When preparing a will, much of the focus is often placed on who should inherit. Before those decisions can be made, however, it is important to understand what assets the person owns and how those assets are held. Asset ownership and wills are closely linked, and failing to establish the ownership position at the outset can result in a will that does not achieve the intended outcome.
Personal Asset Ownership and Wills
A personally owned asset is held in the sole name of the person making the will, known as the testator. Common examples include:
- a bank account in the testator’s sole name;
- a property registered solely in the testator’s name;
- personal possessions;
- investments held directly; and
- shares owned personally in a company.
These assets will usually form part of the testator’s estate and pass under the terms of their will. If there is no valid will, they will generally pass under the intestacy rules.
Joint Asset Ownership and Wills
Joint ownership requires particular care. In England and Wales, there are two different ways in which co-owners may hold the beneficial interest in land: as joint tenants or as tenants in common. This is one of the most important aspects of asset ownership and wills, as ownership can determine whether an asset passes under the will at all.
Joint Tenants
Where an asset is held as joint tenants, the owners do not have separate and defined beneficial shares. On the death of one owner, the asset passes automatically to the surviving owner under the right of survivorship. It does not pass under the deceased owner’s will.
For example, Daniel and Alex own their home as joint tenants. Daniel’s will leaves “my share in the home” to his daughter from an earlier relationship. Unless the joint tenancy was severed before Daniel’s death, Alex will ordinarily become the sole beneficial owner of the property. The gift to Daniel’s daughter will not take effect because Daniel did not own a separate share that could pass under his will.
Tenants in Common
Tenants in common own separate beneficial shares. These shares may be equal or unequal, and each owner may leave their share under their will.
If Daniel and Alex instead own the property as tenants in common in equal shares, Daniel can leave his 50% share to his daughter.
A joint tenancy can generally be converted into a tenancy in common by severance. The severance should be properly documented and served where required. An appropriate restriction should also be entered at HM Land Registry.
The title register may not provide the full picture. Any declaration of trust or other document dealing with the beneficial ownership of the property should also be reviewed.
Joint bank accounts may raise further legal and factual questions. Although the account may transfer operationally to the surviving account holder, the beneficial ownership of the money may depend on who contributed the funds, the parties’ intentions and the terms on which the account was opened.
Assets Held in Trust
A trust separates legal ownership from beneficial ownership. The trustees legally own and manage the trust assets. The beneficiaries are entitled to benefit in accordance with the terms of the trust.
If a person has already transferred an asset into trust, or has an interest in a trust, that asset will not usually be theirs to give away under their will. The trust deed will determine what happens to the asset.
The person may, however, retain rights or powers under the trust that need to be considered. These might include:
- a right to receive trust income;
- a right to occupy trust property; or
- a right that arises when the trust ends.
For example, Margaret transferred an investment portfolio in lifetime to trustees on a discretionary trust for her grandchildren. Her will cannot redirect the investment portfolio if the trust deed already determines how these are held. The trustees will administer the investments in accordance with the trust terms.
Trust interests may also have inheritance tax consequences. The tax treatment will depend on the type of trust, when it was created, the rights retained by the individual and the relevant provisions of the Inheritance Tax Act 1984. The trust deed should therefore be reviewed alongside the will.
Company Asset Ownership and Wills
A company is a separate legal person from its shareholders. A shareholder does not personally own the company’s assets. If a company owns an office, investment account or vehicle, the shareholder cannot give that asset directly to a beneficiary under their will. The shareholder owns shares in the company, not the company’s property.
For example, James is the sole shareholder of a property investment company. His will states that a rental property owned by the company is to pass to his son. The gift will be ineffective because the company, rather than James, owns the property.
James could instead leave his shares in the company to his son. This would be subject to the company’s articles of association and any shareholders’ agreement.
Company documents may restrict the transfer of shares or give other shareholders the right to purchase them. The death of a director may also create management difficulties if there is no surviving director able to act.
Business succession planning should therefore consider the will, articles of association, shareholders’ agreements, insurance arrangements and the appointment of replacement directors together.
Conclusion
A will can only dispose of assets and rights that form part of the testator’s estate, or over which the testator has an exercisable power. The terms of the will are therefore only part of the estate planning process. Asset ownership and wills cannot be viewed separately, as the ownership structure of an asset will often determine what happens to it on death and whether the will can achieve its intended purpose.
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This article is provided for general information only and does not constitute legal advice. Any advice, wording or clauses referred to are illustrative and should not be relied upon as precedent without full consideration of the client’s circumstances, the will as a whole, and the law in force at the relevant time.
