Freedom to Leave Assets by Will
To a large extent, a person is free to leave his assets to whomsoever he wants. This freedom is subject to the legal right share of a spouse or civil partner and to the right for children to apply to the court, where the deceased has failed in his moral duty to make proper provision in accordance with means for them.
The legal right share must be claimed. The child’s right is not to a share and claims based on failure in the parent’s moral duty, will only succeed in exceptional circumstances. Many other countries, notably France and Spain provide greater rights for children so that it is difficult for a parent to avoid leaving the bulk of his assets to children.
The rules on legal right shares etc. of an Irish domiciled person, generally apply to his worldwide assets. However in some cases, such as with France, its domestic rules apply to French situate land and buildings, irrespective of the residence or home of the deceased.
Passing of Assets through Estate
There are a number of means by which the ownership of assets and property pass on death. If the deceased has made a valid will, then the assets will generally pass in accordance with its terms. If he has died without a will, then the deceased’s assets pass to his spouse, children or closest relations as defined by intestacy law.
The rules on intestacy may not accord with a person’s wishes or the financial needs of his immediate family. It is therefore usually advisable for an individual to make a Will, specifying to whom he wishes to leave his assets on death. In the case of an individual with a spouse and no children, all goes to the spouse or civil partner.
Where there is a spouse and children, two-thirds of the person’s net assets pass to his or her spouse (or civil partner) and the remaining one third is divided between his or her children. If the person dies with children and without spouse it is divided equally between children. Further default rules apply where there is no wife, spouse or children. They are dealt with in detail in our chapter on intestacy.
Passing of Assets outside Estate
Certain assets pass automatically on death to a designated third party. In these cases, the assets do not become part of the deceased’s assets or “estate”. This means that they do not need to be administered and the personal representative of the deceased does not pass them to the person entitled under the will or intestacy.
Some assets are held for a limited period and terminate automatically on life/death. It is possible to have a “life estate” in the property. Another commonly encountered example is a pension scheme annuity. These assets simply terminate and are not available after the deceased’s lifetime.
Jointly owned property passes automatically to the surviving joint owner or owners, provided that the joint ownership has not been “severed” prior to the death. It is possible to have legal joint ownership but a beneficial tenancy in common in the same property. In this circumstance, the legal title or nominal title only passes by survivorship but the beneficial ownership passes to the estate of the deceased, for whom the surviving joint owners must hold it in trust.
There are certain types of assets, such as life insurance policies, pension entitlements, Credit Unions and Friendly Society accounts whereby the holder may make a lifetime nomination of the asset to a third party, to take effect on his death. The benefit of the asset concerned does not pass to the estate and do not need to be administered by the personal representative. Under the nomination, the third party, pension trustee, life assurance company etc transfers the asset to the nominated person.
An insurance policy may be taken out by a third party on the life of the deceased. See our section on insurance. There are limitations on the right to do this. Spouses may take out insurance on each other’s life. Generally, an individual has an unlimited insurable interest in his own or in his spouse’s life. This means that the insured amount is not limited to actual known quantifiable loss.
Only assets to which the deceased was beneficially entitled to, will pass to his beneficiaries. Assets of which he was a nominee or trustee, may pass to the personal representative but must be held on trust for the true beneficiaries or owner. They do not form part of the deceased’s estate for any purpose including taxation, availability to creditors in insolvency, etc.
Claims by and against the Deceased
The benefit and burden of legal obligation such as contracts generally continue after death. Some types of contracts, where the personal identity of the party is critical, cease on the death of that individual. However, the personal representatives may sue to enforce the benefit of contracts and may generally be sued to perform the burden or obligation of contracts entered by the deceased before his death.
Civil wrongs for which the deceased was liable or civil wrongs committed against the deceased for which a third party is liable, generally survive death. There are exceptions for personal claims (e.g. for defamation) , which cease on death. In other cases, the fact of death may impact upon the extent of loss or damage which may be claimed.
Claims which existed against a deceased before his death must be sued for, (with the issue of legal proceedings) within two years of death. This special short “Limitation” period can be a significant trap.
If a deceased’s obligations and liabilities on death exceed his assets, then the bankruptcy rules apply to the shortfall. See the section on bankruptcy.
Claims may arise by reason of the death of a deceased due to a civil wrong. Dependents may be entitled to claim under general principles of law, for loss and damage arising from loss of support from the third party. There is a statutory maximum on the extent to which loss can be claimed for grief and emotional distress, due to death.
Commonly, a husband and wife each make wills, whereby each leaves assets to each other and to their children on the death of the second of them. Generally, wills can be revoked so that the mere fact that each has made the same will does not imply a binding contract. It is possible for two persons to contract with each other, to make wills in favour of each other or a third person. Where this can be shown, there is a mutual will and the survivor is contractually bound not to revoke his or her will.
So-called “mutual wills” are unusual and are not generally advisable due to their inflexibility etc. If the person who is bound breaches the terms of the contract, then the beneficiaries under the new will must hold the benefits received as trustees for those who would have been entitled under the revoked will.
Assets may be left to a person on trust to hold them for the benefit of another. At the conclusion of the administration of the estate, the assets may be passed to the trustee to be held for the benefit, for example, of infant children or third parties. Trusts are a very flexible way to deal with assets for the benefit of children, over a period of time, for example, while they are under a certain age.
The tendency of modern taxation legislation has been to remove the former benefits of trusts from a taxation perspective. However, discretionary trusts may be used to postpone liability to inheritance tax while children are under age. Trusts are often structured in accordance with dictates of tax law.
It is possible to have a so-called secret trust. In this case, a person who appears to be a beneficiary under a will may have agreed with the deceased, to hold the asset for the benefit of another on trust. A fully secret trust is one which is not apparent on the face of the Will. It will be enforced where the recipient has agreed or where it would be inequitable for him to deny, that he will hold the benefit as trustee for another. A half secret trust is one where the Will states that the asset is given to a person to be applied for a purpose, but this is not set out.
Gifts on Death
It is a general principle that gifts which are not completed or are imperfectly given, will not pass title or ownership. A gift in contemplation of death may occur where a particular movable asset or document representing an asset, have been delivered to a donee in circumstances that show that it was conditional upon death.
The deceased must have made the gift in contemplation of death knowing that death is imminent or that he is suffering from a serious illness from which he is unlikely to recover.
The item must be passed to the beneficiary or placed under his control. There must be a clear intention to pass ownership of the thing concerned. The gift must be conditional on death. This is an exception to the general principle and such gifts in contemplation of death may pass by death notwithstanding that they do not pass by Will, intestacy rules or otherwise.
Taxation and Estate Planning
Death has taxation consequences. In Ireland, taxation is charged on inheritances received. The liability to tax depends on the amount of the benefit received and the relationship of the recipient to the deceased. There exist various reliefs from inheritance tax which reduce the potential liability for tax significantly.
Wills may be organised so to maximise the possibility of qualifying for available tax reliefs. Taxes change yearly and wills take effect on death. The cumulative defect of tax changes can be significant. Where a Will, is made there is a double uncertainty in terms of the composition of assets on death and the applicable tax law (which will change from time to time).
A Will providing for trusts may introduce an element of flexibility in relation to tax efficiency, dealing with particular needs and with more complex situations. Trusts allow the actual position to be reviewed by trustees before assets pass, rather than passing automatically in a fixed way at the moment of death as is the case where there is no will.
Managing Inheritance Tax
There is potential for managing and postponing the incidence of inheritance tax by the use of trusts. Trusts themselves are subject to a special inheritance tax type charge called discretionary trust tax. Trusts can be flexible devices both from the point of view of dealing with unknown needs, on the part of under age beneficiaries and also from the perspective of managing taxation liabilities
From a business owner’s perspective, succession planning may be important to the business. This main encompass both tax aspects and practical and managerial and succession aspects. Relief is available on business assets, giving a reduction of 90% in the taxable value of assets. The effect is to greatly reduce the value of the assets for tax purposes.
Business relief on gifts and inheritance may keep them out of the inheritance tax net entirely up to significant sums, and beyond that, reduce the tax level to an effective rate of 3% of the value of business assets. Agricultural relief similarly reduces the value of agricultural assets by 90% for inheritance tax purposes. Strict conditions apply in both cases.
Estate planning generally should also include consideration of financial needs of dependents’ post-death. Life assurance is generally part of the package to deal with the needs of dependents and beneficiaries. It is possible for businesses to pay sums on death in a tax efficient manner.
Pension benefits should also be considered. Most pension schemes provide for death in service or other life insurance benefits. Proper estate planning requires the consideration of a person’s entire assets and liability, commercial and business circumstances, possible tax liabilities, future business requirements, future requirements for dependents.