Battles over legacies are rising. As the recession bites, children left out of wills, or with less cash than they hoped, are turning to the courts either to sue siblings or take on trustees.But if you don't want to leave your family in turmoil after your death, there are things you can do. Children who were excluded from inheritances are more likely to challenge the will nowadays. Many heirs have been disappointed by the sums they have received during the economic downturn and challenging the will or the competence of trustees can be a way of pushing up their share.
The Chancery Division of the High Court in London saw claims involving trusts rise from three in 2007 to 13 in 2008 and 44 in 2009. "This pattern is likely to be repeated across the country," says Fay Copeland, private client partner at solicitor Wedlake Bell. Henry Frydenson of Frydenson & Co Solicitors chairs the 450-member Association of Contentious Trust and Probate Specialists and says: "Those members I have canvassed are seeing this area increase. Death and money do very strange things to people." The figures are also likely to be a small part of the total number of disputes in England and Wales, the majority of which are settled informally or by mediation.
Lawyers tend to agree that the economic downturn has pushed up claims. Since house prices have typically fallen nearly a fifth since 2007, many heirs have been disappointed with their legacies. The internet has also made people more informed about their rights. The Inheritance (Provision for Family and Dependants) Act 1975, for instance, enables children, spouses, ex-spouses and people dependant on a person in England and Wales to challenge their will if they were not sufficiently provided for. "In years gone by, people were simply unaware of it," says Henry Frydenson.
Lawyers now advise people wanting to exclude a child from a will to write a "side letter"to the will which does not have any legal effect but explains why the child was not included. They may have already received money, for instance, or their siblings might be seen as being more needy. But the sense of injustice that excluded children feel "sometimes leads to a challenge", says Frydenson, who believes that side letters can do a lot to remove the incomprehension, pain and bitterness that excluded children often feel.
More people are considering setting up trusts these days (see box) if they are concerned that their children could lose some or all of their inheritance in a divorce or bankruptcy or because they are poor at managing money. But individuals need to get good advice on setting up complicated wills, where one child is treated differently to the others, and trusts.
"Trusts are quite easy to get wrong," says Simon Pedley, head of the contested trusts team at law firm Pannone. Too often, he thinks, corners are cut on drawing up wills which are a loss leader for many law firms. But, he says, "you should be OK" if you have sensible trustees and a properly drafted trust document.
However, many trustees are unaware of their duties, especially family members who are trying to do the decent thing and help out a brother or aunt by taking on the trustee role. Even the Big Four accountancy firms have become much less willing to take on trustee appointments, for reasons involving conflict of interest and risk. KPMG confirmed the increasing difficulties that its partners face in this role. "A trustee's duties are very, very onerous," says Pedley. "You have to be pretty brave to be a trustee."
He expects to see more litigation involving trustees. A Court of Appeal decision last month [April] on Pitt v Holt made it far more difficult for trustees to use informal ways of remedying mistakes made on investment or other decisions relating to the trust. "There will be an increase in trusts and trust funds suing professional advisers," says Pedley.
There are already many cases in which beneficiaries and trustees have fallen out with each other. A child who is getting less money from the trustees than his or her siblings may well take it badly even if the trustees think they have good reasons for treating the beneficiaries differently. Such heirs may, according to Pedley, be having thoughts such as: "I am not getting a proper crack of the whip...I want that trustee removed."
So far, some of the organisations that have lost out most in will and trust disputes are the charities that receive money not left to children. The Blue Cross, the RSPCA and others have together paid millions to fight cases under the Inheritance Act and other parts of the law. But all parties to such disputes are best advised to look at the options of pragmatic compromise and mediation. "I have become an absolute believer in alternative dispute resolution," says Frydenson, thinking of mediation in particular.
Deborah Jude, wills and probate specialist at law firm Dickinson Dees says that mediation is on the rise. "You have to be quite confident to turn down mediation," she says, referring to the way opposing parties can propose going to mediation to each other, as an alternative to using the courts. "The court would take a certain view of someone who turns it down." A party which blocks the opportunity of mediation can be penalised in court later for that decision.
A wills dispute can typically be resolved in a day's mediation, costing £3,000-£4,000 for both parties. A court case could last up to a week, costing altogether between £5,000 to £10,000 a day. While most people looking at these calculations will tend to opt for mediation, not everyone does. "Some people want their day in court," says Jude.
Managing the family fortune
* Most of us assume that trust funds are only for the richest in society, those who count their inheritances in millions of pounds rather than hundreds. But solicitor Charles Hicks, of Wedlake Bell, routinely builds in a discretionary trust to the wills he drafts for clients. It is a straightforward step and adds little extra cost to the will-writing process. With the average house price now reaching nearly £163,000, according to the Halifax, many home-owning couples could have assets worth over £300,000 when they die. "In some ways, the smaller the amount, the more important it is that the child doesn't have the opportunity of squandering it," he says. He gives the example of a couple with three children, one of whom is going off the rails, the second being made bankrupt and the third the perfect child. Under a discretionary trust, the trustees could pay out the perfect child immediately and hold on to the shares for the others until a better time came.
* All sorts of factors could be taken into account. The child going off the rails could, for instance, be suffering a mental health problem or be planning to rely on the legacy rather than work. The trustees could decide, says Hicks: "To do them a favour and say, 'Get off your behind and get a job'." Partial payments could be made to needy children, say those with bipolar disorder or alcoholism, but trustees might decide not to give them the opportunity to blow their inheritance in one go.
* Getting the right trustees is crucial. Hicks says: "The important thing is to have chosen sensible trustees who will have a knowledge of the family, understand what their obligations are and not be overwhelmed." One is often a family friend, the sensible niece or nephew who knows the people well and is young enough to carry out the role for a decade or two (or longer ). The other is typically the family solicitor, who may have drawn up the will.
* Annual charges can be kept to around £2,000 (or up to £2,400 including VAT), says Hicks. This would include the investment management charges, annual tax return and professional trustee's fees. Annual costs are a difficult issue for small funds and can make trusts of less than £150,000 uneconomical to run. If the trustees take their eye off the ball, they can run up hefty costs very quickly with professional legal fees, for instance, rarely under £150 an hour. "Professional trustees for smaller trusts aren't always such a good idea," says Simon Pedley of Pannone.
CEDR (mediation forum): www.cedr.com
H M Courts Service (guidance on making a will: www.hmcourts-service. gov.uk/ infoabout/civil/probate/why_will.htm
H M Courts Service (probate procedures): www.hmcourts-service.gov.uk/ cms/ 1226.htm
Institute of Legacy Management: www.ilmnet.org/ilmReuse content