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Will planning - some practical considerations - Part II

This month we continue to look at practical considerations surrounding making a will. In particular, we will look at the role of executors and trustees and at specific issues arising in connection with business assets and digital assets. We will also consider the pros and cons of avoiding probate by transferring assets to a trust during lifetime.

Executors and trustees

It goes without saying that you should carefully choose the people to look after your affairs and carry out your wishes after your death. In most cases this will be family members. It is usual to appoint the same individuals as both the executors and the trustees. If nothing else is said then the executors will also be the trustees automatically. It is also possible to name persons to be trustees who are not executors. In some cases, some of the named executors will not want to act or may reserve their power.  If they are also appointed as trustees then, depending on the wording of the will, if they do not want to act as trustees they will have to resign separately.

An adviser may come across this issue when legacies which are held subject to a trust need to be invested. If a trust has been created under a will, there should be some form of assent of the assets from the executors to the trustees, even when the same individuals act in both capacities. Another important point to remember is that if a legacy is left to a minor child there will be an implied trust and the executors will hold the funds as the initial trustees. If they do not wish to act, they should appoint new trustees, usually the parents or guardian of the minor legatee. 

Avoiding probate with lifetime trusts

It is, of course, possible to avoid probate by transferring assets during lifetime. Until March 2006 a form of trust, referred to as a "probate trust", used to be popular. Under such a trust the settlor would retain a life interest which meant that no transfer of value for IHT purposes would have taken place when the trust was set up, so the arrangement was neutral for IHT purposes.  It did not mitigate any IHT, of course, but ensured that assets were kept outside of the estate for probate purposes and the trustees could deal with the assets and distribute them in accordance with the trust terms (and so according to the settlor's wishes) without any of the delays which are often associated with obtaining probate (or letters of administration if there is no valid will).

Unfortunately, since the changes introduced to the taxation of trusts in March 2006, the tax treatment of these trusts has changed dramatically, namely a transfer into an equivalent trust now (unless it is a trust for the disabled) would be a chargeable lifetime transfer (CLT) so potentially resulting in an immediate IHT charge and, of course, the assets would still remain in the settlor's estate by virtue of the gift with reservation of benefit provisions. However, if the value of the assets going into such a trust is comfortably within the settlor's available nil rate band, some people may still consider using this type of arrangement. In addition to the avoidance of probate, assets held in such a trust would also be protected from the claims of creditors, ex-spouses etc.

Business assets

We touched on this subject last month.

The fundamental question for business owners will be who inherits the business and, if it is not a family business, is there a share purchase arrangement in place so that the family will be compensated and the business can be carried on by the continuing owners?  In a family business, a frequent key question will be what is suitable compensation for those who are not inheriting the business?

It is extraordinary how often people confuse the "business ownership" of assets with the personal ownership of assets and the consequences can be serious. Especially for a partnership, where there are often less than formal arrangements in place, it is essential to be clear which assets are held on the firm's balance sheet, and so are owned by all of the partners, and which are owned by the testator but used in the business.

The issues that need to be addressed in conjunction with making or reviewing the will of a business owner in order   to avoid problems arising on death include checking that the governing documents (such as the Articles of Association or a Partnership Agreement) are up-to-date, in line with the client's wishes and in accordance with their will. All business documents should be reviewed regularly in conjunction with the client's estate succession plans.

Any advice on will planning for a business owner would also need to include a check on whether Business Property Relief (BPR) or Agricultural Property Relief (APR) would be available. There are many instances where such reliefs are not available, one of the most common being a binding buy and sell agreement for purchase on death.

Another issue to consider is whether there any loans outstanding and how they will be dealt with after the client's death, especially if the family continue the business. Is there sufficient cash to keep the business afloat during the estate administration period so maintaining the value, possibly for a future sale/transfer?  Some additional life cover may be appropriate.

It should also be remembered that if there is no specific provision in the will dealing with the business, then any business interest that a client owns, whether an interest in a partnership or a company shareholding, will fall into their residuary estate or pass under the intestacy rules if they have no will. Does this accord with any share purchase arrangements that may be in place?

Digital assets

Again, we touched on this subject last month. It is surprising how often it is overlooked.

Apart from photos and  digital content that has been purchased, a digital legacy also consists of social media accounts on sites such as Facebook, Twitter and YouTube and this is where potential problems for executors may arise. It may come as a surprise to some that they do not in fact own their online content and actually only have a licence to use the website's services. What happens to their profiles on death is governed by the website's Terms of Use. Terms vary depending on the service provider, but often the licence to use the e-platform terminates and the deceased's online data is non-transferable.

When a person dies, their personal representatives will need access to these electronic records in order to administer the deceased's property, but few people plan for this.

Accounts or other assets that are digital-based often leave no paper trail which makes it difficult for an executor to locate the assets or even know they exist.

Even if an executor has knowledge of the assets, if they do not know the relevant passwords, they will be blocked from accessing them by layers of cyber security.

An additional problem is that accessing someone else's account without their specific authority arguably breaches section 1 of the Computer Misuse Act 1990 and may contravene the service provider's Terms of Use. As there is no specific UK legislation dealing with this, executors will have to consult the Terms of Use of each provider separately in order to establish their rights to access and manage the assets.

These potential pitfalls can be avoided by taking certain steps and advisers should discuss these with any client reviewing their will. These include:

  • Making an inventory of all digital assets and keeping the list up to date. This should be stored alongside the will (although bear in mind that such information should not be included in your will because it becomes a public document on death). It is also advisable to make a record of all passwords but, for security reasons, this should be stored separately.
  • Updating a will to include gifts of the digital assets. While sentimental assets (such as digital photos) can be gifted under a personal chattels clause in your will,  digital assets with a significant financial value or any associated intellectual property rights will need specialist treatment.
  • For online assets, checking the Terms of Use to see if they specify what will happen to the account on the death of the account holder. Appropriate guidance can then be given to the executors. For example, you may want your Facebook profile to be changed to an 'in memorium' page or deleted.
  • Specific authority should be given to the executors to access and manage the digital assets.

Conclusion

As you can see, there are many practical issues to consider when arranging one's will and, what is more, new topics keep emerging.  There is plenty to discuss with clients seeking advice on their estate planning.