Deeds of Variation - What Are They and When Can They Be Used?
Those of us who draft Wills for a living are used to inserting the words "last Will" into the Wills that we draft. But a last Will is not necessarily the final word on how an estate will devolve on the testator's death.
Some individuals review their Wills regularly ensuring that they amend them to take account of changed family circumstances, changes in the law or changes to their personal fortunes.
However, others do not do this and when they die their Wills may not reflect their own wishes or the expectations of those they have left behind. A third of adults die without making a Will at all.
It is however possible to vary a testator's Will through a deed of variation and there are a number of reasons why a family might want to do this. A beneficiary may want to provide for an individual who has greater need of funds than him/herself. The beneficiary named in the Will may be well established in life but may have children who would benefit from receiving a share of the estate. The original beneficiary may decide to reroute funds direct to the next generation down.
The variation doesn't have to be in favour of the children of the original beneficiary. If a number of siblings inherit from their parents, a wealthy sibling may decide to reroute some of his/her inheritance to a less wealthy sibling or a charity. Alternatively, beneficiaries may decide that one of them deserves a larger share of the estate, for example to recognise a greater role in the care of the deceased.
Another reason to vary an estate might be if the testator's family circumstances have changed. It may be that they have a new grandchild who was not born when the Will was drafted.
If a deed of variation is completed within two years of the testator's death then, as long as statutory conditions are complied with, the variation takes place retrospectively for inheritance tax and capital gains tax purposes. The effect is that it is as if the deceased left their estate direct to the new beneficiaries.
Of course, the original beneficiary who wishes to give up his/her legacy could always simply hand on his/her share of the estate to another without making a deed of variation, but this would be a lifetime gift by the original beneficiary and would be subject to the seven year survivorship rule. Failure to survive for this period would lead to the gift being assessed for inheritance tax as part of the estate of the original beneficiary.
Deed of Variation Requirements
- The instrument of variation must be in writing. There is no formal requirement for a deed, unless one is required for another reason (for example if land is involved). However, it is good practice to execute a deed as this will ensure that the variation is enforceable.
- The variation must be made by the individual who benefits, or who would benefit, under the Will or intestacy and who is giving up that benefit. The beneficiary who is redirecting his/her entitlement must sign the deed of variation. The beneficiary must be "sui juris" i.e. must be of full age and capacity. The executors are only required to be party to the deed if the variation results in more tax becoming payable. There is no need for the new beneficiaries to be party to the deed, though they are often included as a matter of good practice.
- For the deed to have retrospective effect, it must be made within two years of the deceased's death. The variation can be made before or after the grant of probate has been obtained, and before or after the asset has been formally transferred to the beneficiary. An asset may even have been sold, in which case the proceeds of sale can be transferred to the new beneficiary.
- The deed must indicate which asset is the subject of the variation and that the variation changes the destination of the asset.
- The original beneficiary must not receive payment ('consideration') from outside the estate in return for giving up their entitlement.
- The deed must contain a statement of intent, specifying that the beneficiary elects for the relevant sections of the Inheritance Tax Act 1984 and the Taxation of Chargeable Gains Act 1992 to apply.
It is worth noting that once a variation has been made it cannot be undone, so it is always important to take legal advice before entering into a deed of variation.