Residuary Gifts Including Residuary Trusts
| Author | Lesley King/Peter Gausden |
| Pages | 167-179 |
15.1 Need for an effective gift of residue
Often testators seem to give less thought as to who should take the residue of their estate than to pecuniary legacies and specific gifts. However, an effective gift of residue is essential to avoid a partial intestacy. Not only must testators have one or more beneficiaries in mind to take what is left of their disposable property after all other gifts, liabilities and testamentary expenses have been satisfied, but practitioners taking instructions should also push testators further to find out who they want to take in default should any of the initial residuary provisions fail for any reason.
15.2 Value of residue uncertain
The decision as to who benefits from residue will be dictated quite often by the potential value that residue has to offer. Whilst this can be estimated at the time the will is made, it is vital the testator understands that matters may change in the future. Once testators realise this, they may wish to structure the will differently.
EXAMPLE
Uncle Ted (a widower) has an estate worth £450,000. He has a niece, Linda and a nephew, Raj.
He makes a will leaving £100,000 to Linda and his residue to Raj. He calculates that after paying the legacy of £100,000, it will leave Raj with £350,000 subject to taking out what is needed to pay for his funeral, any debts and lawyer’s fees for administering the estate. Ted is happy with that because he thinks Raj is much more deserving than Linda, having helped him since his wife died. Ted’s wife’s transferable nil rate band ensures there will be no inheritance tax liability when Ted dies.
168 Wills: A Practical Guide
Uncle Ted dies 5 years after making his will and in the intermediate period:
(a) he has made some charitable gifts totalling £40,000;
(b) he has spent £250,000, mainly on residential care;
(c) since he had to sell his house and invest the proceeds, the value of his investments has decreased, giving rise to a loss of £10,000 against the value of his estate when he made the will.
Consequently, his death estate is worth just £150,000.
The legacy to Linda will be paid in full, leaving £50,000 in residue for Raj subject to the payment of funeral and administration costs.
Obviously, Uncle Ted could have reviewed his will in light of his changing financial position, assuming he had capacity to do so, but it might have been better if Uncle Ted had structured his will differently by either:
(a) doing away with a legacy to Linda and instead dividing residue (in effect his whole estate) so that Linda takes, say, a one-fifth share and Raj takes four-fifths. Doing this would have preserved the relative amounts received by each beneficiary in keeping with his wishes despite any fluctuation in the value of his estate; or
(b) giving a pecuniary legacy of, say, £350,000 to Raj and then leaving the residue to Linda. Of course, should Uncle Ted subsequently win the lottery, Linda as residuary beneficiary would reap the benefit of the increase in his estate.
Whilst not every change in estate valuation is predictable, some might be. In Uncle Ted’s case, whilst the fall in investment values may only have been a possibility, his future expenditure on residential care was probably foreseeable. Similarly, his intention to make charitable gifts might have been in his mind when he made the will and so questions about future plans for his money might have alerted his adviser.
15.3 Calls on residue
In determining the size of residue, testators should consider calls on their residuary property which can arise on death. Often, these arise from legal rules about which the lay client may have no knowledge so the will drafter must explain them. In other cases the calls may result from the way the will is drafted – in which case the will drafter must check that the result accords with the testator’s expectations and wishes.
15.3.1 Payment of unsecured debts and pecuniary legacies
Usually, the testator wants any unsecured debts and pecuniary legacies (see definition in section 55(1)(ix) of the AEA 1925 at para 13.2.4) paid out of residue and in many cases will make that assumption anyway. So, there should be either a gift of residue ‘subject to’ or ‘after’ payment of debts and legacies, or a gift of residue on an express trust with a direction to the executors and trustees to pay debts and legacies out of the proceeds of sale before the net amount is paid to or divided amongst the residuary beneficiaries.
A suitable form of wording is:
I give all the rest of my estate to my Trustees upon trust to sell or retain for so long as they in their absolute discretion think fit without being liable for loss and after payment thereout of my debts funeral and testamentary expenses and any legacies given by this will to hold the residue (‘my Residuary Estate’) as follows …
The term ‘testamentary expenses’ includes any inheritance tax payable out of residue (see, also, para 15.3.3).
If no provision is made expressly in the will, unsecured debts and pecuniary legacies are paid from residue anyway under rules in the AEA 1925. However, the application of these rules can sometimes cause uncertainty, particularly if a partial intestacy arises and so it is always better to make express provision.
15.3.2 Payment of mortgages and charges secured on specific property
Under section 35 of the AEA 1925 a mortgage or other debt charged on property which is the subject of a specific gift is borne by the beneficiary taking that property. However, this rule is displaced by a contrary intention and so the testator may require discharge to be made from residue (see para 14.2.3).
15.3.3 Payment of inheritance tax
Under section 211 of the IHTA 1984, any inheritance tax attracted by a gift of UK property not held on trust, or a pecuniary legacy payable out of such property, is payable as a general testamentary expense out of residue rather than by the beneficiary taking the gift. The same consequence follows if the legacy is expressly stated to be ‘free of tax’ for additional clarity.
170 Wills: A Practical Guide
The burden of tax on other chargeable property (e.g. foreign property, property passing by survivorship, lifetime gifts) falls on the property in question or the beneficiary acquiring it. However, this rule can always be reversed by a testator so that even this tax is payable out of residue as well. However, care is needed in ascertaining precisely which tax the testator intends being paid from residue and then drafting the residuary provision accordingly (see para 22.3.1, Burden of inheritance tax).
15.3.4 Relieving provisions
The testator may make it clear that...
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