In last month’s edition of The In-House Lawyer, Alan Eccles mentioned impending changes to Scottish succession law in his article that considered a number of ‘private client’ legal matters for those working in financial institutions and private or family businesses. The Scottish Government recently introduced the Succession (Scotland) Bill (the Bill) into the Scottish Parliament in an attempt to make the law of succession ‘up to date, fairer, clearer and more consistent’.
The Bill follows a lengthy consultation process and implements a number of recommendations raised by the Scottish Law Commission. The Bill would enact the ‘Consultation on Technical Issues Relating to Succession’. This consultation has been followed by a second consultation which, although still ‘technical’, also includes matters of social policy (more on this below).
These reforms are important, as changes in succession law can impact on the processes and procedures operated by certain parts of the financial services (FS) sector. They may also affect how decisions are made regarding, for example, pension and death in service lump sums in the FS sector and also in private/family businesses. This article will consider the most relevant provisions of the Bill for private clients and will also review some of the changes being considered as part of the ongoing consultation process.
A CAUTIONARY TALE: ‘BONDS OF CAUTION’
A bond of caution is a form of insurance contract that is required where the court appoints an executor to an estate. Invariably this will apply where the deceased died intestate. The bond of caution is designed to protect beneficiaries from any mismanagement of the executry or mistakes in the distribution of the estate.
For some, the bond of caution feels like an unnecessary step in the administration of an estate and incurs unnecessary costs. Others will argue that it provides protection to beneficiaries in a situation where we do not know who the deceased wished to entrust with the winding up of their estate (the executor(s) appointed (by the court) to an intestate estate are invariably its beneficiaries).
Ultimately, the Scottish Government does not propose to legislate to abolish bonds of caution. Rather, it will seek further views on introducing a discretionary system (at the discretion of a sheriff) whereby, in certain estates, caution will not be required. The introduction of a discretionary system may, however, make caution more expensive and complicated. The current ‘black and white’ rule on requiring caution at least delivers certainty. We await further announcements as to the Scottish Government’s plans for taking forward any changes to the current system.
RECTIFICATION OF WILLS
In the Supreme Court case of Marley v Rawlings & anor [2014], Mr and Mrs Rawlings signed mirror wills in 1999, leaving everything to each other on the first death and to Mr Marley on the second death. However, due to a clerical error, Mr Rawlings signed the will prepared for Mrs Rawlings, and vice versa.
The Supreme Court decided that Mr Rawlings’ will should be rectified and given effect as though he had signed the correct will in the first instance. However, as this was an English case, there was uncertainty about what decision the Scottish courts would reach in similar circumstances.
Section 3 of the Bill clarifies the position here, and enables the Court of Session/Sheriff Court to rectify a will post-death, where the court is satisfied that the will fails accurately to express the testator’s instructions, provided that the following conditions are met:
- rectification is only available where someone other than the testator has prepared the will, but on the testator’s instructions (ie the will is drafted by a solicitor);
- the deceased must have been domiciled in Scotland at the date of death;
- any application to rectify a will must be made within six months from the date of confirmation, if applicable, or the date of death if confirmation is not obtained (confirmation is the legal document issued by the Scottish courts in favour of the deceased’s executors); and,
- there must be clear evidence to show that the will does not reflect the testator’s intentions, although the instructions do not necessarily need to be in writing.
It will be interesting to see how this would fit with deeds of variation and also how the ‘rectified will’ would be taxed – could a tax drafting error be the basis for rectification and will the rectification be treated as effective from the moment of the tax liability? With regards to the latter, it is also of note that inheritance tax (likely to be the tax at stake here) is a matter reserved to Westminster – Holyrood legislation cannot change inheritance tax law. It also could open up a new route for disappointed beneficiaries – ie those who think they should have received more (or something) from an estate, or lost out due to professional failings. However, there is no doubt that a clear will is necessary to create certainty and avoid cost and delays for families and loved ones.
THE EFFECT OF DIVORCE AND DISSOLUTION OF A CIVIL PARTNERSHIP ON A WILL
Under the existing Scottish law, a testamentary writing (a will or codicil) that makes provision for the spouse or civil partner of the testator (the person making the will) will still be valid following the breakdown of that relationship by divorce, dissolution or annulment. This can lead to some unintended and undesirable outcomes if no steps are taken to update a will following the breakdown of a relationship.
In an important development, the Scottish Government will legislate to provide that, unless a will expressly provides otherwise, divorce or dissolution of a civil partnership will automatically revoke any provision in a will (ie not the whole will) for the ex-spouse/civil partner. In such circumstances the ex-spouse/civil partner is to be treated as having predeceased the testator. Similarly, if the ex-spouse/civil partner has been appointed as trustee, executor or guardian, these appointments would become invalid on the divorce or dissolution of the civil partnership, subject to any provision to the contrary.
This rule will only apply where the deceased is domiciled in Scotland when they die. In practice, it means the provision in the will in effect remains valid until death and only if one dies domiciled in Scotland. Individuals who live in a number of different countries must take care – death in a jurisdiction that does not have a similar rule would mean the provision in favour of the ex-spouse/civil partner would not be revoked.
In addition to the quirk of changing domicile, as there will be other issues to consider (eg death benefits and pensions), it is still always advisable for clients – particularly for those with a global lifestyle or career – to revisit a will during or following separation or divorce, rather than relying on this new backstop rule.
SURVIVORSHIP DESTINATIONS
Following on from the plans to legislate to introduce the automatic revocation of any provision in a will in favour of the ex-spouse/civil partner, the Scottish Government has confirmed that it will extend this to other property which (by way of Scots law) would otherwise pass automatically on death to the surviving ex-spouse/civil partner by way of a ‘survivorship destination’ contained within the title deeds to the property.
‘Survivorship destination’ is the term used to describe where a property is held in the names of, for example, ‘Mr and Mrs Williams and the survivor of them’. On the first death, the deceased’s one half share of the property automatically passes to the survivor of Mr and Mrs Williams – even if they were no longer together – and irrespective of the terms of the deceased’s will.
Survivorship destinations can cause unintended consequences on death, particularly in the context of separation or divorce. Therefore, this legislation will provide clarity and will be a welcome change.
This change will not, however, affect contractual ‘survivorship destination’ arrangements, which are commonly found in investment management agreements. These should continue to be treated with caution.
REVIVAL OF EARLIER REVOKED WILLS
Under the current law, an earlier will which is then revoked by a subsequent will automatically revives if the later will is then revoked. Under s5 of the new Bill, the earlier revoked will will only be revived automatically if the testator either took proactive steps to re-execute it, or makes a new will on the same terms as the one that was revoked.
Disappointed beneficiaries looking to challenge the validity of, and ultimately reduce a will, must always investigate the existence and consider the terms of any earlier will made by the deceased, as the effect of a successful challenge is to revive any earlier wills. This change will make those initial investigations all the more important for individuals looking to challenge a will: if the earlier revoked will cannot be revived, what are the consequences for the disappointed beneficiary? Specifically, is it in the interests of the disappointed beneficiary to challenge the later will if the earlier revoked will cannot be revived?
DEATH OF BENEFICIARIES IN A WILL BEFORE THE TESTATOR
Section 6 of the Bill provides that, where a legatee under a will dies between the will being made and receiving the legacy, the legatee’s children and remoter descendants would step into the shoes of the deceased legatee and inherit the legacy in their place, unless the will expressly precludes this. Currently, this rule only applies to legacies bequeathed to the testator’s children, nieces or nephews, but s6 would see the rule widened to include any beneficiary.
PROTECTION OF TRUSTEES/EXECUTORS
Trustees and executors are to receive certain statuary protections where they have distributed an estate and have done so ‘based on ignorance of the existence or non-existence of persons or their relationship or lack of relationship’ with the deceased. This is not a blanket protection or watering down of executor or trustee duties, as an executor or trustee must show that they have acted in good faith and made reasonable and prudent enquiries.
EU REGULATION ON WILLS AND SUCCESSION
The EU Regulation on Succession (the Regulation) came into force on 17 August 2015. The UK (with the agreement of the Scottish Government) will not be party to the Regulation. However, the Regulation is still important and may affect the owners of homes in, for example, France, Spain or Italy. Advice should be taken about the interaction of the Regulation with a Scottish will where assets are held in a European country that has adopted the Regulation.
LEGAL RIGHTS
As noted above, the initial consultation on technical issues has been followed by a second consultation on proposed new rules for the division of an estate where someone dies without a will, protection from disinheritance under a will, and extended rights for cohabitants on the death of their partner. This consultation is underway and the Scottish Government’s proposals are expected to be published next year.
Perhaps the most eagerly anticipated and hotly debated proposals to come from the second consultation are changes to the application of legal rights. Legal rights are a distinctive feature of Scots law. They are an exception to the rule of testamentary freedom and act as a safeguard to protect members of a family from being disinherited. Legal rights apply in testate and intestate estates and give spouses, civil partners and children limited rights to claim against the deceased’s moveable estate.
However, under the Scottish Government’s proposals, the distinction between moveable and heritable property would be removed (which also ties in with the land reform legislation currently before the Scottish parliament) and a spouse/civil partner would instead be entitled to claim 25% of what they would have inherited if the deceased had died intestate.
The consultation has also addressed the application of legal rights in relation to the deceased’s children and remoter descendants and it has proposed two options for reform.
Under option one, the child’s ‘legal share’ would amount to a 25% share of what the child would have obtained from the parent’s estate (heritable and moveable) if they died intestate.
Under option two, only ‘dependent children’ would be entitled to a capital sum. Dependent children would include children under the age of 18, or aged 18-25 and in full time education – essentially, those to whom a duty of aliment is owed by a parent. The capital sum would be calculated by assessing the needs and resources of the child, having regard to lifestyle of the family.
On one view, option two would address the concerns of some commentators who oppose the extension of legal rights to ‘adult’ children. However, on another view, the subjective interpretation and discretionary nature of the scheme proposed could create uncertainty in practice, which may, at best, lead to increased costs of estate administration relating to disputed claims, and at worst, injustice in terms of the distribution of the deceased’s estate. However, if ‘adult’ children were no longer entitled to a share of their parent’s estate, this would increase an individual’s freedom to dispose of their estate as they wish.
The concerns regarding the proposed changes to legal rights are perhaps felt most acutely among rural landowners and farming communities where, in many cases, the largest asset in the deceased’s estate will be land. Here, the removal of the distinction between heritable and moveable property could potentially restrict the landowner’s freedom to bequeath such property to their chosen heirs, inviting the possibility of farmland being broken up by claims from children not otherwise provided for in their parent’s will. The consultation does go some way to addressing these concerns by proposing that, like legal rights, the legal share could be renounced during the testator’s lifetime. The Scottish Law Commission has also recommended that it should be possible to apply to the court for the legal share to be paid in instalments.
COHABITANTS
The second consultation also considers the rights of cohabitants on death. Since the introduction of the Family Law (Scotland) Act 2006 (the 2006 Act), cohabitants have a right to apply to the Scottish courts within six months the death of their partner to claim financial provision from their estate in certain circumstances. However, the discretionary nature of the provisions under the 2006 Act has been subject to criticism as their applicability and scope is uncertain, and the absence of judicial guidance makes it difficult for practitioners to advise clients on the prospects of success – the only clear guidance is that a cohabitant cannot be awarded more than they would receive under intestate law had they been married to the deceased at their death.
Crucially, the right of a cohabitant to apply for financial provision only applies where the deceased was intestate. However, the Scottish Government has invited views on whether a new statutory regime should be introduced to replace the existing rules, which would provide rights for surviving cohabitants in intestate and testate estates.
The Scottish Government has also proposed that the period for making an application for financial provision should be extended to one year. Although this would be in line with the timescales for cohabitant claims for financial provision on separation, this extension could lead to undue delay in the winding up of the deceased’s estate.
NEXT STEPS
The law is often criticised for being stagnant and out of touch with modern day societal structures, and this is particularly so in the area of succession law, which remains largely based on laws introduced in 1964. Today it looks as though many aspects of the succession law in Scotland will change. As well as private client lawyers and individuals being affected by the updates, organisations holding, managing or advising on assets owned by or for individuals need to take note and be aware of how succession law works to avoid unnecessary risks and assist clients and families achieve their estate planning and inheritance objectives.
By Nicola Neal, senior solicitor, Brodies LLP.