28 day survivorship clause in wills

Downthedrain

My wife and I both have wills at draft stage and they each contain a 28-day survivorship clause. I've read quite a lot about pros and cons of this and when asked our solicitor merely said "You can leave it out, if you like." Both our estates are above the IHT threshold and I can see the benefit under certain circumstances, but also the disadvantage should we die together in a common tragedy where both of us are presumed under IHT rules to have died simultaneously. Under the interaction between commorientes and the IHTA, the estate could in such a circumstance result in zero IHT to pay. Admittedly a rare situation. What's the general view on this? There seems to be a sea of conflicting views when researching this subject and I'd like a better understanding to ensure that there are no unintended consequences either way.

getmore4less

Something not many look into other than doing the same as you with research of  opinions of those with legal knowledge.

Articles on legal sites tend to be more researched 
IHT planning to make it a non problem is an option.

Sea_Shell

When we looked into this, I understood that if you do die "simultaneously", then legally the older of the two is deemed to have died first.

We've both written ours to leave everything to each other first and then to both our sisters, so one side of the family won't miss out if the worst happened, regardless of who died first.

Obviously we realise that there is nothing to stop a surviving spouse changing their will in the future, but we know that we'd want both our sisters treated equally.

We don't have children.

Mojisola

As is often the case, Scotland has a more sensible approach - when two people die in circumstances where it cannot be determined who died first, both are considered to have failed to survive the other.

Downthedrain

Sea_Shell said:

When we looked into this, I understood that if you do die "simultaneously", then legally the older of the two is deemed to have died first.

This is the position for the rules of commorientes, which deals with the distribution of assets. However, under inheritance tax law where it cannot be known which of two or more persons who have died survived the other(s) they shall be assumed to have died at the same instant. So on the one hand under the rules of commorientes, the first to die is the eldest and without the 28 day rule all the assets pass to the younger spouse, including the nil-rate band of £325,000.  But, because IHT law recognises that the recipient could never have benefited from the gift, for the purposes of taxation the assets of the older spouse are excluded from that of the younger. So long as the estate of the younger spouse is less than their total nil rate allowance (which would now be £650,000), the entire estates of both spouses pass to their beneficiaries without tax. So, if the elder spouse's estate was worth (say) £500,000 and the younger one £600,000, £1.1 million would be left to beneficiaries tax-free.

However, if a 28-day survivorship clause was present, each estate would be treated in it's own right as this would act to prevent any assets from passing between spouses. So the eldest spouse's estate would be taxed at 40% of £500,000-£325,000 (£70,000) and the younger spouse's estate would be taxed at 40% of £600,000-£325,000 (£110,000). This means that with the 28-day clause there is now £180,000 to pay in IHT.

SevenOfNine

It isn't in our current wills done a couple of years ago, it wasn't discussed with the solicitor though. It was in my MiL/FiL mirror wills done many years ago. Perhaps as inheritance things have changed, so has some of the previous standard text in wills?

Just as well it isn't in ours, appreciate the info downthedrain.

Downthedrain

There's another downside to the 28-day clause;

Assume that the total combined estates of a married couple (or civil partners) is less than £650K. Now let's say this is divided up such that one estate is well below the individual £325K nil-rate band, and the other well above it - for the purpose of illustration these could be £100K and £500K respectively. Now, assume that the couple die within 28 days of each other. Without the 28-day clause the surviving spouse/partner would have inherited the other's estate, as well as the transferred nil-rate band, then upon their subsequent death have a total estate value of £600K, with a total nil-rate allowance of £650K. No IHT to pay.

If there's a 28-day condition, with the same circumstances the surviving partner would not receive the gift and both wills would be executed separately, with each respective nil-rate band of £325K being applied. The £100K estate is below the IHT threshold, so no tax to pay. However, the larger estate at £500K would be above the threshold by £175K, resulting in a tax bill of £70K.

It seems to me as the 28-day survivorship condition could be a real trap for the unwary and I'm yet to fully understand why there would be any overriding benefit to this being included.

naedanger

Downthedrain said:

There's another downside to the 28-day clause;

Assume that the total combined estates of a married couple (or civil partners) is less than £650K. Now let's say this is divided up such that one estate is well below the individual £325K nil-rate band, and the other well above it - for the purpose of illustration these could be £100K and £500K respectively. Now, assume that the couple die within 28 days of each other. Without the 28-day clause the surviving spouse/partner would have inherited the other's estate, as well as the transferred nil-rate band, then upon their subsequent death have a total estate value of £600K, with a total nil-rate allowance of £650K. No IHT to pay.

If there's a 28-day condition, with the same circumstances the surviving partner would not receive the gift and both wills would be executed separately, with each respective nil-rate band of £325K being applied. The £100K estate is below the IHT threshold, so no tax to pay. However, the larger estate at £500K would be above the threshold by £175K, resulting in a tax bill of £70K.

It seems to me as the 28-day survivorship condition could be a real trap for the unwary and I'm yet to fully understand why there would be any overriding benefit to this being included.

If the beneficiaries would be the same if death A followed death B, as if death B followed death A then would a dov not fixed any tax issues? And if they were different then that may well be the reason for having the 28 day clause. 

And if the first death was the lower valued estate then could the unused nil rate band not still be passed to the surviving (albeit by less than 28 day) spouse?

Downthedrain

I'm not sure how a DOV would fix the tax issues - would you explain how this would work in practice for a couple who are in the process of writing wills?

The transfer of the unused NRB either way happens only if the 28-day condition is not present, otherwise the gift fails if the second spouse dies within 28 days and subsequently each will is treated individually without any transfer of NRB between them.

getmore4less

Downthedrain said:

I'm not sure how a DOV would fix the tax issues - would you explain how this would work in practice for a couple who are in the process of writing wills?

The transfer of the unused NRB either way happens only if the 28-day condition is not present, otherwise the gift fails if the second spouse dies within 28 days and subsequently each will is treated individually without any transfer of NRB between them.

Are you sure?
The will just deals with the distribution of assets.

How they are taxed is separate and unused NRB can transfer 

edit : hereis the IHT manual section that applies.
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm43000

naedanger

Downthedrain said:

I'm not sure how a DOV would fix the tax issues - would you explain how this would work in practice for a couple who are in the process of writing wills?

The transfer of the unused NRB either way happens only if the 28-day condition is not present, otherwise the gift fails if the second spouse dies within 28 days and subsequently each will is treated individually without any transfer of NRB between them.

Firstly I am no expert so anything I say would need checked, which is why I phrased the point as a question.

Secondly I don't understand why you say the transfer of the unused NRB only happens if the 28 day condition is not met. The 28 day condition changes the beneficiaries but it doesn't change the reality of who died first.

Using your example: Two married people with estates of £100k and £500k die within 28 days each leaving their estate to their children if their spouse has died before them or within the 28 days following their death.
Case A: the 100k person dies first. This goes to the children since the spouse dies within 28 days, and there is an unused NRB of £225k. The spouse has £500k of assets and NRB of £325k+£225k so £50k of headroom and no IHT.
Case B: the 500k person dies first. After the spouse dies the beneficiaries have a dov written that redirects £175k from the 500k's estate to the estate of their spouse. So no IHT is paid on the £500k person's estate because of the spouse's exemption. Then the spouse has assets of £100k plus the £175k from the dov. This is under the IHT threshold by £50k.

That said the dov will have a cost. And if both spouses are leaving all their assets (in the case of their spouse pre-deceasing them) to the same beneficiaries and in the same shares then I don't see much advantage to the 28 clause, especially if their tax situation is as described. (There would be a slight advantage in that the assets from the first to die would go straight to the children and not via their spouse's estate so distribution might be slightly quicker.)