Proper distribution

Friday, 01 January 2010
An outline of the recommendations of a recent Law Commission consultation paper on intestacy procedure.

STEP members who saw press coverage of the launch of Law Commission Consultation Paper No 191, Intestacy and Family Provision Claims on Death, may be forgiven for thinking that we have only one thing on our minds.

Our provisional proposals to include at least some cohabitants in the intestacy rules was, perhaps understandably, the principal focus of much of the media attention. These proposals are certainly an important element of our project and we hope that STEP members will tell us their views.

The Consultation Paper does, however, address many other issues. As well as reviewing the entitlement (under the intestacy rules and the family provision legislation) of other relatives and dependants of the deceased, we address a number of more technical issues that are perhaps less newsworthy, but are no less important than the headline-grabbing proposals.

In this article we want to focus on some of these more technical areas, which raise questions that we believe will be of particular interest to STEP members. We should stress at the outset that we have attempted to ensure that our proposals are ‘tax neutral.’ By that we mean, while we would avoid suggesting changes that would automatically increase tax liability, our proposals are not motivated by a desire to reduce the tax burden of any party. To do otherwise would be futile, since it is not possible to predict future changes in tax legislation. Individuals who are concerned about the incidence of tax on their death should take advice and make a will that attempts to minimise that liability.

The statutory trusts

A good example of one of the less glamorous and more technical aspects of our project is the discussion in Part 5 of our Consultation Paper of the statutory trusts that arise on intestacy.

We provisionally propose that trustees’ powers of advancement under section 32 of the Trustee Act 1925 should be extended (for the purposes of the statutory trusts on intestacy) to the whole, rather than one half, of the share of a beneficiary who is under 18 and not yet absolutely entitled. We note that trust and will trust precedents generally remove that restriction and the reform we propose would, we believe, increase trustees’ flexibility and reduce the need for court applications where the trust arises by operation of law. We therefore hope that this proposal will meet with the general approval of practitioners.

A more contentious suggestion, on which we make no provisional proposals but seek the views of consultees, would change the current system of per stirpes distribution among the children of a deceased beneficiary. Under current law, the children of a deceased beneficiary share that beneficiary’s entitlement ‘by representation.’ If, for example, one of the deceased’s children had one child and the other had three children (and neither child outlived the deceased), one grandchild would inherit half the estate and the other three grandchildren would share the other half of the estate.

An alternative, found in some other countries, is distribution ‘per capita at each generation.’ In the above example, this method of distribution would divide the estate equally among the grandchildren so that each received a quarter of the estate. The two alternatives are considered in some detail in the Consultation Paper, and illustrated with examples. Per stirpes is, we know, a system with which many practitioners are familiar and many may feel that the current system works well in principle and in practice. Yet the equal distribution of an estate under a per capita system is instinctively attractive. We would be very interested in the views of practitioners. Our final recommendations on this point and on others will also be informed by public attitudes research.

Appropriation and self-dealing

Another potentially contentious issue on which we invite the views of consultees is whether the application of the rule against self-dealing to administrators of intestate estates should be modified so that an appropriation should not be voidable (at least by reason of the rule) if it was at a fair value.

We recognise that the rule against self-dealing is a well established and important principle of fiduciary relationships, which applies in a wide variety of circumstances. Although the present rule may operate harshly on occasion, it has the benefit of clarity and discourages behaviour by personal representatives that may prejudice other beneficiaries. To create an exception in the context of intestacy may therefore seem to set a dangerous precedent. We note, however, that many will and trust precedents provide for modification of the rule. The rule is also disapplied by statute where a surviving spouse appropriates the family home as part of his or her entitlement, but only where there is at least one other administrator.

In all other cases an administrator who appropriates property to his or her own share of the estate as beneficiary does so in breach of the self-dealing rule. This is the case even if he or she acts with another administrator and whether or not the transaction was at a fair value (though it has been suggested that the rule does not apply if the property is ‘equivalent’ to cash, such as government stocks; see Kane v Radley-Kane [1999] Ch 274, 285 and 287). The rule can therefore present something of a trap for inexperienced administrators (often the surviving spouse of the deceased) who honestly appropriate property to themselves as beneficiaries without being aware of the rule.

Small estates

Current law permits cash sums and certain other assets, which are individually valued at less than GBP5,000, to be to be paid to a person entitled under a will or intestacy, without any grant of representation (see the Administration of Estates (Small Payments) Act 1965). The current limit was set in 1984 and is equivalent to around GBP11,000 today.

It is, however, common for banks and building societies to release much greater funds from a deceased’s bank account, in some cases up to GBP20,000. Although procedures differ, these institutions generally require an undertaking that the person seeking the withdrawal is entitled to the funds and an indemnity against any loss caused by a wrongful distribution.

We provisionally propose that this level be reviewed with a view to its being raised. Ultimately this is a matter for HM Treasury, but we would be interested in the views of practitioners on whether the level should be raised and, if so, what level would be appropriate.

Survivorship

The intestacy rules provide that, unless a surviving spouse is living at the end of the period of 28 days, beginning with the date of death, he or she will be treated as having died first and therefore will not take any benefit under the intestacy rules (Administration of Estates Act 1925, s 46(2A)). This survivorship provision was added to the intestacy rules in 1995 as a direct result of previous Law Commission recommendations (made in our Report, Family Law: Distribution on Intestacy (1989) Law Com No 187).

We now ask whether this survivorship provision should be extended to all those who stand to benefit under the intestacy rules. A survivorship period avoids the need to administer the estate of the first to die and then administer the same assets in the estate of the beneficiary, which may increase costs and delay the administration. It also means that, if the order of deaths is uncertain, there is no need to obtain evidence as to who died first or, where this cannot be determined, to apply the presumption that the elder died first.

We recognise that extending the principle of survivorship in this way could cause more estates to pass as bona vacantia, where there are no other relatives entitled to take on intestacy in place of those who are treated as not having survived the deceased. We therefore make an additional proposal that any statutory survivorship provision should be disapplied where this would be the result.

Missing kin

We also raise a suggestion that has been put to us to ameliorate the problem caused by ‘missing kin’, who are entitled to an inheritance but cannot be traced. Administrators commonly turn to professional genealogists to trace missing beneficiaries and this will often be need to be done before missing beneficiary insurance can be purchased. Ultimately, however, administrators may have to apply to the court for directions; for example, an order that the estate may be administered on the basis that a beneficiary who cannot be traced has died. Alternatively, the court may order that known beneficiaries are entitled to their share of the estate immediately. The practical effect is that the cost of further investigations falls on those who have yet to be traced.

It has been suggested that administrators should be entitled to distribute to known beneficiaries without reserving a portion of the estate for the costs of tracing missing beneficiaries. We can see merit in this but have some concerns, for example, that it might reduce the incentive of known family members to assist the administrators to locate missing relatives. We would be interested in the views of practitioners on this, or any other reforms that might ease the burden on administrators who are placed in this invidious position, and what safeguards might be needed to prevent abuse.

Responding to the consultation

The Consultation Paper was published on 29 October 2009 and the consultation period, extended to take account of the holiday period, ends on 28 February 2010. Copies are available to download free of charge from our website at: www.lawcom.gov.uk/intestacy.htm. We seek responses by 28 February 2010 by email to: [email protected] or by post to: Jack Connah, Law Commission, Steel House, 11 Tothill Street, London SW1H 9LJ.

We hope that those STEP members who have not yet contributed to the debate will do so. As with all Law Commission projects, the content of our final recommendations depends to a large extent upon the responses we receive to our consultation questions.

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Professor Elizabeth Cooke, Joel Wolchover

Professor Elizabeth Cooke is a Law Commissioner for England and Wales. Joel Wolchover is a Lawyer in the Commission’s Property, Family and Trust Law team.

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