With domicile being incredibly fluid in this modern world, cross-border estates are becoming commonplace. Professional advisors therefore need to be more attune than ever to the quirks that crop up either side of that dividing line, one of which is legal rights.
Unlike our counter-parts South of the border, where a testator has freedom to dispose of their estate (subject to claims under the Inheritance Act 1975), Scotland has a form of forced heirship known as legal rights. If a person dies domiciled in Scotland, legal rights will operate to give a fixed share of the deceased’s estate to any spouse/civil partner and/or any descendants.
Despite being a uniquely Scottish concept, it does have multi-jurisdictional impact. Aside from the fact that parties entitled to legal rights may be domiciled anywhere in the world, legal rights is calculated with reference to the deceased’s net worldwide moveable estate. If domicile is uncertain and parties believe they might have a greater (or at least a fixed) benefit under legal rights, this can also lead to actions being raised to clarify domicile.
Unfortunately, the law on legal rights is not straightforward. It is derived from common law and many of the cases are now historic. As parties are often reluctant to litigate, many disputes are settled out of court, impeding the development of clear judicial authority on many key issues.
Practitioners will often come across clients seeking to minimise the entitlement where there is for example a “black sheep” child or an ex-spouse/civil partner delaying a divorce/dissolution. Even where families appear amicable prior to a death, true colours can soon emerge once parties discover they have an entitlement to legal rights. On death, this can lead to numerous contentious issues from agreeing what is moveable, to proper valuation, appropriate deductions, and so on.
There is often a misconception that assets held in trust are out of reach from legal rights claims. However, that is not the case and there are two main situations where assets gifted to trusts may form the basis of legal rights disputes. These are:-
- Where the assets are still deemed to be part of the testator’s estate and included in a legal rights calculation; or
- Where assets have been gifted to one or more children via a trust structure and these may need considered to equalise legal rights claims.
It is irrelevant what jurisdiction the trust is administered under, provided that the deceased is domiciled in Scotland at the time of their death such that legal rights apply. This could therefore cause issues to trustees throughout the UK and beyond.
Assets Deemed Part of the Testator’s Estate
From a Scots’ law point of view, in order for a gift to be validly made and the asset excluded from a legal rights calculation, the doner must have fully divested themselves of all interest in the asset, i.e. there should be no reservation of benefit.
This means that if a trust is settlor-interested, gifts to it will still need to be included in a legal rights calculation and there is various Scottish authority where such gifts to settlor-interested trusts have failed for legal rights purposes. That said, where the interest was merely a potential right of reversion to the settlor, one that never materialised, a Court has held the assets in such a trust to be excluded from legal rights.
If the trust has been set up to give the appearance of putting assets outside of the estate of the settlor, but the settlor retains full control such that the assets won’t transfer until after their death, this would also likely be caught by some form of “sham” arrangement in the relevant jurisdiction. Lord Ormidale in the Scottish case of Buchanan v Buchanan (1876) 3 R 556 put it best when he deemed such gifting “a mere bit of acting”, whilst in England the sham principles of Snook v London & West Riding Investments Ltd  2 QB 786 (CA) may apply.
If there is some form of sham arrangement, then the assets would be deemed to be held for the testator as bare trustee and form part of their estate (and any legal rights calculation).
Trustees acting for Scottish domiciled (or potentially domiciled) parties may therefore wish to take care when creating or transferring assets to trusts to ensure such issues can be avoided for the trustees in the future.
Gifts Used to Equalise Payments
There is a further concept known as “collation”, which aims to equalise what children (or other descendants) have received by treating certain lifetime payments as advances from their legal rights entitlement. It doesn’t increase the amount of legal rights available, but alters the division of the legal rights fund between the claiming parties to create equality. This too can therefore be a bone of contention.
For collation to apply there must have been a loss to the doner’s estate and a gain to the recipient’s estate. As such, gifts made to a trust where there is a subsequent payment to a legal rights claimant could, potentially, be brought back into account. It will very much depend on the facts and circumstances: how distinct the trustees were to the doner, whether the onward payment was pre-ordained, how independent the decision of the trustees was and so on.
This could cause issues for trustees where they are called upon to give evidence. Not only are there issues around requirements to disclose such information, but the trustees will owe a duty of impartiality to beneficiaries and if multiple parties are trust beneficiaries, the trustees could breach that fiduciary duty.
Advice for Practitioners
With contentious trusts and estates generally on the rise, practitioners should be mindful of seeking Scottish advice where there is any potential cross-border issue, particularly with legal rights. Whilst this article focuses on some of the problems for trustees, the risks posed by legal rights are numerous, so seeking advice will help the client, but will also protect the practitioners if issues do crop up later.