Post-Death Estate Planning: Deeds of Variation vs Disclaimers

 

 

What are they? 

 

A Deed of Variation is a legal document that can be prepared for a beneficiary of a deceased person’s estate that allows them to give up their entitlements under the deceased’s Will or the intestacy rules in favour of other individuals. It can also be used to vary nomination or survivorship. 

 

Deeds of Variation can apply to any assets in the estate such as land, cash, property, a share in the residuary estate or a beneficial interest in a Trust. 

 

A Deed of Variation works by allowing the beneficiary to rearrange or redirect the interest that came to them originally from the deceased’s estate by transferring some or all of the interest they have inherited to another beneficiary. This transfer is usually made by way of a gift, but it can also be done by exchanging respective interests in the estate or by selling an interest. 

 

It is important to note that a variation is not a rewriting of a deceased’s Will, a redrafting of the intestacy rules, or a device to correct a defective Will. 

 

When are they used? 

 

There are a number of reasons why a person may choose to give up their entitlement: - 

• To provide for others who are in greater need of funds or other resources, such as a house. 

• Giving 10% of the net chargeable estate to a beneficiary who is exempt from paying Inheritance Tax (IHT), such as a charity, can lower the IHT rate from 40% to 36% resulting in a lower IHT bill for the estate as a whole. 

• Redirecting assets qualifying for IHT relief from an exempt beneficiary to a non-exempt beneficiary so that the relief is not wasted i.e., business property relief. 

• Using the deceased’s IHT nil rate band by creating a discretionary trust or making an absolute gift of the value of the nil rate band. 

• Using the deceased’s residence nil rate band by directing the deceased’s qualifying interest to their descendants. 

 

A beneficiary who gives up their entitlement makes a lifetime disposition. However, if the disposition is made within 2 years after the deceased’s death, it is treated as if it had been made by the deceased for inheritance tax and capital gains tax purposes. 

 

Advantages of a variation 

 

Making alterations in the distribution of an estate after death has several advantages: 

 

Flexibility – Deeds of Variation offer a flexible approach, allowing the original beneficiary to control the redirection of all or part of their interest in the estate. The Variation can either be made during the administration of the estate or after it has been finalised. 

 

Tax Planning – Strategic use of Deeds of Variation can help optimise tax implications, potentially reducing the overall tax burden on the estate for IHT and CGT purposes. 

 

Dispute Resolution – By providing a mechanism for agreement amongst beneficiaries, Deeds of Variation can help prevent disputes between families. 

 

 

What are they? 

 

An individual who does not wish to benefit from an estate can refuse their interest in it absolutely and disclaim it, provided that they have not accepted any benefit from it before disclaiming it. However, if they choose to disclaim it, they have no control over who should receive the benefit in their place. 

 

They must disclaim the whole interest, not just part of it, unless the Will specifically allows for partial disclaimers. 

 

When are they used? 

 

Disclaimers may be made in the following situations: - 

 

• Where there has been a change in circumstances since the Will was written. For example, a falling out between a testator and a beneficiary, or a beneficiary may feel that others are more deserving than them any may feel that it is appropriate to refuse their gift. 

• The original beneficiary may already have a sizeable and valuable estate and therefore not wish to take the gift but are not concerned as to who receives the gift otherwise. 

 

Where a disclaimer results in an increase in the amount of IHT payable, the personal representatives cannot veto a disclaimer, whereas they might well refuse to be a party to a variation.