How survivorship clauses in Wills can cause problems for your clients

It is common for Wills to contain provisions that a gift to a beneficiary will not take effect if the recipient does not survive by a stipulated period, usually twenty-eight or thirty days. These provisions are known as “survivorship clauses.” The advantages of survivorship clauses are that they ensure that tax is not paid twice on the same asset and they avoid the administration of that asset twice in quick succession. However, survivorship clauses can be disadvantageous for spouses if they die together in an accident or in other circumstances where it is impossible to determine which spouse dies first.

We look at a case which illustrates the problems that can arise and consider how in this particular situation survivorship clauses can increase the inheritance tax on a couple’s estate.

Double legacies

In 2010 Mr and Mrs Winson, a couple with no children, made Wills which were broadly identical. They left all their estate to the surviving spouse and, if there was no survivor, they left legacies totalling £214,000 to various beneficiaries and the residue of their estates to their two nieces.

In October 2011 the couple were found dead at their home and it proved impossible to determine which of them had died first.

The applicable law

In these circumstances  the “commorientes rule” provides that the younger spouse is deemed to survive the elder. Mr Winston was the younger spouse and was deemed to survive his wife. If their Wills had not included survivorship clauses, under the commorientes rule, the remainder of Mrs Winston’s assets would have passed to her husband. Mr Winston’s Will would have given the £214,000 legacies and the remainder to his two nieces, as his wife would be deemed to die before him.

However, both Wills provided that if any person died within 28 days of the Winstons’ deaths, they would be treated as having predeceased the testator. In other words any gift in the Will to a beneficiary who did not survive 28 days would fail. If this survivorship clause took effect, despite the commorientes rule, neither estate would pass to the other spouse, as they had not survived the requisite period, and instead both estates would be given as to £214,000 to the pecuniary legatees and the residue to the nieces. The legatees would therefore be paid twice over even though it was felt likely that the Winstons only wanted the legacies to be paid once.

The Court’s decision

There was a difference of opinion as to how the estate should be administered and so the High Court was asked to construe both Wills, and to state how the estates devolved. The court held that the survivorship clause was clear, it did not exclude either spouse from its ambit, it over-rode the commorientes rule and therefore the legacies should be paid twice.

Tax disadvantages

In the Winstons’ case the effect of the survivorship clauses meant that their estates were not administered in the way it was believed the couple would have wished, and their nieces received significantly less than would otherwise have been the case.

In these circumstances, survivorship clauses can also considerably increase the inheritance tax (IHT) payable on an estate.  This is because, although for succession purposes, the younger spouse is deemed to survive the elder, but for IHT purposes they are deemed to die at the same instant. The assets passing from the elder spouse to the younger spouse under the commorientes rule are free of IHT due to the spouse exemption, and when assessing the liability of the younger spouse’s estate to IHT, the property passing from the elder spouse is ignored as they are deemed to die at the same instant. This means that for IHT purposes the elder spouse’s assets are never in the younger spouse’s estate.

However, if the commorientes rule is over-ridden by a survivorship clause, this IHT advantage will be lost.

Example

George and Charlotte are married; George has assets of £500,000 and Charlotte owns assets of £400,000. They live in a rented home and have never owned a property. The couple die in a plane crash in December 2016. Charlotte is the younger spouse and their Wills leave everything to the other and then to their children.

If their Wills contain survivorship clauses applicable to all the gifts in the Will

• The gift in Charlotte’s Will to George fails and vice-versa so their respective assets pass direct to their children and the IHT payable is £100,000 (£70,000 from George’s estate and £30,000 from Charlotte’s estate).

If there are no survivorship provisions, or they are stated not to apply in this situation

• Under the commorientes rule George’s estate passes to Charlotte. There is no IHT due because of the spouse exemption. Charlotte’s estate passes to their children, George’s assets are ignored in assessing the IHT on Charlotte’s estate but his unused IHT nil rate band can be transferred to her. As Charlotte’s assets are worth less than the combined nil rate bands of £650,000 there is no IHT at all to pay, a difference of £100,000.

A need for revision?

Although survivorship clauses can have advantages, it is clear that as far as spouses are concerned, in the case of a common accident they can cause unforeseen results and increase the IHT otherwise payable. If your clients’ Wills include a survivorship clause that covers all beneficiaries it is worth considering amending the Will to deal with this particular situation.

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