IPDIs, COMMON ACCIDENTS AND THE SURVIVORSHIP CLAUSE This article, written by Nick Acomb, was first published in the June 2009 issue a/trusts and Estates Law & Tax Journal. Immediate post death interests (IPDIs) are an important feature of the Will drafting landscape post- Finance Act 2006. They offer one of very few opportunities nowadays to create a trust governed not by the inheritance tax relevant property regime, but rather by the 'pre-22 March 2006' life interest rules where the trust capital is counted with the life tenant's estate for inheritance tax purposes on their death, but there are no periodic or exit charges whilst the trust subsists. IPDIs are frequently used to provide for a surviving spouse or civil partner: the spouse exemption from inheritance tax is available, yet not at the expense of control over capital. IPDIs are also frequently used for gifts to children. Here again, they allow control over capital - in a flexible, long term manner - but not at the inheritance tax cost of creating a relevant property regime trust. But creating an IPDI is a one-off opportunity. Where deaths occur in a common accident or in quick succession, it's possible that a short-lived IPDI for a surviving spouse will squander that opportunity. Solving this by way of a 'blanket' survivorship clause may work in many cases, but there are problems. Care is needed where a Will contains gifts to a discretionary trust; these gifts should not be subject to a survivorship clause. The interaction of the succession and inheritance tax rules in common accident or 'commorientes' situations adds further complexity: when is a survivorship clause appropriate? To add yet further complication, the 'transferrable nil rate band' introduced in the Finance Act 2008 adds a few more tricky situations where a 'blanket' survivorship clause may not be the best solution. It's a good time, then, for a review of survivorship clauses. The Billmgs. Cuildford, Surrey CU1 4YD 'Iel: +44 (0)1483 302264 Fax: +44 (0)1483 302254 rnail(di.stcvcns-bolton. co.uk www.stcvcns-bolton.co. uk Stevens & Bolton LLP l~a Iirmted hubihty partnership registered III England (registered number OC3(6955) and j, regulated by the Solicitors Regulation Author-ity Lawyers for A list of members' names is open [0 mspecuon at the above address.
What is a survivorship clause? A survivorship clause is a clause in a Will which provides that a beneficiary must survive the Testator by a specified period of time as a condition of that beneficiary inheriting. Typically the specified period is one month or thirty days. A twenty-eight day survivorship period applies to a surviving spouse or civil partner on intestacy under section 46(2A) of the Administration of Estates Act 1925. There are three main reasons for having survivorship clauses in a Will: 1 Administrative convenience. Administration of an estate becomes more burdensome if assets are passed to a beneficiary who only survives the Testator for a short period of time. It produces double administration in that the assets are included in the estate of the deceased Testator and then have to be transferred into the estate of the deceased beneficiary to be included also in that beneficiary's estate. 2 Loss of control. As a consequence the Testator has lost control over the destination of the assets. Had the beneficiary pre-deceased, the assets would pass to someone else. The Testator may take the same view if the beneficiary dies at the same time or within a short period of time of the Testator before the beneficiary has had an opportunity of enjoying the legacy. 3 Taxation. It avoids double taxation. If tax is payable on the death of the Testator it would be payable again on the death of a beneficiary who inherits by surviving the deceased by a short period of time. Although there may be quick succession relief here under section 141 of the Inheritance Tax Act 1984, the survivorship clause avoids any such claim. However, importantly there are some cases on a common death where a tax advantage can be obtained by not having a survivorship period - this is explained further below. What about joint property? Where property is held by two owners as beneficial joint tenants, the property will pass to the surviving joint owner regardless of the terms of the deceased owner's Will. Any survivorship clause in that Will, will not apply to the joint property passing by survivorship. 2
What does the legislation say? Section 92 of the Inheritance Tax Act 1984 is the only section covering survivorship clauses. It provides for a maximum survivorship clause of 6 months for Inheritance Tax purposes. The effect of the section is that the disposition which takes effect at the end of the period is treated as taking effect at the beginning so that for Inheritance Tax purposes the survivorship period is ignored. Although section 92 provides for a maximum 6 month period, such a long period is slightly impractical - it would prevent any distribution from the estate until 6 months have elapsed. One month is a more practical period. The section only applies where property is held for any person on condition that he survives for a specified period. As will be explained below, there is a problem in the application settled legacies. of this section to Survivorship clauses and legacies to trusts For section 92 to apply, property must be held for the beneficiary to whom the survivorship is attached. condition Where a legacy is left to a discretionary trust, property is not held for anyone beneficiary. So, such a legacy should not be conditional upon a spouse (or any other person who is a beneficiary of the trust) surviving the Testator by a specified period - the requirements of section 92 would not be satisfied. The types of gift that this typically affects are legacies of the Inheritance Tax nil rate band to a discretionary trust, but also legacies of assets attracting Business Property Relief or Agricultural Property Relief to a discretionary trust. In these cases the legacy to the discretionary trust can be conditional upon a spouse or another beneficiary surviving the Testator, but cannot be conditional upon surviving the Testator for a specified period of time. 3
Survivorship clauses and common accidents 'Commorientes' refers to two or more people dying simultaneously, or in circumstances where it is uncertain which of them survived the other or others. Where two people die in such a common accident and where the order of deaths is unknown, section 184 of the Law of Property Act 1925 provides that the younger is deemed to have survived the elder for all purposes affecting title to property. There are four implications of this: 1 If assets are owned as joint tenants, the younger inherits the whole of the asset so that the whole of the asset passes under the younger's Will or intestacy. 2 If the younger person is a legatee under the Will of the elder, the younger will inherit unless there is a survivorship clause in the Will of the elder. 3 If the younger is entitled on the intestacy of the elder, the younger will not inherit since the intestacy rules provide that the younger is treated as not having survived the intestate - section 46 (3) of the Administration of Estates Act 1925. 4 Under section 4(2) of the Inheritance Tax Act 1984, the estate of the elder which does pass to the estate of the younger (where the order of deaths is not known) is not taxable in the estate of the younger. (See HMRC IHT Manual at IHTM 12191-12197.) The effect of section 4(2) is that for spouses and civil partners, a survivorship clause should be excluded in the Will of the elder in the event that the couple dies in a common accident. This is because the younger will inherit free of Inheritance Tax covered by the spouse exemption under section 18 of the Inheritance Tax Act 1984, but those assets passing to the younger are then exempt from Inheritance Tax in the younger's estate by virtue of section 4(2) of the Inheritance Tax Act 1984. Of course, there may be reasons other than taxation where Testators may still prefer there to be a survivorship clause e.g. where the residuary estate of the couple passes in different directions on the second death under their Wills. than an absolute interest. In these cases an IPDI trust for the survivor may be more appropriate 4
Survivorship clauses and immediate post death interests Where a beneficiary is given an interest in possession (or life interest) by Will, this gift can be made the subject of a survivorship condition to which section 92 applies because property is held for that beneficiary. The trust created must give that beneficiary an interest in possession. The following additional points should be noted: 1 If an interest in possession for a beneficiary is followed by a successive life interest for another beneficiary the interest of the second beneficiary would not normally qualify as an IPDI because it does not arise on the death of the Testator - it arises on the death of a life tenant (section 49A(3) of the Inheritance Tax Act 1984). However, by including a survivorship clause which applies to the first beneficiary, the interest of the second beneficiary will qualify as an IPDI by reason of section 92 if the first beneficiary dies within the survivorship period. 2 In the event of a common accident it might be sensible to exclude a survivorship clause so that the estate of the elder becomes exempt from inheritance tax in the estate of the younger by virtue of section 4(2). However, where a Will leaves a life interest to a surviving spouse, will HMRC accept the spouse exemption applies - and the assets become exempt by virtue of section 4(2) - where the surviving spouse only has an interest in possession for what would be a "deemed" moment in time? If such a claim were successful there would be no inheritance tax to pay on the assets passing into the successive trust following the spouse's interest in possession, though any successive life interests would not qualify as IPDIs. A safer course of action might be to provide that in a common accident the estate of the first to die passes absolutely to the surviving spouse (not into an IPDI) and for the surviving spouse's Will to create the successive IPDI. In this way the estate of the elder spouse would pass free of inheritance tax, but would pass into trusts under the younger spouse's Will, which would qualify as IPDIs. 5
Is there a problem with the transferable nil rate band? The transferable nil rate band introduced by the Finance Act 2008 (sections 8A to 8C of the Inheritance Tax Act 1984) allows any unused proportion of a deceased's inheritance tax nil rate band to be claimed on the death (on or after 9 October 2007) of a surviving spouse, giving an enhanced nil rate band in calculating the inheritance tax due on the second death. Note that it is not necessary for the surviving spouse to have inherited any of the estate of the first spouse to die. All that is required is that on the death of the first spouse the nil rate band was not fully utilised. Note also that there can be a transferable unused nil rate band even where a spouse's estate has a value below the nil rate band. However, an unexpected result arises where there is a "poor" spouse (with assets less than the nil rate band) and a "rich" spouse (with assets in excess of the nil rate band), and a survivorship provision is in play. Suppose the rich spouse dies first and the poor spouse dies second but within the survivorship period. The estates would pass down to say, the children. The rich spouse's nil rate band would be fully utilised. The poorer spouse's nil rate band would not be fully utilised, but since the poorer spouse was the last to die his/her unused nil rate band cannot be carried back in time to the estate for the richer spouse. In such circumstances, would it be better to disapply the survivorship clause? Where each spouse has sufficient assets (whether passing by survivorship under a joint tenancy, or under their Will or intestacy) equal to or in excess of the nil rate band, there will not be any problem. However, consideration should be given to disapplying the survivorship clause in circumstances where the rich spouse predeceases the poor spouse within the survivorship period, at least to an extent so that sufficient assets to "frank" the poor spouse's nil rate band do actually pass to that spouse. In the event of a common accident, as previously explained, it would generally be preferable from a tax point of view to disapply the survivorship clause in the Will of the elder so that the elder's estate passes free of inheritance tax in the younger's estate by virtue of section 4(2). However, can an unused nil rate band of one spouse pass to the other spouse in a common accident scenario? 6
Section 8(A)(3) and section 8(B)(l) contemplate that a claim for a transferable nil rate band must be made by the survivor's personal representatives - but who is the survivor? Section 184 LPA 1925 only presumes the younger to have survived the elder for all purposes affecting title to property. A possible construction is that given that section 184 would not be relevant to the provisions of section 8(A) - 8(C), each spouse is a 'survivor'. If they both died at the same time, they would each have had a spouse immediately before they died, and as each is thus a 'survivor' within the meaning of section 8( 1), this enables any unused nil rate band of one spouse to be claimed by the personal representatives of the other. As ever, in disapplying survivorship clauses for any reason, careful consideration should be given to the succession consequences. Survivorship clauses and executors and trustees A survivorship clause should not apply to the appointment of executors/trustees or their ability to charge, otherwise an executor/trustees would be unable to take any action (including a speedy application for Probate) until the specified period has expired. Drafting When drafting Wills, having a survivorship clause in place remains important for all the established practical reasons - the actual destination of the property being key amongst them. But nowadays, there is also the further imperative - post Finance Act 2006 - of making the most of the opportunity to create IPDI trusts. But Will drafters need to be aware of the situations where survivorship clauses should be disapplied. They are inconvenient on appointments of executors and trustees. They won't work with gifts to discretionary trusts. Where required, such gifts can be made conditional on the survival of a specified person - but not their survival for a period. 7
They may not be advisable in the Will of an elder spouse in a commorientes or common accident situation, so that the opportunity to avoid Inheritance Tax in the estate of the younger is exploited. This will usually be the better result in these limited circumstances, but careful drafting may be required if trusts for children are to qualify as IPDIs. They may not be advisable where one of two spouses or civil partners has assets less than the nil rate band, and the other has assets in excess of the nil rate band, and might be disapplied in limited circumstances. Survivorship clauses should not be disapplied, however, without careful consideration of the succession consequences. Nick Acomb is a Partner in the Tax & Trust Department at Stevens & Bolton LLP. 8