Legal rights and grey areas

“I want to challenge the will” – something many private client practitioners have heard in recent years.

Contentious executries are increasing in number. This has perhaps not been helped by the pandemic, which has heightened emotions and, in turn, tensions around settling estates. At the forefront of many of these disputes are issues around legal rights.

These issues are not confined to calculations, but spill over into questions of executors’ duties and professional negligence. I have seen complaints about failures to take proper steps to identify or advise potential claimants, and legal rights “schemes” that have failed resulting in unwanted taxes being triggered and solicitors being left in a sticky situation.

From my experience, these issues tend to fall under one of three broad headings – who is claiming, what is included in the net moveable estate, and how legal rights are dealt with.

Who is entitled?

With family structures slowly evolving, and the relevant law constantly changing, these are areas in which we may see further developments. That said, in the past year, I have had numerous unusual issues arise. These have included a pre-2006 cohabitant considering a court action for marriage by cohabitation with habit and repute, disputes over paternity, and queries over posthumous children. Each of these can cause issues for executors in identifying the correct parties entitled to legal rights.

It is always important for practitioners to pause and think about not only who is potentially entitled, but what happens if such parties don’t have capacity, or cannot be located. Where capacity is an issue, this can be further complicated if the guardian or attorney is conflicted due to their own interest in the estate. I was recently involved in the succession to a farming business, where the executors were not only the residuary beneficiaries but also the guardians for an adult son with an entitlement to legal rights. In that case, we sought directions for the sheriff to agree the distribution from the estate in a manner that would benefit the adult (bearing in mind care costs and deprivation of capital issues).

Where a party cannot be located, so often practitioners will calculate the legal rights and put a sum on deposit – but is that enough? What if that party comes forward and seeks to apply collation (where gifts in life come off a legal rights claim)? If the executors have not made provision for this and have overdistributed, what then? There will be a loss to make good and a question over liability between the executors and the solicitors.

What is included in the net moveable estate?

The net moveable estate is possibly one of the most contested areas of legal rights, particularly when it comes to the intricate issues around when heritable property may be moveable.

In recent months, however, I have found many of the issues have been around gifts made by a deceased. There is often a misconception that because an asset is no longer in the deceased’s estate, either because it was apparently gifted, or because it was transferred to a trust, it will not form part of the legal rights calculation. That is not the case. I have been involved in various disputes around whether transfers were intended as gifts or loans, and likewise, whether gifts to trust have been effective in order to escape legal rights, particularly if the settlor has retained an interest.

In order for assets to be outside the scope of legal rights, the donor must have fully divested themselves of the benefits from that asset, much like avoiding a gift with reservation for inheritance tax purposes. While gifts with reservation bear their own tax (if due), it is not quite clear-cut with legal rights how a claimant is to be paid if the assets are outwith the control of the deceased, which makes for difficult conversations with the trustees.

How to deal with legal rights?

Unfortunately, it is not as straightforward as getting legal rights accepted or discharged: there are further nuances to be considered. The main problems seem to arise around the concept of forfeiture and the revocability of any elections made between the terms of a will and legal rights. As the use of trusts in wills is becoming commonplace, it is key that those entitled to legal rights understand exactly what they are electing to receive – if it is a liferent interest, do they know it can be revoked at any time, for instance?

Tax is often not at the forefront of anyone’s mind when negotiating a legal rights calculation. Yet, as unwanted taxes could be triggered, it must be factored in. An example that comes to mind is where there is an interaction with agricultural or business property relief and s 39A of the Inheritance Tax Act is triggered. Often it may be better to vary the terms of the will to agree assets to pass to legal rights claimants instead, to secure a more favourable tax position.

Why are legal rights cases on the rise?

Legal rights are something of a minefield and there are a number of common pitfalls practitioners should be aware of. To further complicate matters, there are many quirky aspects that arise in practice that are not widely known.

Despite these challenges, there is no source currently available to practitioners in the form of a checklist of the common issues to be wary of. Instead, the law relies on practitioners having the knowledge and expertise to identify issues and points of law, and then researching how that applies in their circumstances. More often than not, legal rights issues are overlooked because of that old adage “you don’t know, what you don’t know”, and it is not until something goes wrong that an issue comes to light.

The biggest issue for practitioners, however, is that there is often no clear or definitive authority on many of the issues. Instead, it is for practitioners and our clients to come to an agreement.

The costs involved in raising a court action are prohibitive, which together with the uncertainty of the outcome results in many legal rights disputes being settled outside of court. Practical solutions are often needed. I have had a very positive experience with mediation in executry disputes, which has, in every case, resulted in agreement being reached and has cut out a lot of the protracted correspondence we often find ourselves in.

Given the contentious climate we now find ourselves in, it has never been more important to be mindful of these legal rights issues and to seek advice or take action early to avoid complications later.