Understanding your legal documents is essential. Modern Will precedents (standard clauses) use plain English and you should have no difficulty reading the layout or understanding the meaning of your documents. Legal jargon should be kept to a minimum but may occasionally be necessary.
In this blog, we explain the key legal terms used in estate planning.
Glossary of Key Legal Terms
Administration of Estate
Dealing with the affairs and the estate of a person who has died, including collecting their assets, paying their debts and ensuring that the terms of the Will or the Intestacy Rules are adhered to.
A gift which passes completely to the recipient, so that they can do with it exactly as they wish. The other usual way of making a gift, where the recipient does not have complete control of it, is a gift in trust.
The person dealing with the estate of someone who has died without a Will. The estate will be dealt with in accordance with the Intestacy Rules and only certain people are able to act as an Administrator.
The failure of a gift in the will because the property in question is not in the estate any more.
A decision made in advance by an individual to refuse particular medical treatment if they are not able to make the decision later. This is also known as a living will.
Agricultural Property Relief (APR)
Relief from inheritance tax for the agricultural value of some farms and farmhouses (the value if the land & buildings could only be used for agricultural purposes and not the open market value). Various conditions apply including a minimum ownership period.
The acceptance of one asset in whole or partial satisfaction of another legacy. For example, a person accepts a car in lieu of a cash sum that they have been left in a will.
A trust in which the beneficiary has the definite right to both the capital and the income of the trust property. Also known as a simple trust.
A person or organisation who will receive assets from the estate of the deceased.
Business Property Relief (BPR)
Relief from inheritance tax for businesses – a minimum ownership period applies and the business or interest in the business must fulfil the conditions.
Being able to make your own decisions. Someone without mental capacity is unable to make their own decisions due to an illness or disability. The test for mental capacity to make a Will is set out in the judgment of Banks v Goodfellow in 1827 and is still good law today.
Capital Gains Tax (CGT)
This is a tax that may be payable on disposal (for example when you sell an asset) if you make a chargeable gain. Usually, you have made a gain if the asset is worth more at disposal than it was when you acquired it. A disposal is not only a sale for money’s worth. You will only pay CGT on capital monies ie monies that you received that do not form part of your income. The tax applies not to the value of the asset but to the increase in value.
Assets of a person not including land (which includes residential and commercial property), for example jewellery, ornaments, clothes, cars, furniture and so on.
A document that may change, modify, delete, extend or add to a Will. Carisma Wills does not use codicils. It is simpler to create a new Will with the required amendments.
A gift in the will that is expressed as taking effect only if a future event takes place such as ‘if and when the child attains 18’. The gift only takes effect if the child reaches the age of 18.
Court of Protection
This is a Court that can make decisions in relation to the property and affairs and personal welfare of adults (and children) who lack the mental capacity to make decisions for themselves. The Court has the same powers as the High Court and can make a wide range of decisions and orders including the appointment of Deputies or a declaration as to whether a person has capacity. The Court works closely with the Office of the Public Guardian – see below.
Deed of Variation
A document that can vary the division of a person’s estate after they have died either by changing their Will retrospectively or altering the persons entitled on an intestacy (where there is no Will or the beneficiaries no longer exist). This must be done within 2 years of the person’s death to be effective for Inheritance Tax Purposes.
Formerly known as Receivership, this is the process by which the Court of Protection appoints a Deputy to deal with the affairs of a person who has lost mental capacity (i.e. is not capable of managing their own affairs) and did not have an Enduring or Lasting Power of Attorney in place. The Office of the Public Guardian keeps a register of Deputies and supervises the Deputy as they manage the affairs of the person who does not have capacity. Deputyship can relate to personal welfare decisions as well as to the management of property and affairs.
Disabled person’s trust
A trust for someone who suffers from a mental or severe physical disability. This sort of trust attracts a favourable tax treatment if it meets certain conditions.
(a) The formal ending of a marriage or civil partnership.
(b) The formal closure of a company or partnership.
Distribution of the estate
The process of paying or handing over the estate of the deceased to the people who are to inherit it.
HMRC define Domicile as follows:
Domicile is not the same as nationality or residence. Your domicile is decided under the general law, which means it must be interpreted according to previous rulings of the courts. Questions of domicile can be complex but broadly speaking, you have your domicile in the country that is your ‘real’ or permanent home which, if you have left, you intend to return to.
A trust where the Trustees can choose which beneficiaries (if any) should receive income and or capital. They are a flexible way of setting property aside for the benefit of one or more persons.
The property and assets of the person who has died.
This is the personal representative (see below) who has been appointed by the Will or Codicil.
Grant of representation
The authority given by the court to a person or persons to deal with the estate. It comes as the grant of probate or letters of administration.
A guardian will have parental responsibility for any child under the age of 18). Parental responsibility means the legal authority to act in relation to a child on such matters as medical care, where they are to live, their education, what surname they should be known by, etc. Guardians may be appointed by a parent who has parental responsibility, an existing guardian or the Court. If you name a guardian in your Will the appointment may not take effect if your child has a surviving parent with parental responsibility.
Inheritance Tax (IHT)
A tax on the value of a person’s estate on their death and also on the value of certain gifts made by an individual during their lifetime. You may be subject to Inheritance Tax on all your assets everywhere in the world if you are domiciled in England & Wales. Inheritance Tax also applies to most types of trusts and may be charged when assets are added to or leave the trusts and on the ten-year anniversaries of the trust’s creation.
Inheritance tax threshold
The nil rate band of inheritance tax.
Interest in possession
A right to the income from a trust.
The rules that govern where a person’s estate is to pass and who can deal with the estate in the absence of a Will.
Children, grandchildren, great-grandchildren and so on.
A joint tenancy means that each of the owners (more than 1) will have an equal share in the property. If a property is held in this way, the principle of survivorship will apply. This effectively means that on the death of the first person, the share of the property they owned would pass automatically to the surviving owner and would do so outside the terms of any Will. The land would still be part of the estate for Inheritance Tax purposes but could not be dealt with by the terms of the deceased owner’s Will.
Lasting Power of Attorney
A Lasting Power of Attorney can relate to your property and affairs or your personal welfare i.e. decisions about your medical treatment. In order to make a Lasting Power of Attorney you must have mental capacity to do so which must be certified by a certificate provider. An ordinary General Power of Attorney will come to an end if you lose your mental capacity but a Lasting Power of Attorney will not.
A legacy is a specific gift left within the Will to an organisation or individuals. There are different types of legacy:
A gift of cash.
This is a gift of an object, for example a gift of a property, shares, personal belongings etc.
Letter of wishes
A document that accompanies a will and sets out the testator’s wishes and guidance to their executors on what should happen after their death. A letter of wishes is not legally binding.
Letters of Administration
A grant of representation where there is no valid Will, or there is a Will but no Executor appointed.
A right to receive the income from an asset for the rest of the beneficiary’s life or until the life interest is terminated. If the life interest relates to a property, the beneficiary will either be entitled to live in the property or to receive the rental income from it.
This is a person who is entitled to benefit from a trust during their lifetime. They cannot have the capital in the trust fund; they are entitled only to the income or enjoyment of the property, for example, if the trust fund contained a house the beneficiary would be entitled to live there.
A gift made by the deceased before they died. A substantial lifetime gift made less than seven years before the death will have to be added back to the value of the estate.
Office of the Public Guardian (OPG)
Formerly known as the Public Guardianship Office (PGO) this Office supports the Public Guardian in helping people who do not have the mental capacity to manage their own financial affairs by setting up a register of Enduring and Lasting Powers of Attorney and a register of Deputies. The OPG supervises Deputies. The OPG works closely with the Court of Protection, see above.
The person responsible for administering the estate of the deceased. They may be the Executors or Administrators of the estate.
Potentially Exempt Transfer (PET)
This is an outright gift lifetime by an individual to another individual or certain types of trusts. If the giver (donor) survives the gift by seven years it will become completely exempt from inheritance tax – it will be outside the donor’s estate for the purposes of calculating inheritance tax.
Power of Attorney
This a formal document giving legal authority from one person (the donor) to another (the attorney) so that the Attorney may act on behalf of their principal. Power of Attorney may be an ordinary General Power or it may be a Lasting Power of Attorney.
Enduring Powers of Attorney (EPA) were replaced by Lasting Powers of Attorney in 2007. Unregistered Enduring Powers of Attorney can still be registered with the Office of the Public Guardian. EPAs do not have the same safeguards for the donor as an LPA and do not appoint replacement attorneys.
The process of proving that a deceased person’s will is valid and then giving the deceased’s personal representatives the right to deal with their assets and estate. If there is no will, the process of probate ends with the grant of letters of administration.
A will made by an individual in active military service, so that it can be made and validly executed quickly. It can be either written or “nuncupative” – which means that it is spoken in front of a credible witness.
The remainder of the estate of the person who has died after all their debts have been paid and any specific gifts they make under their Will have also been paid.
Revocation (of Will)
Cancelling an existing Will can happen in two ways: either by destruction – tearing, burning or otherwise destroying the Will; or by executing (signing in the presence of two adult witnesses) a new Will.
The Testator must have mental capacity to revoke the Will (or Codicil). Revoking a Will means that any previous Will is resurrected. If there is no previous Will then the person revoking their Will becomes intestate. Most new Wills contain an explicit clause stating that they revoke any previous Wills. There are formal requirements for revocation of a Will as there are for making a Will.
The person who creates a trust and puts assets into it. When the trust is created by a will, the settlor is the testator.
Severance of Tenancy
The document required to change the ownership of a property from Joint Tenants to Tenants in Common.
A will made by the Court of Protection for a person who does not have testamentary capacity to do so for themselves.
Substitute executor (or trustee or guardian)
An individual appointed to act if the first appointed executor(s), trustee(s) or guardian is unable or unwilling to do so, or has died before the testator.
Tenancy in Common
The land can be separated into different shares and does not have to be owned equally between the parties. In this situation, on the death of an owner of the land, the share of property owned by the deceased proprietor will pass according to the terms of their Will. Therefore, it can be referred to specifically as a legacy or could fall into the residue of the estate and be distributed accordingly.
The costs of obtaining the Grant of Probate or Letters of Administration and of administering the estate.
The person making a Will (male or also used for all genders)
A female person making a Will
An arrangement under which the legal ownership of property or assets is held by one person (the trustee) for the benefit of another or others (the beneficiaries). The person setting up the trust is the settlor. Wills very frequently create trusts for the distribution of the estate, but they are also very common to protect assets when someone wants to pass on the benefit of property without totally relinquishing control over it. A trust created by a person to be managed during their lifetime is a trust inter vivos.
One or more persons hold property for the benefit of others (the beneficiaries). A Trustee is the person who is acting in the trust and holds the property for the benefit of someone else.
The formal document by which a Testator/Testatrix confirms their wishes as to the division of their estate on death.
A person who signs a document but is not party to it. You cannot leave your witnesses (or their married or civil partners) anything in your Will.
One final top tip:
If you can’t understand the terminology, layout, meaning or legal jargon in your Will you should ask the legal practice that drafted it to give you an explanation in writing.