Considering a deed of variation?

One fact of life which we all agree on, is that you just never know what the future holds for you, your loved ones and more generally what laws and tax rules may be in place when you pass away, and what unforeseen effect these may have on your legacy.

One way of reacting to these unforeseen circumstances when someone has passed away, is with the use of a deed of variation.

A deed of variation is a legal agreement whereby the executors and beneficiaries can make changes to the deceased’s will after their passing, or in circumstances where there is no will, change the way intestacy rules apply to the estate.

Executors and beneficiaries might consider a deed of variation for some of the following reasons:

1. Tax Efficiency:

Inheritance Tax (IHT) Savings: A deed of variation can be used to redistribute the estate in a manner that reduces the overall inheritance tax liability. For example, diverting some of the estate to beneficiaries with a lower IHT rate or to those who haven't used up their IHT threshold can result in significant tax savings (essentially 40% of the inherited sum, if the beneficiary’s estate is already liable to IHT).

Capital Gains Tax (CGT) Benefits: By redirecting assets that have increased in value since the deceased's death, beneficiaries can also minimize their capital gains tax. Assets passed through a deed of variation are treated for CGT purposes as if they had been bequeathed directly by the will or intestacy.

2. Rectifying Will Discrepancies and Providing for Others Not Named in the Will:

Sometimes, a will may not fully reflect the deceased's intentions due to errors or omissions. A deed of variation allows beneficiaries to alter the distribution of the estate to better align with what they believe were the deceased's true wishes, without needing to go through the potentially lengthy and contentious process of contesting the will.

As bustling as everyday life can be, updating the will may not have been a priority and the deceased may have inadvertently left out someone they intended to provide for, such as a newer family member or a charity. The beneficiaries can use a deed of variation to redirect some of the estate to these overlooked individuals or organisations, ensuring that the deceased's final wishes are more accurately fulfilled.

3. Flexibility for Beneficiaries:

Beneficiaries’ personal circumstances can change between the time a will is written and when it is executed. A beneficiary might feel that their share of the estate would be better utilised by another family member, perhaps due to a change in financial circumstances. A deed of variation allows for the flexibility to redistribute assets in a way that reflects current needs and relationships within a family.

Whilst a deed of variation is a great tool for beneficiaries to amend any errors and administer the estate in a way which truly reflects the deceased’s wishes, there are clear limitations on its purposes and situations where it cannot be used.

Limitations of the use of deeds of variation:

The Law Cannot be Overruled:

 A deed of variation cannot be used in ways that would contravene existing laws. For example, it cannot redirect assets in a way that would illegally maintain state benefits, evade taxes or defraud creditors. The variation must comply with all legal requirements, including tax laws and debt obligations.

No Creation of New Beneficiaries Without Agreement:

While a deed of variation can redirect assets to someone not originally named in the will (or under the rules of intestacy), it requires the consent of all existing beneficiaries who would be affected by the change. The variation must be made voluntarily, without coercion or undue influence from other parties. It cannot be used as a tool to pressure beneficiaries into redistributing their inheritance against their will.

Cannot Be Used for Personal Benefit of the Executor:

If an executor is also a beneficiary, they cannot use a deed of variation purely for their own benefit, to the detriment of other beneficiaries, without their explicit consent and understanding of the implications.

A deed of variation must be completed within two years of the deceased's date of death to be effective for tax purposes. This time limit means it cannot be used for tax planning or redistribution purposes after this period has elapsed.

A deed of variation is a flexible instrument that allows beneficiaries to redirect their inheritance to others after someone's death, often for reasons such as tax planning, correcting errors, or redistributing assets among family members.

At Solomons Solicitors, we advise clients to formally review their will every 2-5 years to reduce the need for post-humous amendments.

As always, it's essential to consult with a legal professional when considering varying an estate, to ensure compliance with current legislation and to maximise the deed’s effectiveness. It ensures that the process respects the current law and fulfils the intended purposes without unintended consequences.

At Solomons Solicitors, our expert private client lawyers have a wealth of experience advising on a deed of variation and estate planning. Contact us on 01202 802807 to arrange an initial consultation.