Deciding to make a Will and then actually putting the decision into action can be a somewhat stressful, upsetting and daunting task for some people. So it may be a little disconcerting to learn that after you have put all that effort and thought into planning your Will that there might be some opportunity for those left behind to change your instructions and alter your Will. after you are gone. It is a perfectly sound argument to point out that you have the right to leave your possessions to whom you please and therefore why should disgruntled beneficiaries be allowed to change your instructions? 



The Government's focus on tax avoidance, the overhaul of the trusts regime as proposed in the Pre-Budget Report 2004 and the consequent new legislation - Finance Act 2004 (to come into effect April 2005) - led some to believe that Deeds of Variation - the means by which a testator's instructions in a Will are amended - would cease to be valid.

However, the Chancellor Gordon Brown did not rule out their existence and therefore such Deeds have continued application and relevance. So what exactly are Deeds of Variation, how are they created and what is the justification for their continued existence?

Deeds of Variation - What Are They?

A Deed of Variation is a written document which seeks to amend/vary certain instructions/dispositions in a testator's Will. The result of a variation to any Will is that one or more beneficiaries will have their entitlement affected in order to take into account someone else's new entitlement; this means that either their share is reduced in value or completely obliterated. The following example, (whilst probably very artificial), demonstrates the point.

Example

Maude in her Will left £6,000 to her son Michael and nothing to her daughter Michelle. To rectify the unfairness of the Will disposition Michael agreed to a Deed of Variation by which his share was split with his sister, thus allowing each to receive £3,000.

In order to be legally valid, the Deed must comply with certain conditions;

1) Must be made in writing.

2) All persons who were original beneficiaries in the Will and any persons who benefit from the proposed variations in the Deed must sign the Deed.

3) It cannot be given for money or money's worth.

4) It must be made within 2 years of the death of the decedent.

Consent

The first criterion is self explanatory so we turn to the issue of consent. With the above example in mind it appears clear why consent of all parties is required due to the significant changes in a beneficiary's entitlement which can ensue from any variation. A clear indication of consent is a signature.

Money or Money's Worth

The must be no inducement for a beneficiary of a Will to agree to a variation which would benefit someone else. Again, an example will demonstrate the point.

Example

Walter leaves substantial gifts to his two children Jane and Wayne but consequently has left his widow Joan impoverished and unable to sustain herself. Jane and Wayne agree to give a share of their gifts to their mother on the agreement that Joan will return it to them in the form of PETs (potentially exempt transfers). This will be deemed to have been given to Joan for money or money's worth and thus will not constitute a valid Deed.

Made Within 2 Years of Death

The Deed must be made within 2 years of the decedent's death and this time frame is due to issues of tax. If made after more than 2 years the Deed cannot be given retrospective affect for either Capital Gains Tax (CGT) or Inheritance Tax (IHT) purposes which, as we shall see, is one of the main reasons Deeds of Variation are still used.

Justification for Deeds of Variation

Perhaps the above examples have already provided some clues as to why Deeds of Variation still have application in UK law. The example of Michael and Michelle demonstrates that such Deeds can serve an equitable role in correcting/amending what would otherwise appear to be unfair dispositions. 

The unfair dispositions might not be intentional on the part of the testator, particularly where they have not updated their Will.

Example

In 1998 when Monica made her will, her relationship with her daughter Amy, problematic for years, had eroded to the point that Monica decided to leave Amy nothing in her will, dividing her estate of £1,000,000 equally between her two other children, Sam and Sadie. By the time of Monica's death last year she and Amy had reconciled, and Monica often voiced her intention to change her will to leave Amy one third of her estate. Due to infirmity Monica died before making this intended change, but aware of her wish, Sam and Sadie give Amy one third of Monica's estate via a variation.But Deeds of Variation serve another practical role, and this is within the realm of tax.

Not everyone engages in estate and tax planning let alone makes a Will in the first place! Thus a person may have made a Will which upon their death was grossly out of date and an intolerable - and avoidable - amount of tax particularly IHT ensues. Or maybe there was no Will at all, in which case there would have been no IHT mitigation! This is where a Deed of Variation can save the day.

Example

Malcolm left everything he owned to his wife Maude by survivorship. Transfers to spouses are automatically exempt anyway which means that Malcolm failed to utilise his Nil Rate Band Exemption. The result is that a hefty IHT bill will accrue on Maude's estate upon her death. Michael and Maude have adult children and a Deed of Variation could be agreed whereby Malcolm could leave his NRB legacy to his children thus using his allowance.

On the other hand, if Malcolm's Will left more than the current IHT allowance to his children in error (an outdated Will for example) the tax would be due immediately. A Deed of Variation could remedy this by changing the beneficiary to Maude thus resulting in delayed IHT and allows Maude time to engage in some tax planning and gift giving to reduce the value of her estate.

Conclusion

It has been argued by many that the very notion of allowing family members to alter the wishes of the deceased Will maker flies in the face of freedom of choice - freedom to choose who to leave one's own possessions to and who NOT to benefit as the case may be.

But I submit that the value of such legal documents far outweighs their 'intrusive' nature. They are able to remedy a range of situations, including persons who have wrongly been ignored reaping some benefit to those who have unintentionally been left out or not given enough. 

Taking into account the fact that approximately 70% of people do not make a Will and with the ever increasing value of people's estates beneficiaries can be left with sometimes overwhelming tax bills due to their family member leaving everything to intestacy, and here again the Deed of Variation comes to the rescue. And even those with the foresight to make a Will can make mistakes and not plan adequately; the Deed of Variation can come to the rescue in minimizing the tax that as inadvertently arisen.

The Deed of Variation is by no means a perfect tool and there are no doubt situations which it just cannot present itself as a remedy. But from the tax perspective alone, with an ever increasing tax-hungry Government seeking to minimize tax avoidance schemes where ever possible, one is thankful that this tax saving tool and equitable remedy has been left untouched.

For the meantime that is...