Inheriting from the estate of a deceased person can often provide much needed additional funds for those beneficiaries, either by virtue of a valid will or under the rules of intestacy. In certain cases, however, the beneficiaries may not require their inheritance and may wish to benefit others.
Many people do not realise there is a way that those beneficiaries can redirect their entitlement to benefit others. This can be achieved using a deed of variation, also known as a deed of family arrangement.
A deed of variation is a document whereby the beneficiary nominates someone else to take their share, either absolutely or in part. It does not change the terms of the will itself, but it does change the way the estate is then administered. A beneficiary can only alter their individual entitlement, but beneficiaries can do so collectively, if they all agree. The variation can be made in relation to any asset bequeathed in the will, for instance a simple cash legacy or something more complex such as an interest in land or a business.
A deed of variation cannot change the appointment of executors or guardians in a will.
Why could a deed of variation be beneficial?
A deed of variation can be a very attractive option in certain situations. The scenarios where a deed of variation would be suitable depend entirely upon individual circumstances, but the reasons can include:-
- to reduce the amount of inheritance tax or capital gains tax that is payable on an estate;
- being part of a strategy of tax efficient gifting;
- to benefit beneficiaries who require the funds (usually intergenerational); or
- to ensure that assets pass to someone not provided for in the will or following the rules of intestacy.
When is a deed of variation valid?
For a deed of variation to be valid, there are a number of conditions that must be met;-
- the deed requires to be made, in writing, within two years from the date of death;
- there needs to be absolute clarity as to which part of the estate the deed of variation relates to;
- the terms must be agreed and the deed signed by all beneficiaries who are varying their entitlement; and
- it must be clear who the "new beneficiary" is. This can be a person, a group of people (for instance, grandchildren) or an entity, such as a trust or a charity.
It is very important that specific reference is made in the deed that the variation is to be effective for inheritance tax and capital gains tax purposes.
Usually the executors would sign the document but this is not an absolute requirement unless they are affected by the terms of the variation.
Once the deed has been validly executed then the redistribution can take place.
Some clients question whether such a change should be allowed as it may not meet the testator's wishes. In many cases the beneficiary is only seeking to change their entitlement to benefit a subsequent generation and, as such, can be seen as a more tax efficient way of gifting. In other circumstances, the beneficiary is looking to redress an imbalance that was not anticipated when the will was put in place, for instance where a subsequent grandchild was born after the will was prepared but that grandchild was not provided for.
How can Brodies help?
Every situation is different, and it is imperative that advice is obtained in relation to the particular situation in early course, to ensure the paperwork is completed within two years from the date of death. Whilst some deeds of variation may be straightforward, other situations may require technical tax planning and expert legal advice. A strategic review of assets and the type of planning that can be achieved may provide the beneficiaries with a range of suitable options to meet their needs. At Brodies, we are well placed to deal with deeds of variation as part of estate administration but can also be instructed in relation to the preparation of deeds of variation to complement any advice already being received in relation to an estate.