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Life companies recommend trusts after UK disinheritance case

The case of a woman who secured £164,000 from her mother’s will despite being excluded from it has led the life industry to recommend trusts as a more secure way to distribute wealth upon death.

Life companies recommend trusts after UK disinheritance case

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Heather Ilot received the figure from her mother Melita Jackson’s will after the Court of Appeal deemed her exclusion as “unreasonable, capricious and harsh”, despite Ilot permanently eloping at age 17 with her boyfriend.

Rachael Griffin, head of product law and financial planning at Old Mutual International, said the ruling confirms that people must have a good reason to disinherit their children and be able to demonstrate what connects them to others that have been named in their wills instead.

She said a more secure way to control the distribution of wealth beyond the grave would be the use of a trust, given that the Inheritance Act 1975 allows a court to “override” the general principle of testamentary freedom in certain situations where it is considered “just and equitable”.

“Whilst some commentators seem to consider that trusts are merely mechanisms to alleviate tax, their longest standing use is to ensure that the right people benefit, by the right amount, at the right time,” she said.

“As well as the Inheritance Act 1975 not applying to trusts, another useful feature in providing certainty is that trusts are confidential, unlike wills that become public knowledge once probate has been obtained, and available for anyone to scrutinize through the Probate Registry.

“With no such registry or provision existing for trusts in locations such as England & Wales, Jersey, Guernsey and the Isle of Man, a settlor choosing appropriate trustees can go to their grave with significant confidence.”

Particuarly clear

She added that Isle of Man law is “particularly clear” that through an exclusion of foreign law clause, which states that where a foreign law renders a trust unenforceable or set aside, Manx law will not recognise this part of that foreign law.

“With testamentary freedom further eroded by this recent case, no doubt more people, absolutely sure of their intentions of who should benefit from their wealth, will want to consider a trust, with appropriately located trustees, as a valuable complementary tool.”

The court’s latest ruling revisits a previous decision in which Illot was awarded a £50,000 share of Jackson’s £486,000 estate on the grounds that her mother had not made reasonable financial provisions for her upon her death in 2004, despite her wish to leave her wealth to animal charities.

Paul Thompson, tax and estate planning consultant at Canada Life, said care needs to be taken to ensure that transfers of property cannot be overridden by the Court using an application under the Inheritance Act 1975.

He added that it is not generally understood that gifts made less than six years ago can still be defeated by the Court.

“This would be the case whether the gift was outright or via a suitable trust,” he said. “Consequently, it would make sense to act sooner rather than later in order to start the six-year clock ticking as soon as possible.”

Correct trust

Neil Chadwick, technical manager at RL360°, said courts are placed in a difficult position when close family members with specific needs do not inherit, even though the deceased may have made it clear that this was their intention.

He said that using trusts for succession planning provides a way for a person to be confident that only those who they intend to benefit will actually do so, either during the settlor’s lifetime or when they are deceased.

“Furthermore, if the trust is fully discretionary, then even if a disinherited heir were to discover that a trust existed, they have no rights to the trust fund,” he said. “However, it is vitally important that the correct type of trust is used, otherwise the settlor’s intentions could all be undone.”

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