Property passing outside the estate - Nominated property

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Overview

Understanding how property can transfer outside the estate is vital for law students preparing for the SQE1 FLK2 exam. Nominated property is a key component in estate planning, enabling efficient asset transfer and offering potential tax benefits. This article delves into the legal framework, benefits, and intricacies of nominated property, focusing on its relevance to the exam and practical use in estate planning.

What is Nominated Property?

Nominated property includes assets that bypass probate and go directly to named beneficiaries upon the owner's death. Governed by specific statutes and case law, these often include life insurance policies, pension schemes, and certain bank accounts.

The legal basis for nominated property is mainly found in the Inheritance Tax Act 1984 (IHTA 1984) and the Wills Act 1837. Key provisions include:

  1. Section 5(1) IHTA 1984: Defines inheritance-taxable property, notably excluding certain nominated assets.
  2. Section 151 IHTA 1984: Details rules for pension scheme lump sums in inheritance tax matters.
  3. Section 9 Wills Act 1837: Highlights the distinction between testamentary and non-testamentary transfers, although not directly addressing nominated property.

Types of Nominated Property

Nominated property includes various asset categories:

  1. Life Insurance Policies: Beneficiaries are specifically named in the policy.
  2. Pension Schemes: Includes personal and occupational pensions with named beneficiaries.
  3. Jointly Owned Property: Particularly those held as joint tenants, transferring by survivorship.
  4. Certain Bank Accounts: Some accounts allow for nomination of beneficiaries.

Legal Mechanics of Nomination

The nominating process involves key legal principles:

  1. Formalities: While less strict than wills, nominations must typically be in writing and signed by the nominator.
  2. Capacity: The nominator must have the mental ability to understand the nomination, as per Banks v Goodfellow (1870) LR 5 QB 549.
  3. Revocability: Most nominations can be revoked during the nominator's lifetime, allowing flexibility.
  4. Trust Creation: In some cases, nominations create trusts, as seen in Re Danish Bacon Co Ltd Staff Pension Fund Trusts [1971] 1 WLR 248.

Key Features and Benefits of Nominated Property

1. Direct Transfer to Beneficiaries

Nominated property allows assets to transfer immediately to beneficiaries, skipping the lengthy and costly probate process. This ensures swift distribution, reducing delays and administrative tasks for beneficiaries.

2. Avoiding Probate

Probate, the process of validating a will and distributing assets, can be arduous and expensive. Nominated property sidesteps this process, sparing beneficiaries financial and logistical challenges.

3. Control and Flexibility

Owners retain control over the distribution of their assets after death, choosing beneficiaries and terms of transfer, thus aligning distribution with personal wishes and goals.

4. Tax Benefits

Nominated property often has specific tax rules, potentially offering significant advantages for both the estate and beneficiaries. Some types may be exempt from inheritance or capital gains tax.

5. Protection for Minor Beneficiaries

Nominated property provides a secure way to manage inheritance for minors. Naming a trust as the beneficiary ensures immediate availability of funds for a child's benefit, ensuring financial stability.

Taxation and Estate Planning Strategies

Understanding the tax treatment of nominated property is key to successful estate planning:

  1. Inheritance Tax (IHT) Treatment:

    • Generally, these properties fall outside the estate for IHT.
    • Exceptions exist, especially for certain pension plans under Section 151 IHTA 1984.

  2. Potentially Exempt Transfers (PETs):

    • Some nominations can be PETs if made over seven years before death.

  3. Nil-Rate Band Interaction:

    • Detailed planning is essential to optimize the nil-rate band use with nominated properties.

Practical Considerations and Risks

Advising clients on nominated property involves being alert to several practical issues:

  1. Alignment with Will: Ensure nominations fit within overall estate planning goals.
  2. Regular Review: Nominations should be revisited periodically, especially after major life changes.
  3. Pension Scheme Rules: Different schemes have varying rules on nominations.
  4. Creditor Claims: In certain cases, these properties might still be subject to creditor claims.

Examples and Case Studies

Example 1: Life Insurance Policy

John names his wife, Mary, as the beneficiary of his life insurance policy. Upon John's death, the proceeds transfer directly to Mary, bypassing probate and ensuring immediate financial security.

Example 2: Pension Scheme

Sarah designates her daughter, Emily, as the beneficiary of her pension. Upon Sarah's death, the benefits are paid directly to Emily, avoiding probate and ensuring swift access to funds.

Case Study: Conflicting Nominations

In Re Weis (Deceased) [2017] EWHC 3617 (Ch), conflicting pension nominations led to a High Court resolution, stressing the need for clear, updated nominations to prevent disputes.

Advanced Considerations

Further advanced topics relevant to the SQE1 FLK2 exam:

  1. Cross-Border Issues: Handling nominated property in international estates, considering conflict of laws.
  2. Business Succession: Using nominations for transferring business interests, particularly family businesses.
  3. Trust Interaction: Combining nominated property with trust structures for enhanced estate planning.

Conclusion

Nominated property is a vital tool in estate planning, streamlining asset transfers outside the estate and potentially reducing tax liabilities, ensuring beneficiaries receive their inheritance quickly. Understanding its legalities, benefits, and challenges is essential for law students preparing for the SQE1 FLK2 exam.

Key takeaway points:

  1. Nominated property bypasses probate for direct asset transfer.
  2. Offers potential tax benefits, notably concerning inheritance tax.
  3. Involves specific legal formalities, capacity requirements, and revocability issues.
  4. Coordination with overall estate planning is crucial to maximize advantages and avoid disputes.
  5. Regularly review nominations to ensure alignment with the nominator's intentions.

Mastering the concept of nominated property equips future lawyers with crucial knowledge for both exam success and future legal practice in estate administration.