An Introduction To Probate

An introduction to Probate
Probate What is it?
Probate is the word used for the administration of a persons estate. When somebody dies more often than not there are financial things that need to be sorted such as bank accounts, life insurance, pensions, tax or houses. Just because that person has passed away their wife/husband or son or daughter cannot just come along and say that is mine now. There is a legal procedure to actually claim the estate of that person. This procedure involves two key institutions, one is the law courts and the other is the Inland Revenue. In order to claim the estate of a deceased person an application must be filed with the courts. Every application to the court must be supported by forms that are sent to the Inland Revenue. In cases where there is inheritance tax due (IHT) the tax must be dealt with before the application to the court is submitted. If no IHT is due the forms can be submitted at the same time as the court application. It is this procedure which is known as probate. We will return to IHT in more detail later. Primarily there are two types of Probate, there is Probate where the person who died made a will and there is probate where that person did not. If they did not make a will they are deemed to have died intestate. As such the probate procedure becomes known as intestacy. If intestacy applies then a
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set of rules, known as the Intestacy Rules, that the government lays down will apply when distributing the estate. (See intestacy) If the person made a will before they died they would have appointed Executors in the will. Executors are the people who they have chosen to deal with their affairs after they died. A will can choose many executors however only a maximum of four can act. (The more executors that wish to act the harder our work becomes). If they did not make a will, they did not choose anybody to deal with their affairs as such the law steps in and dictates who is going to deal with their affairs. There is a very strict hierarchy as to who can deal with the affairs where there is no will as such it is important to know who the administrator could be. Generally it does however follow the family tree, i.e spouse, adult children, parents, siblings etc.. (Please see our website www.iwc-ltd.co.uk for a full and comprehensive list). If somebody other than the natural administrator wishes to act, with the approval of that administrator, a Power of attorney document can be drafted so that the other person can act in their place. An example of this would be if an elderly spouse would rather their son dealt with matters. The person or persons who are going to deal with the affairs of the person who died without a will becomes known as the Administrator(s). When they apply for probate they will actually be applying for Letters of Administration (LOA). Sometimes referred to as the Grant of Letters of Administration. If there was a will the Executors will be applying for a Grant of Probate. This is sometimes referred to as proving the will. In other words the executors are proving to the courts that the document they hold is the last will of the deceased person. Once a will is proven it becomes public record and anybody can view it. The same forms have to be filled in for either type of probate. However the forms that go to the Inland Revenue are not the same for every estate, for small estates under 325k or for estates under 1million where everything goes to the spouse or civil partner the Inland Revenue form is known as IHT205 but for larger estates over 325k or over 1million when everything goes to the spouse there are multiple forms, the first being known as IHT400. IHT400
is actually a series of forms and thus the work is quite extensive whereas IHT205 is only one form. (There are a few exceptions to this rule) For your information only, if a person has tried to make a personal application to the court or has made enquiries they would have obtained form PA1. When we deal with probate we do not use form PA1 as we are not making a personal application. Inheritance Tax When dealing with the administration of an estate the value of the persons assets have to be entered onto inheritance tax forms. If the total net value of these assets is less than 325,000 the values are entered onto the form IHT205. If the assets are more than 325k but less than 1million we can still complete IHT205 provided everything is going to the spouse. These two types of estates would be known as Excepted estates. If the person died without making a will, everything cannot pass to the spouse, as the intestacy rules would take over. If the net value of the estate is more than 325k and it is NOT going to the spouse inheritance tax (iht) will become payable. The iht is 40% of everything about 325k. The amount up to 325k is known as the nil rate band allowance. This is the amount the government allows to pass to beneficiaries other than a spouse without iht becoming due. If the estate is over 1million but is still all going to a spouse then there is not iht due as spouses are exempt from paying iht provided they pass everything to each other. If the whole estate is going to a spouse then the deceased persons nil rate band allowance has not been utilised therefore when the second spouse passes away the executors or administrators of that persons estate would be able to claim the nil rate band of the first spouse and the second spouse. Therefore there would be no inheritance tax to pay unless the estate of the second spouse was greater than 650k. This is referred to as the transferable nil rate allowance. For your information, gifts to charities and political party donations are exempt from inheritance tax, so if an entire estate or part thereof is left to charity or politics regardless of its size there is no inheritance tax on that part.
Transferable Nil rate band As mentioned married couples are now permitted to transfer their nil rate band allowance to their spouse. This legislation was introduced in Oct 2007 however it is retrospective. This means that even if somebody passed away ten years ago, provided they left everything to their spouse at the time, when the spouse dies their estate would benefit from two nil rate band allowances at the current rates. This is referred to as Uplift i.e When Mr died the nil rate allowance at that time may have been only 150k but when Mrs dies the nil rate allowance is 325k, their combined allowance would be uplifted to two times 325k. If Mr had given 50% of his estate to his son and 50% to his wife, when Mrs dies we could only reclaim 50% of the unused proportion of his nil rate band. Intestacy Rules If the person died without making a will the intestacy rules apply. This is too complex to explain in full so I would suggest you visit our website. However it is important to know that under intestacy the whole of an estate cannot pass to a spouse. The spouse is only automatically entitled to the first 250k of the other spouses estate. The rest of the estate is split into two, one half is given to the children, the other half is kept for the spouse by way of a life interest but he/she is not allowed to keep the capital. When the second spouse passes away, any money held for the spouse is gifted to the children. If the children agree it is possible to create a deed of variation which is another legal document which can revert the assets back to the spouse. This cannot be done, unless by way of a court order, if any of the children are under 18. This is very important to understand because if a married persons dies where there is no will and they have an estate worth over 325k, inheritance tax will become payable. This is because, under intestacy, the spouse cannot have all of the estate so there is no spouse exemption. Everything above 325k will be taxed at 40%. In this instance a deed of variation would be used to revert the assets back to spouse but this is not possible if the children are under 18. Not having a will would prove very costly indeed. Deed of Variation A deed of variation is a legal document that the beneficiary of a persons will can sign to either alter the will after they died or alter intestacy if they did not
make a will. It is important to understand that we cannot create a deed of variation if any of the beneficiaries either by the will or by intestacy are under 18. There are many reasons for creating a deed of variation and we have already mentioned one above i.e to reduce inheritance tax. Another reason could because the beneficiary simply does not need the money. If they are to receive a large sum of money it may be more beneficial if they direct that money to their own child. It is not necessary to get approval from all of the beneficiaries to get permission to create a deed of variation. There only needs to be approval from the people that are affected. If a person is in line to receive money from an estate and yet they are currently in receipt of means tested benefit they are often worried about losing their benefit. They ask if they can sign a deed of variation so that the money goes elsewhere. We cannot create a deed of variation in this instance as the DWP would see this as a deliberate depravation of assets. Finally a deed of variation must be signed and completed within two years of somebody passing away. Personal application If somebody makes a personal application for probate they will complete either forms IHT205 or IHT400 plus form PA1. They send this to the court and they are asked to go to the court to attend a probate interview and swear an oath. This is a daunting prospect for a lot of people, the words Court hearing does tend to have certain worrying concepts. A major advantage in us dealing with the administration is that no court hearing is necessary. Probate duration Generally speaking estates, where there are no iht matters to deal with, are completed within 12-24 weeks. If iht is due the Inland Revenue charge interest six months from the date of death therefore, for these types of estates, we need to have the application for probate submitted within six months from the date of death and completion is usually within three months after. However certain estates are not distributed until six months from the date on the probate. This is because the personal representative(s) (i.e.
executors or administrators) could be sued personally if they distribute the money before anyone can make a claim against the estate. Estate money Once the bank of a deceased person has been informed of a death all monies into and out of that account are frozen. This can have a considerable effect on a surviving spouse. In addition many do not have the funds to pay for a funeral. We can help with this as the banks will release funds to pay for a funeral. Personal representatives responsibility The personal representative(s) (i.e. executors or administrators) have a responsibility to administer an estate correctly. They can be held personally accountable for any mistakes. In addition there are many people who are appointed as executors who have nothing to gain from the estate therefore they do not want to take on that responsibility. These people would rather hand over their duties to us. Discretionary Trust Wills In October 2007 the government introduced legislation that allowed the transfer of the nil rate allowance from one deceased spouse to another. This ensures that married couples could benefit from two tax allowances and therefore their estate would not be subject to tax unless it was larger than two times the nil rate band (currently 325k). Prior to this legislation their estate would have been subject to tax if it was larger than 325k. To circumvent this problem many wills were set up so that the nil rate allowance of the first person to pass away was transferred to a trust. In this way a married couple could still get 650k tax free. Trusts and tax planning are very complex and are dealt with after probate. Life Interest Trust Wills Many elderly married couples are concerned that if they go into care they could lose their home to pay for their care in their later years. As such they have set up their wills so that when the first person dies one half of the house goes into a trust for the benefit of the surviving spouse but not for the
ownership of the spouse. Again trusts and financial planning are too complex for this probate introduction. Deed of Renunciation If a deceased person appointed a bank or perhaps even a solicitor as an executor however the family are aware that the fees that they will charge for being the executor are much more than they are willing to pay. In this instance we can draft a deed of renunciation and then we can deal with the administration for them. This is a legal document that the bank or solicitor will (hopefully) sign so that they are not responsible for the estate. It is far easier to get a bank to renounce than a solicitor. Some solicitors will only renounce if they prepare the deed. Probate reseals This means that probate has been granted in another country and it now needs to be dealt with in England. This is a very complex matter, too complex for this probate introduction. For further assistance or advice with Probate, Letters of Administration or Intestacy please visit us at www.iwc-ltd.co.uk or call us free of charge on 0800 612 6105 alternatively our land line number is 020 8150 2010

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Probate What is it?

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