In the first of a three-part technical series looking at estate planning, Canada Life's Jeremy Pearson examines the options for the surviving spouse of a client who has died intestate
It is not uncommon for a client to die intestate and, under current rules, this can produce an income for a surviving spouse. They may prefer a lump sum rather than, what could be, a small regular income. So, what can the surviving spouse do about it?
An adviser recently asked us about a client whose wife had died intestate. The client was aged 57 and lived in Malvern. Under the intestacy rules, the husband and their two children shared the estate. She left an estate worth £450,000 plus personal effects.
The husband was entitled to £250,000 plus the personal effects, along with a life interest in half of the balance of £200,000. This life interest was arranged by a statutory trust being established, with him as the life tenant. The children, who were both adult, received the other half of the residue (£100,000).
The widower did not need income and was not impressed by the thought of receiving trust income of a few thousand a year for the rest of his life. He could put the capital to good use, such as funding his retirement at age 60 or 65.
What could be done?
The adviser asked if anything could be done to improve the situation. The answer was yes.
A life interest arising under an intestacy can be capitalised and a lump sum paid to the widower (in this case). But because the income was payable in the future, he does not simply receive £100,000. He receives the discounted value of the future income.
So, what are the procedures for facilitating the payment and how do you calculate the amount due?
Where a statutory trust is created on intestacy, section 47A of the Administration of Estates Act 1925 allows a surviving spouse or registered civil partner to exchange their right to an income for life for a lump sum payment.
However, there is a time limit. The survivor has to make an election for the lump sum within 12 months of the date on which letters of administration are granted, although the time limit could be extended by direction of the court if the survivor can satisfy the court it would operate unfairly in certain circumstances.
The election is made by the survivor giving notice to the legal personal representatives in writing. However, in many cases, the survivor is actually the sole personal representative themselves - in which case, notice must be given to the senior registrar to the family division of the High Court.
Lump sum calculation
Then there is the question of how to calculate the lump sum payment. This is done by using a set of official tables included in the Intestate Succession (Interest and Capitalisation) Order 1977.
The calculation is based on the future income the survivor is likely to receive and is expressed as a proportion of the amount destined for the statutory trust (£100,000 in this case). You will appreciate that the younger the survivor, the higher the proportion they will receive.
The amount varies according to the age and gender of the survivor – gender equalisation not having reached intestacy orders yet. The table of values is also based on the average gross redemption yield on medium coupon 15-year government stocks but, as the minimum figure is ‘less than 8.5%', it is not difficult to work out which column to use!
The table stretches from an age last birthday of 16 to 100 and over, so most situations should be covered.
For our widower, aged 57, the factor is 0.580, meaning a capitalised lump sum of £58,000 is available as an alternative of a life income (of an unspecified amount). If that was taken, the remaining £142,000 of the residue would be payable to the two children.
It should also be noted that the children's entitlement is a chargeable transfer by the deceased mother, using up 43.6923% of the nil-rate band, leaving 56.3077%, which could be claimed by the legal personal representatives after the death of the widowed client.
It probably goes without saying – but that won't stop me – that all of these shenanigans could have been so easily avoided if the client's wife had made even just a simple will.
When settling a client's estate, there are a lot of factors to consider so, in some circumstances, this facility could be overlooked. It could allow a surviving spouse to invest more tax efficiently and to consider estate planning on their own estate.
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