Gifts, Inheritance tax, 7 year rule, and whose money is it anyway?

Mr._H_2

Hi all,

I hope someone can answer this, or point me in the direction of suitable reading material to help me find an answer. Apologies in advance that setting the scene for the question takes a while:

My mother recently acted as the personal representative of a relative (let's call him "A") who died intestate. His wife ("B") died several years earlier, also intestate, so B's entire estate went to A when B died, and B's surviving family were not entitled to any of the estate when A passed (A and B did not have any children together).

As this did not seem fair on B's family, my mother asked the beneficiaries (Let's call them "C" through "H") to make donations from their inheritance, to be shared out amongst B's surviving family. She set up a bank account that all the gifts were paid in to, and will be distributed shortly.

The question is: has a terrible mistake been made setting up the above-mentioned account in my mother's name? Will the money now count as hers, and she is making gifts to B's family, and therefore the gifts will be liable to inheritance tax if my mother dies within seven years (she is 77 now)? Or, can a case be made that the account was merely a conduit and the money never really belonged to my mother and therefore all the money still counts as gifts from "C" through "H" for inheritance tax purposes?

If this is a problem, is there any way to unf**k the situation?

Thanks for reading 

Jeremy535897

You are asking a legal question: who is the beneficial owner of the money in the account? For some HMRC views on this subject, in the context of income tax payable on interest, see https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2400

poseidon1

Mr._H_2 said:

Hi all,

I hope someone can answer this, or point me in the direction of suitable reading material to help me find an answer. Apologies in advance that setting the scene for the question takes a while:

My mother recently acted as the personal representative of a relative (let's call him "A") who died intestate. His wife ("B") died several years earlier, also intestate, so B's entire estate went to A when B died, and B's surviving family were not entitled to any of the estate when A passed (A and B did not have any children together).

As this did not seem fair on B's family, my mother asked the beneficiaries (Let's call them "C" through "H") to make donations from their inheritance, to be shared out amongst B's surviving family. She set up a bank account that all the gifts were paid in to, and will be distributed shortly.

The question is: has a terrible mistake been made setting up the above-mentioned account in my mother's name? Will the money now count as hers, and she is making gifts to B's family, and therefore the gifts will be liable to inheritance tax if my mother dies within seven years (she is 77 now)? Or, can a case be made that the account was merely a conduit and the money never really belonged to my mother and therefore all the money still counts as gifts from "C" through "H" for inheritance tax purposes?

If this is a problem, is there any way to unf**k the situation?

Thanks for reading 

I assume  ( hopefully) the account in question is non interest bearing or there is very little interest to worry about.

What your mother has created as matter of trust law is a bare trust account where the donors are beneficiaries 'C' to 'H' with your mother acting as bare trustees for the children of wife 'B'.  

Now ideally, and assuming we are still within 2 years of the death of 'A',  what your mother should have done is execute a deed of variation ( DOV ), whereby beneficiaries 'C' to 'H' by virtue of that deed formally divert part of their inheritance from 'A'  (equal to their individual donations ) to the children of 'B'. 

 In this way the total monies in question are treated as directly gifted by the deceased estate of 'A' with no gifting consequences on anyone else.

If still within the 2 year period therefore, that is her best course of action I would reccomend.

If the 2 year period has passed, then to put this 'bare trust ' arrangement beyond doubt  your mum should set up a Memorandum of Gift to be signed by all the donors, identifying their individual gifts and listing the donees who benefit and the amounts concerned.

This option is less than ideal, since depending on the amounts in question, the donors may have potential  individual  IHT consequences of their own, which would not arise in the case of a DOV. So although this also let's your mum off the hook, it's less than ideal.

By the way I assume that both groups of donors and donees are over age 18 and have legal capacity to engage in one or other of the above options?

mybestattempt

Mr._H_2 said:

Hi all,

I hope someone can answer this, or point me in the direction of suitable reading material to help me find an answer. Apologies in advance that setting the scene for the question takes a while:

My mother recently acted as the personal representative of a relative (let's call him "A") who died intestate. His wife ("B") died several years earlier, also intestate, so B's entire estate went to A when B died, and B's surviving family were not entitled to any of the estate when A passed (A and B did not have any children together).

As this did not seem fair on B's family, my mother asked the beneficiaries (Let's call them "C" through "H") to make donations from their inheritance, to be shared out amongst B's surviving family. She set up a bank account that all the gifts were paid in to, and will be distributed shortly.

The question is: has a terrible mistake been made setting up the above-mentioned account in my mother's name? Will the money now count as hers, and she is making gifts to B's family, and therefore the gifts will be liable to inheritance tax if my mother dies within seven years (she is 77 now)? Or, can a case be made that the account was merely a conduit and the money never really belonged to my mother and therefore all the money still counts as gifts from "C" through "H" for inheritance tax purposes?

If this is a problem, is there any way to unf**k the situation?

Thanks for reading 

My view is that the donations from the 6 beneficiaries of A (C to H) were gifts from them to the relatives of B, which were to be held on trust for a brief period by your mother and although held in an account in her name she did not have beneficial ownership of the money.

I would suggest you ensure that she keeps evidence of the agreement she brokered (email exchanges, letters etc) as well as details of the amounts paid to each recipient along with all statements for the bank account. This will support the fact the account was, as you put it, a conduit.

Mr._H_2

poseidon1 said:

I assume  ( hopefully) the account in question is non interest bearing or there is very little interest to worry about.

What your mother has created as matter of trust law is a bare trust account where the donors are beneficiaries 'C' to 'H' with your mother acting as bare trustees for the children of wife 'B'.  

Now ideally, and assuming we are still within 2 years of the death of 'A',  what your mother should have done is execute a deed of variation ( DOV ), whereby beneficiaries 'C' to 'H' by virtue of that deed formally divert part of their inheritance from 'A'  (equal to their individual donations ) to the children of 'B'. 

 In this way the total monies in question are treated as directly gifted by the deceased estate of 'A' with no gifting consequences on anyone else.

If still within the 2 year period therefore, that is her best course of action I would reccomend.

If the 2 year period has passed, then to put this 'bare trust ' arrangement beyond doubt  your mum should set up a Memorandum of Gift to be signed by all the donors, identifying their individual gifts and listing the donees who benefit and the amounts concerned.

This option is less than ideal, since depending on the amounts in question, the donors may have potential  individual  IHT consequences of their own, which would not arise in the case of a DOV. So although this also let's your mum off the hook, it's less than ideal.

By the way I assume that both groups of donors and donees are over age 18 and have legal capacity to engage in one or other of the above options?

Thank you (and Jeremy535897 and mybestattempt also); it is very much appreciated.

We did know that a deed of variation would have been better, but the legal costs were already mounting, and I understated the number of people involved. Even without brokering deeds of variation, distribution of the estate took over two years and an enormous amount of stress and hard work by my mum. Inviting people to make donations was much simpler (apart from this oversight of course!).

If this thread can serve as a cautionary tale to at least one other person in a similar situation, then I would say that in retrospect, it would have been better to bite the bullet and make the deeds of variation.

Keep_pedalling

Mr._H_2 said:

poseidon1 said:

I assume  ( hopefully) the account in question is non interest bearing or there is very little interest to worry about.

What your mother has created as matter of trust law is a bare trust account where the donors are beneficiaries 'C' to 'H' with your mother acting as bare trustees for the children of wife 'B'.  

Now ideally, and assuming we are still within 2 years of the death of 'A',  what your mother should have done is execute a deed of variation ( DOV ), whereby beneficiaries 'C' to 'H' by virtue of that deed formally divert part of their inheritance from 'A'  (equal to their individual donations ) to the children of 'B'. 

 In this way the total monies in question are treated as directly gifted by the deceased estate of 'A' with no gifting consequences on anyone else.

If still within the 2 year period therefore, that is her best course of action I would reccomend.

If the 2 year period has passed, then to put this 'bare trust ' arrangement beyond doubt  your mum should set up a Memorandum of Gift to be signed by all the donors, identifying their individual gifts and listing the donees who benefit and the amounts concerned.

This option is less than ideal, since depending on the amounts in question, the donors may have potential  individual  IHT consequences of their own, which would not arise in the case of a DOV. So although this also let's your mum off the hook, it's less than ideal.

By the way I assume that both groups of donors and donees are over age 18 and have legal capacity to engage in one or other of the above options?

Thank you (and Jeremy535897 and mybestattempt also); it is very much appreciated.

We did know that a deed of variation would have been better, but the legal costs were already mounting, and I understated the number of people involved. Even without brokering deeds of variation, distribution of the estate took over two years and an enormous amount of stress and hard work by my mum. Inviting people to make donations was much simpler (apart from this oversight of course!).

If this thread can serve as a cautionary tale to at least one other person in a similar situation, then I would say that in retrospect, it would have been better to bite the bullet and make the deeds of variation.

A deed of variation is easy to do without racking up legal costs all each beneficiary had to do was write an appropriate letter. This can still be done if the death occurred within the last 2 years.

https://www.gov.uk/alter-a-will-after-a-death

Mr._H_2

Keep_pedalling said:

Mr._H_2 said:

poseidon1 said:

I assume  ( hopefully) the account in question is non interest bearing or there is very little interest to worry about.

What your mother has created as matter of trust law is a bare trust account where the donors are beneficiaries 'C' to 'H' with your mother acting as bare trustees for the children of wife 'B'.  

Now ideally, and assuming we are still within 2 years of the death of 'A',  what your mother should have done is execute a deed of variation ( DOV ), whereby beneficiaries 'C' to 'H' by virtue of that deed formally divert part of their inheritance from 'A'  (equal to their individual donations ) to the children of 'B'. 

 In this way the total monies in question are treated as directly gifted by the deceased estate of 'A' with no gifting consequences on anyone else.

If still within the 2 year period therefore, that is her best course of action I would reccomend.

If the 2 year period has passed, then to put this 'bare trust ' arrangement beyond doubt  your mum should set up a Memorandum of Gift to be signed by all the donors, identifying their individual gifts and listing the donees who benefit and the amounts concerned.

This option is less than ideal, since depending on the amounts in question, the donors may have potential  individual  IHT consequences of their own, which would not arise in the case of a DOV. So although this also let's your mum off the hook, it's less than ideal.

By the way I assume that both groups of donors and donees are over age 18 and have legal capacity to engage in one or other of the above options?

Thank you (and Jeremy535897 and mybestattempt also); it is very much appreciated.

We did know that a deed of variation would have been better, but the legal costs were already mounting, and I understated the number of people involved. Even without brokering deeds of variation, distribution of the estate took over two years and an enormous amount of stress and hard work by my mum. Inviting people to make donations was much simpler (apart from this oversight of course!).

If this thread can serve as a cautionary tale to at least one other person in a similar situation, then I would say that in retrospect, it would have been better to bite the bullet and make the deeds of variation.

A deed of variation is easy to do without racking up legal costs all each beneficiary had to do was write an appropriate letter. This can still be done if the death occurred within the last 2 years.

https://www.gov.uk/alter-a-will-after-a-death

My mum did a deed of variation for her share of the inheritance and was charged quite a lot by the solicitor for doing so. Unfortunately it's too late now to do any more.