CHAPTER TWO – INTESTACY
It is worth considering how the law of intestacy affects farmers, if for no other reason than to persuade a farmer that they must make a will.
The detail of the law of intestacy is beyond the scope of this book, but solicitors will all be aware that a surviving spouse or civil partner is entitled to Prior Rights on the estate of someone who dies without a will.
A Prior Rights claim comprises the residential dwellinghouse where the couple lived together to a maximum value of £473,000, the furniture and furnishings in the residential dwellinghouse and a cash sum of £89,000 reduced to £50,000 if the deceased had children.
Consider however the situation where the deceased is a farmer who does not own a residential dwellinghouse. This could be because the house is owned by a partnership or company or because the farm is leased.
The surviving spouse has no entitlement to the house and would be left with only the furniture and furnishings and cash sum.
Most people would prefer to provide more security for a spouse or civil partner and that can be achieved in a properly drafted will.
After Prior Rights the deceased’s estate would be split among the Legal Rights claimants – spouse or civil partner and children – and beneficiaries of free estate – children or close family members.
Children who are involved in the farming enterprise and those who are not so involved would be treated equally. Likewise, children from any previous relationships would be treated equally with those from the current relationship.
If the farmer is cohabiting with someone they are not married to or in civil partnership with and the farmer dies intestate, the cohabitant may pursue a claim under the Family Law (Scotland) Act 2006 for provision from the deceased’s estate on death. The result of such a claim is uncertain for the cohabitant and both the cohabitant and the executors would be involved in expensive court proceedings. Clear provision for the cohabitant in a will would avoid the uncertainty and expense of court proceedings.
In many cases the need to pay out cash or transfer assets to meet the claims of a cohabitant, Prior Rights, Legal Rights and the claims of beneficiaries entitled to the free estate may compromise the future viability of the farming business.
The following examples illustrate the problem:-
Alastair is a tenant farm and sole trader. He owns a residential property which is rented out. He has a small savings account. Alastair is married to Belinda and they have three adult children Chrissie, Della and Edward. Alastair dies suddenly without leaving a will. Edward, who works on the farm, is nominated by the executor dative to take over the tenancy. The remainder of the estate comprises the sole trader business valued at £50,000, the residential property valued at £150,000 and the savings of £9,000. Alastair’s estate is distributed under the laws of intestacy as follows –
-
Belinda –
prior rights£50,000.00 (cash sum)
Belinda –
legal rights£3,000.00 (one third of moveable estate)
Total –
£53,000.00
Chrissie, Della and Edward – legal rights
£3,000 (one third of moveable estate – £1,000 each)
Chrissie, Della and Edward – free estate
£153,000 (residential property plus balance of savings – £51,000 each)
Total each child
£52,000
Belinda cannot claim her prior rights over the residential property as she and Alastair did not live there together at the time of his death. The farmhouse is part of the farm tenancy which has passed to Edward. Belinda is left with £53,000. Although Edward acquires the farm tenancy, the business assets owned by his father as a sole trader may require to be sold to meet the prior rights and legal rights claims of the rest of the family.
If Alastair had made a will, he could have bequeathed the residential property to Belinda and the sole trader business assets to Edward. He could have provided for Chrissie and Della either by leaving the residential property in liferent to Belinda and in fee to his daughters or by taking out life insurance.
Tom is a farmer. The farm belongs to a trading company ABC Ltd. Tom is a director of ABC Ltd and owns 100% of the shares in that company. Tom is married to Susan and they have two young children Ursula and Victor. Tom was married before and has two adult children Freddie and Gertrude from that earlier marriage. Susan works with Tom in the farming business and is a director of ABC Ltd. Freddie also works with his father in the farming business and is a director of ABC Ltd. Gertrude is estranged from her father. Ursula and Victor are still at primary school. Tom dies suddenly with no will. The company is valued at date of death at £5,000,000. Tom also has a share portfolio worth £270,000 and a collection of classic tractors worth a surprising £150,000. His estate is entirely comprised of moveable property and totals £5,420,000. His estate is distributed according to the laws of intestacy as follows:-
-
Susan Prior Rights
£50,000 (cash sum)
Susan Legal Rights
£1,790,000 (one third of moveable estate)
Susan total
£1,840,000
Children legal rights
£1,790,000 (one third of moveable estate)
Children free estate
£1,790,000 (one third of moveable estate)
Children Total
£3,580,000
Ursula, Victor, Freddie and Gertrude each receive
£1,193,333
Again, Susan cannot claim her prior rights against the farmhouse because it belongs to ABC Ltd although she is in a much better position financially than Belinda in the example above. Freddie works in the farming business but he receives exactly the same inheritance as Gertrude, Ursula and Victor. A well drafted will could have provided for Susan, Freddie, Ursula and Victor appropriately and reduced Gertrude’s share, albeit that she could still have claimed her legal rights.
Vera and Wilma are civil partners. They have no children. Vera owns a farm. Vera and Wilma farm in partnership. Vera dies suddenly without making a will. Apart from Wilma, Vera’s only relative is her brother Bryan who lives in New Zealand and with whom she has had no contact in the last five years. Her estate at the date of her death comprises the farm valued at £800,000 (farmhouse worth £175,000), her capital balance in the partnership of £150,000 and £25,000 in a savings account. Vera’s estate is distributed as follows:-
-
Wilma prior rights
£175,000 (value of the farmhouse)
£89,000 (cash sum)
Wilma legal rights
£87,500 (one half of moveable assets after prior rights)
Wilma total
£351,500
Bryan – free estate
£625,000 (value of the farm under deduction of the farmhouse)
£87,500 (balance of moveable assets after prior rights and legal rights)
Bryan total
£712,500
In this example at least Wilma can claim the farmhouse but it is unlikely the eventual distribution was in line with Vera’s wishes. Wilma and Bryan could enter into a Deed of Variation of Vera’s will but that would require Bryan’s consent as his entitlement would be affected.
Farmers, rich or poor, who do not have properly drafted wills risk causing financial and emotional problems for their families.