Three good reasons to consider using a “Deed of Variation” for a Will following a death

After a death beneficiaries receive their inheritance of an estate either through the Will of the deceased or, where the deceased did not make a Will, through the rules of intestacy. However, many people do not realise that beneficiaries can redirect their entitlement to others and there are several reasons why a beneficiary might redirect their entitlement to others.

What is a Deed of Variation and how does it work?

A Deed of Variation is a document in which a beneficiary redirects their share in the deceased's estate to another person (s) If the deceased made a Will, the Deed of Variation cannot change the terms of the Will but it does change the distribution of the estate. Alternatively, if the deceased died intestate, without a Will the beneficiary uses a Deed of Variation to redirect their entitlement to another person.

There are specific requirements to ensure the Deed of Variation is valid:

• It must be made within 2 years of the date of death;

• It needs to clearly identify to which part of the estate the Deed of Variation relates and must identify who is to benefit;

• It must be agreed and signed by all beneficiaries who are instructing the redistribution, and

• It must include a statement that the variation is to be effective for Inheritance Tax (IHT) and Capital Gains (CGT) purposes.

What are the advantages of a Deed of Variation?

1. Reduce Inheritance Tax (IHT) payable

When a beneficiary redirects their entitlement to share in an estate, they may be able reduce the IHT payable to HMRC. For example, the beneficiary might transfer a share in the estate to a charity, which is exempt from IHT. If, for instance, the value of the estate is more than the current IHT threshold of £325,000, then any redirection to a charity will reduce the value of the estate. This means it will reduce the IHT payable and may be eliminated altogether if the redirection reduces the value of the estate to below the IHT threshold.

Alternatively, the beneficiary may redistribute their share in the estate to their children. Where the estate is liable to IHT then rather than the beneficiary inheriting their share of the estate after IHT has been paid on it and then, when they die leaving their estate to their children, their estate is, again, subject to IHT. This means that a redirection of the estate to the children incurs IHT just once.

2. Make changes to the distribution of the estate

There may be circumstances where the beneficiaries wish to change the way the estate is distributed. This may happen where the Will has an uneven distribution of the deceased’s estate, but the beneficiaries wish to share the estate equally amongst them. Alternatively, where the Will or rules of intestacy direct the estate to be shared amongst several beneficiaries, those beneficiaries may decide that an unequal distribution may be a better option to benefit one or more of their number. This would mean some beneficiaries would receive a higher share and others a lower share. Alternatively, it may be an advantage for some of the estate to be passed to beneficiaries via a trust. For example, where the deceased share of a property owned as tenants in common is passed to their children, instead of the spouse, the latter receiving a life interest to reside, rather than full inheritance of the share.

3. Pass assets to someone not included in the Will

There may be circumstances where the beneficiaries decide to pass assets to someone not included in the Will or who has no entitlement under the rules of intestacy. That might be, for instance, where a stepchild is left out of the Will and the beneficiaries wish the stepchild to receive a share in the estate.

Alternatively, the beneficiaries may wish to include grandchildren who were born after the Will was made and where there is no provision for them in the Will.

Summary

A Deed of Variation can be an excellent means of saving tax, redistributing an estate and including someone who has been omitted. We have covered 3 reasons to use a Deed of Variation, but these are not exhaustive.

If you are a beneficiary and wish to explore your options to redistribute the estate of the deceased, please contact us