London based Wilder Coe LLP Chartered Accountants look at the current issues surrounding probate and argue the case for reform and regulation.

With the Institute of Legacy Management estimating recently that fraud in the area of estate management could amount to as much as £150 million, clearly there are issues which need addressing. Much of these can be attributed to the unsatisfactory training and regulation of those practitioners involved in Wills and estate planning which lead to poor service for consumers and support for professionals

We have come across an absurd number of wills and trusts which have been badly drafted, in some instances completely missing their initial objective. After all, properly drafted documents are capable of saving tax and, whether voiced or silent, this is what the consumer is essentially hoping to gain when they employ the services of a practitioner. Unfortunately a similar situation arose when we dealt with Estates in Administration.

Will Drafting is one of the key areas of probate and if this is handled correctly, the procedures which follow will inevitably be simpler. We recently dealt with a case where Turner paintings were among the assets of what was a very large and complex estate with a significant tax bill attaching to it. The Turners were already housed in an Art Gallery and it was the wish of the testatrix that they would remain in the public domain. The existing Will had been drafted and signed within the two years immediately prior to our review and, whilst it recognised the wishes of the testatrix, no attempt had been made to manage the inheritance tax liability attaching to the estate. Following Wilder Coe LLP guidance, a new will was drawn up making it possible to offer the Turners to the state using the Heritage Property provisions.

The value of the painting was sufficient to meet the tax liability on the Estate and, with the paintings already housed at a Gallery, there were no difficulties attaching to the requirement to have them available to the public. Sadly, the testatrix died within six months of the new will being put in place.

Steps had been taken to ensure that her doctor was on hand when the will was signed to certify mental capacity and, to our relief, probate was granted without difficulties and the state accepted the paintings promptly. The estate was settled quickly (within 18 months) and the beneficiaries walked away with their inheritance intact.

Had the will not been amended when it was, the clear wishes of the testatrix would have been met but tax the opportunity to minimise tax would have been completely missed..

In July 2003 Sir David Clementi was commissioned to produce a Report on the Review of the Regulatory Framework for Legal Services in England and Wales. In March 2004 he issued a consultation paper which sparked a flurry of responses, over 250 in total, from various professional individuals, law firms and other interested parties, not the least of which were the professional governing bodies.

Summing up in his Final Report, Sir David noted there was strong evidence for the need for major reform to:

• the regulatory framework which, as described in the Government’s own Scooping Study, is flawed
• the complaints system which needs to change to benefit the consumer
• the types of business structures permitted to provide legal services to the consumer

The good news is the government have responded positively to the report and are actively working with the professional bodies to address the issues highlighted by the Clementi Report.

The Society of Trust and Estate Practitioners (STEP) was among the list of respondents, stating that the consumer suffers because unqualified probate practitioners operate widely. The majority of ‘average’ lawyers under current regulation are legally qualified to apply for the Grant of Probate and while they are required to undertake specific probate training, they are not required to undertake any probate continuing profession development. The available training such as the STEP Diploma in Trusts and Estates is only voluntary. Once in possession of the Diploma, the practitioner must maintain a minimum level of hours of relevant training to retain continuing membership of STEP.

So why is such stringent regulation needed? Wills are executed in good faith can leave the executors with the problem of dealing with poorly drafted clauses and, at worst, invalid Wills. Invariably, the executors lack the appropriate knowledge to deal with the difficulties facing them and resort to Estate administrators for assistance. Failing to ensure that service providers, at each step of the process, are appropriately qualified can lead to disappointed beneficiaries, either because the intended legacy in their favour has failed due to a badly drafted Will or because legal (including tax) and administrative costs have depleted the estate to such and extent that there are insufficient assets. Frequently large sums of money and very valuable assets are involved with corresponding large tax liabilities. The degree of trust placed in those who deal with the work is high.

STEP, in response to the consultation process submitted evidence that estate fraud and incompetent will writing is increasing, noting ultimately that it was disappointed by the omission of Estate Administration in the Final Report as they had hoped that Clementi would help make a case for regulation that would impose higher standards of professionalism and better protection for the consumer.

The commonest areas of complaint and incompetence are:

• Severe delay as the result of over-work or under staffing is probably the single most common cause of complaint. This can give rise to financial loss by virtue of missed tax deadlines and missed good opportunities for the sale of investments, or for the investment by beneficiaries of the money to which they are entitled.
• A lack of tax knowledge is probably the second biggest area of concern. Tax relief’s which are frequently overlooked and, if not claimed will not necessarily be volunteered by HM Revenue and Customs are: quick succession relief for Inheritance tax (IHT), loss-on-sales (IHT), cost of realising foreign assets (IHT), loss from expenses of sale of freehold and leasehold property (Capital Gains Tax (CGT)) and cost of obtaining probate (CGT)
• An incorrect application of the rules relating to the allocation of the inheritance tax liability between the beneficiaries when some but not all are exempt from IHT, e.g. charities.
• A failure to appropriate assets to beneficiaries before selling in order to maximise available capital gains tax exemptions.
• An incorrect application of the rules relating to the allocation to beneficiaries of different categories of income in the correct tax year.
• Over-charging. Since most practitioners charge on the basis of time spent, it follows that the inefficient practitioner will often end up charging more as they will spend more time on a job than someone who knows what they are doing.
• Poorly presented accounts
• Accounts that do not balance or have to be “adjusted” in some way.
• Failure to identify correctly what is due to income and what is due to capital, and to know when accountancy rules differ from those for tax purposes, e.g. accrued income.
• Allocating the residue to expenditure incurred on assets that have been specifically bequeathed.
• Not preparing estate accounts in order to save costs. This in itself is not wrong but, unless great care is taken, it can result in incorrect returns being made for tax purposes.

There are numerous case studies to demonstrate the problems that currently surround estate and probate administration. Even those which appear straight forward are taking far too long to resolve. Case study A is one such example.

In this straightforward, albeit valuable, estate (no contentious matters, nor unusual assets were involved), it took more than a year for the professional executors to even obtain the Grant.

Even before the Grant had been issued therefore, the deceased’s stocks and shares had unfortunately plummeted in value in the wake of September 11th (one holding had fallen by more than £1m). The residuary beneficiaries were unaware of this because, despite being continually pressed for details, it was a further seven months after the Grant had been issued before the executors provided them with any information at all regarding the assets of the Estate.

In another case, the Beneficiary was left a pecuniary legacy of £5,000 in April 1997. The professional executors failed to respond to the beneficiary’s enquiries. Eventually, in September 2000, the beneficiary was forced to appoint a separate firm to act for them.

The executor’s finally admitted that they had paid out the residue without having paid the pecuniary legacy. They promised to correct the position and the beneficiary agreed to accept the legacy plus interest calculated to 11 October 2000. In September 2002, the beneficiary’s solicitor received a cheque for £5,000 drawn on the private account of one of the partners. In November 2002, a further cheque for £1,350 was received relating to interest, and, although this was not enough to cover more than four years’ statutory interest, the beneficiary accepted the position. After deducting their legal costs in pursuing the matter totalling £1,607.35, the beneficiary ultimately received a total of £4,742.65, five and a half years after the testator had died.

Wilder Coe LLP believe that STEP plays a vital role in minimising fraud relating to wills and probate. From the very beginning the Society, and, indeed, in many ways the whole reason for its existence, was to provide a forum in which lawyers, accountants and bankers all working within the field of Trust and Estate Practice could work together. Each of the professions had specialists, but there was no forum for members from three distinct professions, essentially involved in similar work, to come together.

In June 2005 Lard Falconer of Thoroton (Constitutional Affairs Secretary and Lord Chancellor) at the St Paul Traveler’s Conference: On Risk 2005 stated they would publish a White Paper, follow this with the necessary legislation and work with those involved to make these new ways of working a reality.

While this is good news, clearly reform of the legal system is going to be a slow process, the emphasis being to get it right and to get it right first time. In the meantime, consumers should take reasonable steps to ensure that the advisors that they appoint are appropriately qualified to provide the services sought.

Wilder Coe LLP is a 16 partner firm based in London. The firm covers a full range of accounting and business advice services

For more information call 020 7724 6060.