When you die, your spouse and your children will automatically be entitled to a share of your estate regardless of whether or not you have a Will. This is due to Legal Rights which are a form of forced inheritance in Scotland and can affect what happens to your estate after death. Early planning can help you reduce their effect and ensure your estate is left to those you intend.
This will be of little consequence to a harmonious family unit where wealth will simply devolve from one spouse to the other and then to the children. However, Legal Rights in a deceased's estate can have a disruptive impact on succession, tax, business assets and family relationships.
What are Legal Rights and who is entitled?
Legal Rights are an absolute entitlement of a spouse and children (and, in some cases, grandchildren). Beneficiaries can choose whether or not they want to claim their Legal Rights. If someone entitled to Legal Rights also has an entitlement under a Will, they can either accept that entitlement under a Will or claim Legal Rights but cannot have both. A potential Legal Rights claimant has twenty years from death to make a claim.
'Children' includes those who have been adopted by the deceased and those born or conceived outside of a marriage. A spouse will continue to have a prospective entitlement to Legal Rights even during separation before a divorce has been finalised, a formal agreement is likely to be required to avoid them inheriting against your wishes.
How are Legal Rights calculated?
Legal Rights are calculated against 'moveable' property which means that your spouse and children are entitled to a share in your estate excluding the value of land and buildings owned by you as an individual. That is a broad category of estate and could include bank accounts, share portfolios, businesses and business property.
The share of Legal Rights which a beneficiary is entitled to depends on who survives the deceased. Where a spouse or children survive the deceased they are entitled to half of the moveable estate. If there is more than one child, each child is entitled to the relevant proportion of that half but their share is not increased by other children electing not to claim. Where there is a spouse and children, the spouse is entitled to one third of the moveable estate and each child is entitled to a proportionate share of a third.
The remaining half or third of the estate is dealt with either in terms of the Will or the laws of intestacy.
Why you should be aware of Legal Rights
Claimed Legal Rights can frustrate those who are intended to inherit under the terms of a Will. In many estates the rights are disclaimed because the people entitled to them are provided for in the Will or because children agree the estate should pass to their surviving parent. However, if someone claims their Legal Rights this will usually reduce the intended shares of other parties and can lead to family conflict.
Where the terms of the Will may have been tax efficient, for example, the estate passing to a spouse in a tax efficient way, the claim of a disinherited child under Legal Rights can increase the tax exposure of the estate. This can reduce the amount available to the other beneficiaries and it can reduce the inheritance tax nil-rated amount ultimately available to a surviving spouse. In an estate of a first spouse or civil partner to die, any ‘unused’ proportion of the nil-rated amount for inheritance tax (currently £325,000, subject to the residence nil-rate band) is ultimately available to the estate of the surviving spouse.
Some complex estates may include business or agricultural property which can form part of the moveable estate subject to Legal Rights. Sizeable legal rights claims to estates with limited liquidity can impact the running of an estate. Such claims may negatively affect business relationships and business value. They may also lead to the business property being sold or broken up to meet claims and further consequences might include loss of tax reliefs
What can be done about them?
Reducing or avoiding the impact of Legal Rights can be complicated but not necessarily impossible and legal advice should be sought as there are practical measures which can help.
Good professional advice can help you identify where Legal Rights might impact an estate and allow you to plan accordingly. For example, there could be a means of dividing assets and the value of an estate equally while leaving administrative power in the intended hands.
By considering your own personal and family circumstances you can plan in relation to your needs, address exposure for a claim under Legal Rights and ultimately ensure your estate goes to whom you intend.
