When is a Simple Will Not So Simple?
Most individuals believe that their affairs are simple because they are familiar to them – it is the reality they live with every day. Many therefore request simple Wills to save time and costs. However, on further inspection their affairs may be more complex than they think and, ironically, require more detailed planning in order to save time and costs in the longer term.
Most individuals understandably want to save time and costs when drafting their Wills. Indeed, not everyone requires bespoke Will drafting and hours of expert advice. However, that does not mean that everyone should have a simplistic “pro forma” Will and estate plan. Let us compare Person A and Person B. Person A is single, on a salaried income with no expectations of inheriting significant wealth from their family and holds all of their assets in one jurisdiction. Person B is married for the second time, has children from their first marriage, is the custodian of significant generational wealth and holds assets across numerous jurisdictions. Person A and Person B would not expect to have the same investment advisors, expense profiles or personal priorities so why would they expect to have the same succession plan?
Factors which can complicate the estate planning process include:
- Assets in multiple jurisdictions;
- Control mechanisms;
- Internationally mobile families; or
- Blended families and unequal distributions.
If these issues are not considered and properly dealt with at the outset it can lead to more costs, complexity and even litigation further down the line. The rise in contentious estate litigation around the world reminds us of the worst case scenario where estate and succession planning is not properly considered.
This article examines how the above factors can impact the estate planning process and how they might best be addressed.
Assets in Multiple Jurisdictions
High net worth and ultra high net worth clients increasingly hold valuable assets in multiple jurisdictions. These may be holiday homes, homes for their children studying abroad, investment portfolios, company shares, or chattels. When considering cross-border estate planning it is helpful to break the issues down into three headline points: succession, tax and administration.
Succession refers to who inherits the estate. In jurisdictions such as Singapore, the UK or the USA, individuals generally have freedom of testamentary disposition and can leave their estates to whomever they wish under their Will.1With some exceptions e.g. for those bound by the Faraid under the Administration of the Muslim Law Act 1966. However, other jurisdictions may implement forced heirship, which dictates that a portion of the testator’s estate must pass to specified beneficiaries, and which may conflict with the terms of the Will.
Furthermore, there can be a conflict as to which law applies. You may be familiar with the concept of “renvoi“, derived from the French for “to return” or “to send back.” It is a famously murky subject, but according to the English Supreme Court2Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan (2010) UKSC 46, (2011) 1 A.C. 763 especially paragraph 124. “renvoi” is concerned with what happens when a court (the English court in that instance) refers an issue to another country’s laws and that country’s conflict of laws rules then refer the issue to another country’s law.3See also Dicey, Morris & Collins, Chapter 2, paragraph 2-098. What does this mean in practice?
Let us consider a Singapore domiciled individual who is habitually resident in Singapore and who owns real estate in France. This individual passes away. Under Singapore law, the succession of their immoveable assets is governed by the law of situs (lex situs) – it refers the matter to French law. French law4Applying the EU Succession Regulation (EU) No 650/2012, also known “Brussels IV.” refers to the law of the testator’s habitual residence – back to Singapore. What happens next? We can see how, with quite a “vanilla” fact pattern, the matter of succession can be quite complex – and that is only with two jurisdictions. It is entirely possible for the laws of multiple jurisdictions to apply to the succession of one estate.
The doctrine of renvoi is famously complex and unclear, but there are ways to circumvent this in practice, such as, in the example above, making a nationality election under the EU Succession Regulation to apply to the succession of the testator’s estate. This is a relatively simple solution but requires engagement upfront and taking relevant local advice.
Tax refers to whether the country in question imposes an estate tax or other tax on death (some countries impose a form of capital gains tax rather than estate tax on death). Depending on the profile of the testator and the nature/location of the assets, some countries may impose estate tax only on specific assets (e.g. real estate), on all assets situated in that country, or on worldwide assets. Consideration should then be given to structuring options to optimise tax efficiency (if that is one of the testator’s objectives) in each jurisdiction; for example, the UK has a 100% inheritance tax exemption for assets left to spouses. Double tax treaties may also allow a credit for estate taxes in certain countries, but these will only apply for countries which have treaties in place.
Lastly, administration refers to how to release the assets to the beneficiaries. In Singapore and other common law countries a Grant of Probate is typically required by asset providers in order to release the asset to the executors to distribute to the beneficiaries under the Will or intestacy. However, many civil law countries do not follow this system; instead, the assets vest directly in the heirs on the death of the testator, which may still necessitate the appointment of a notary and specific filings to be made. Not engaging with these issues upfront and leaving them until after death can significantly delay the probate process and therefore the timeframe in which the beneficiaries can expect to receive the assets. It is also generally more costly to deal with these issues after death than before, and opportunities for planning and structuring may be missed.
An advisor who has experience with cross-border estates should be appointed to coordinate the estate planning exercise with advisors from the other relevant jurisdictions. The client could have different Wills for each jurisdiction which should be carefully drafted to ensure that they do not conflict or revoke one another. However, multiple Wills are not always necessary or even advisable depending on the facts, and it may be possible to deal with the issues above under one Will, saving both time and costs.
Many clients wish to incorporate some form of control mechanism into their estate planning such as ensuring that young children do not have immediate access to significant wealth, protecting the estate assets in the event of divorce or a beneficiary coming under negative influences, and making provision for beneficiaries’ living costs and schooling. Typically, such mechanisms are incorporated by way of a testamentary trust (also known as a Will trust).
Some individuals may be reluctant to incorporate trusts in their Will planning if they see it as an unnecessary complication and expense. A testamentary trust can actually be the most cost-effective way to incorporate desired control mechanisms. Attempting to do so by way of conditional gifts or other provisions in the Will can be even more time consuming and expensive, and may cause uncertainty which can lead to disputes.5There is numerous common law case law on this subject including Naylor & Another v Barlow & Others (2019) (England and Wales) EWHC 1565 (Ch) and Hicken v Carroll (2014) NSWSC 1059 (New South Wales).
Discretionary trusts are the most commonly used form of testamentary trust. These trusts usually have multiple beneficiaries or a class of beneficiaries (e.g. all the settlor’s children and remoter issue) and the trustees have full discretion as to when to make distribution to the beneficiaries. Of course, the trustees are subject to fiduciary duties to act in the best interests of the beneficiaries, and they would also be guided by the letter of wishes written by the testator (or the settlor, in trust terms) setting out when they expect the beneficiaries to receive distributions. For example, the testator may request that children do not receive significant capital distributions until a specific age, such as 25 or 30. Before that age they can receive support for schooling, purchasing a property, living expenses and medical expenses. They may also request to split the fund equally between all children unless one of the children has an urgent need e.g. extraordinary medical expenses. The settlor can also make changes to their letter of wishes without needing to amend the Will itself, allowing for a flexible and ultimately cost-saving structure that allows the detail of the succession plan to be changed as the settlor’s family life progresses without having to re-execute an entirely new Will. That said, it is generally recommended that individuals review their Wills every five to 10 years or so, especially if significant life events occur such as marriage, divorce or moving to another country.
It can be tempting to immediately jump to a discretionary testamentary trust, but other structures may better reflect the client’s instructions. For example, a life interest trust gives a beneficiary the right to income arising within the trust whilst keeping the underlying capital protected. That beneficiary can still receive capital distributions if needed (guided by the testator’s letter of wishes) but on the termination of the life interest trust the capital can be left to the remainder beneficiaries. This is especially helpful in a second marriage scenario where the testator wants to provide for their spouse whilst ensuring their estate is secured for their children from their first marriage. The rise in contentious probate disputes worldwide, including those involving second spouses changing Wills and disinheriting children from the first marriage, demonstrate the importance of such structuring.
Another alternative is a standby trust (also known as a pilot trust). Unlike the examples above, this trust is settled before the death of the testator and the provisions of the trust are in a separate trust deed and not under the Will. The Will instead leaves the testator’s estate to the trustees of the standby trust, and those assets are then held by those trustees in accordance with the terms of that trust as guided by the settlor’s letter of wishes. Standby trusts may be more appropriate for individuals who are concerned about privacy and who do not wish for the provisions of their Will trust (including the identity of the beneficiaries) to be public record, as some jurisdictions make Wills publicly available after probate has been granted.
Trusts for Wills can come in a variety of forms, and the best option will depend on the priorities and concerns of the testator. It is clear, however, that a “one size fits all” approach is not appropriate especially where the testator has more complex personal circumstances and/or a desire for increased privacy. Care should also be taken when dealing with cross-border estates as not all jurisdictions recognise trusts, and some jurisdictions impose penal tax rates on assets held in trust. It may be necessary to carve out certain assets or consider other local alternatives to trusts that still provide mechanisms for control.
Internationally Mobile Family
This considers the effect of the Will structure on the beneficiaries, which may in turn impact the entire estate. For example:
- One beneficiary may be subject to high taxes in their jurisdiction of residence and it may be more efficient to structure their share in a specific way;
- Another beneficiary may not wish to receive assets situated in certain jurisdictions that give rise to tax or reporting issues for them; and
- If there is a testamentary trust for beneficiaries in multiple jurisdictions, one beneficiary may be subject to punitive tax measures in their country whilst the others are not.
These issues should be considered and appropriate structuring put in place at the Will drafting stage such as carving out certain beneficiaries’ entitlements. Where there is a testamentary trust the letter of wishes should contain guidance such as requesting that beneficiaries should receive their distributions gross or net of tax, requesting that the trustees seek local tax advice where beneficiaries are resident in a high tax jurisdiction, and considering excluding or making alternative arrangements for beneficiaries subject to tax in jurisdictions which may affect the tax liability of the entire trust fund, such as the USA. Separate trust structures or sub-funds could be established for beneficiaries in different jurisdictions, or part of the estate can be left to an existing standby trust that has been settled during the testator’s lifetime with the most effective structuring in place for the particular country the beneficiary is resident in.
Of course, it is not always possible to consider these issues during the estate planning process as beneficiaries can move countries later in life. This is another reason that periodic re-examination of one’s Will is important.
Blended Families and Unequal Distributions
Blended families can present unique challenges such as providing for a spouse from a second marriage without prejudicing children from the previous marriage and perhaps also providing for step-children. Even without a blended family issues may arise where the testator wishes to leave more to one child than the others, perhaps leaving shares in the family business that the child has significantly contributed to or perhaps because they have a closer relationship. It is possible to leave unequal amounts to children or even cut them out entirely in jurisdictions with freedom of testamentary disposition (although certainly not immune to challenge6See the English Supreme Court case of Illott v Mitson (2017) UKSC 17.), but this is less easy, perhaps even impossible, to reconcile with forced heirship regimes.
Even the best of intentions can lead to unforeseen negative consequences. For example, a testator may leave their entire estate outright to their spouse from their second marriage with the request that the second spouse ensures the testator’s children from the first marriage are provided for after the second spouse’s death. However, in most common law jurisdictions there is nothing to prevent the second spouse from changing their Will and disinheriting the children from the first marriage after the first spouse has died.7There are, of course, mutual Wills where the parties essentially contract not to change their Wills without the other’s consent but these have largely fallen out of favour in recent years and most advisors would not recommend entering into a mutual Will arrangement because it is so inflexible. Seemingly cordial and positive relationships during the testator’s lifetime can sometimes sour after death, and that is especially true if family members feel that they have been treated unfairly. These situations are ripe for contentious probate proceedings, which are on the rise as wealth increases and blended families become more common.8See cases such as UWF and another v UWH and another (2020) SGHCF 22 (Singapore) and Lilleyman v Lilleyman (2012) EWHC 821 (Ch) (England and Wales).
Trust mechanisms can be used to provide for a surviving spouse’s needs during their lifetime whilst preserving the capital on their death for the testator’s children. Clients should be encouraged to discuss expectations with their families so that there are no surprises and the family understands the Will structure and the motivations behind it. Open communication during lifetime and sensible mechanisms through a Will can help avoid contentious situations after death.
Engaging with complex fact patterns and concepts at the outset of Will planning prevents larger problems from surfacing later on, ultimately saving time and money. Dealing with complexity upfront therefore allows for a more efficient and ultimately cost-effective experience overall.
|↑1||With some exceptions e.g. for those bound by the Faraid under the Administration of the Muslim Law Act 1966.|
|↑2||Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan (2010) UKSC 46, (2011) 1 A.C. 763 especially paragraph 124.|
|↑3||See also Dicey, Morris & Collins, Chapter 2, paragraph 2-098.|
|↑4||Applying the EU Succession Regulation (EU) No 650/2012, also known “Brussels IV.”|
|↑5||There is numerous common law case law on this subject including Naylor & Another v Barlow & Others (2019) (England and Wales) EWHC 1565 (Ch) and Hicken v Carroll (2014) NSWSC 1059 (New South Wales).|
|↑6||See the English Supreme Court case of Illott v Mitson (2017) UKSC 17.|
|↑7||There are, of course, mutual Wills where the parties essentially contract not to change their Wills without the other’s consent but these have largely fallen out of favour in recent years and most advisors would not recommend entering into a mutual Will arrangement because it is so inflexible.|
|↑8||See cases such as UWF and another v UWH and another (2020) SGHCF 22 (Singapore) and Lilleyman v Lilleyman (2012) EWHC 821 (Ch) (England and Wales).|