior rights and legal rights, the rest of the estate is made over in accordance with the provisions of the legislation. It is in the context of this free estate that numerous different scenarios are envisaged by the legislation, and priority given depending on who survives. In order to illustrate how this division may not always mirror what one would expect, here are some examples:
- Where there is a surviving spouse and children, the widow(er) will receive the prior rights, the legal rights entitlement will be one-third to the widow(er) and one-third amongst the children, and the entire free estate passes to the children equally amongst them. Depending on the assets in the estate, this may leave the widow(er) in a less financially secure position than the deceased would have intended.
- Where there is a surviving spouse, no children, but the deceased's parent(s) and sibling(s) survive, the widow(er) receives the prior rights and in terms of legal rights a one-half share of the net moveable estate goes to the widow(er). The rest of the estate is divided one-half to the parent(s) and one-half to the sibling(s). This is perhaps an even more stark example as to how the legislation will divide the assets in a way that the deceased may not have wished or indeed envisaged.
- Where someone dies survived by no spouse, children (or grandchildren etc), parents, siblings, uncles/aunts, nephews or nieces or cousins, then ultimately the estate would pass to the Crown.
- No provision is made for cohabitants, although there is now a limited right to apply to court by a strict deadline for some financial provision.
There are two particular tax planning issues that I would highlight arising out of this. The first is that where assets pass to a surviving spouse they are free of inheritance tax. However, as we have seen, assets on an intestacy may pass to other individuals which may create an unnecessary requirement to pay inheritance tax.
The second point is again IHT related and is where assets may pass back up to the deceased's parents and this in certain circumstances could undo inheritance tax planning that has already been carried out by the parents.
The division of intestate estates may well not provide for a division that accords with the wishes of the deceased. None of us know when we will die, what our assets will be, what our family position will be or what the legal and tax rules will be. Therefore, it is sensible for everyone to have a Will in place to provide what is to happen to their assets on their death.
This article first appeared in SCRUM Magazine issue 54.