WillsUnderstanding Survivorship Clauses

When drafting a will, one of the key considerations is how and when beneficiaries will inherit from an estate. A survivorship clause is a common provision included in wills that can significantly affect this process. This article explores the use of survivorship clauses in wills, examining their potential benefits and drawbacks.

What is a Survivorship Clause?

A survivorship clause is a provision in a will that stipulates a beneficiary must survive the testator by a specified period in order to inherit under the will. The most common period is 28 days, although this can be longer or shorter depending on the testator’s wishes. If the beneficiary does not survive the testator by the specified period, their gift will fail, and the will’s terms will determine who inherits instead.

Example:

If a will states that no person may benefit unless they survive the testator by 28 days, and the testator’s daughter dies 20 days after the testator, the gift to the daughter fails.

Benefits of a Survivorship Clause

There are several benefits to including a survivorship clause in a will:

They can prevent the need for two sets of probate or estate administration in quick succession, particularly where spouses or close family members die together or within a short period. This can reduce administration costs and complexity

If a beneficiary dies within the set period, their gift passes to substitute beneficiaries named in the will, rather than under the deceased beneficiary’s own will or the intestacy rules. This gives the testator greater control over the ultimate destination of their estate. However, this control is not absolute and for more comprehensive control the use of trusts should be considered.

A survivorship clause provides clear rules for distribution in the event of near-simultaneous deaths, reducing the risk of disputes or litigation among potential beneficiaries.

By preventing assets from passing to a beneficiary who dies soon after the testator, the clause can avoid the same assets being taxed twice in a short period. This is particularly relevant for non-spouse beneficiaries. Unmarried couples in particular will gain IHT benefits. They do not benefit from the spousal exemption, transferable nil-rate band (NRB), or transferable residence nil-rate band (RNRB). If unmarried couples leave their estates to each other and die in quick succession, a survivorship clause can result in an IHT saving.

Example

Alex and Morgan are unmarried and each have assets of £300,000 (including an interest in their home). They make wills leaving their estates to each other, and then to their children. Alex dies first, followed by Morgan 10 days later.

• On Alex’s death, the estate passes to Morgan. No spousal exemption applies, but the estate is under the NRB. Morgan’s estate is now £600,000, which is above the combined NRB and RNRB allowances (£500,000). IHT is levied and £40,000 is payable.
• If a survivorship clause of 28 days is used, Alex’s estate passes to the children (under the NRB, so no IHT is payable). Morgan’s estate (only £300,000, as no inheritance from Alex) also passes to the children, again under the NRB, so no IHT is levied.

Use of a survivorship clause in this circumstance saves £40,000 in IHT.

Drawbacks of a Survivorship Clause

Whilst survivorship clauses have clear benefits, there are also potential drawbacks:

The requirement for a beneficiary to survive by a set period can delay the administration and distribution of the estate, particularly if the set period is lengthy and if the IHT payable could vary depending on the beneficiaries who inherit.

If the survivorship period exceeds six months, the gift is treated as a trust for IHT purposes (S92, Inheritance Tax Act 1984), which can have adverse tax consequences. It is therefore inadvisable to have a survivorship period longer than six months.

If not carefully drafted, a survivorship clause can result in assets passing to unintended beneficiaries, particularly when dealing with mirror wills for couples. For example, in Jump v Lister [2016] EWHC 2160 (Ch), the inclusion of a survivorship clause applying to the spouse led to a set of ‘second death’ money gifts being paid out twice.

Where a survivorship clause is used between co-owners of property, severance of the joint tenancy is required to obtain any benefit from the clause. If a property is held as joint tenants, it will still pass to the co-owner by survivorship, and the benefits of the survivorship clause will be bypassed.

Survivorship clauses can cause difficulties on gifts to the testator’s spouse or civil partner and may lead to adverse IHT consequences. This topic will be explored in detail in next week’s article.

Conclusion

Survivorship clauses are a valuable tool in will drafting, offering clarity, potential tax efficiency, and greater control over estate distribution. However, they must be used thoughtfully and tailored to individual circumstances to avoid unintended consequences. Join us next week as we consider the implications of survivorship clauses for gifts between spouses and civil partners

 

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