Survivorship Clauses

Since the introduction of the Transferrable Nil-Rate Band (TNRB), there have been questions on whether survivorship clauses should still be considered when drafting wills. The simple answer is yes, as the use of a survivorship clause can be beneficial in certain cases enabling the estate to save a lot of money, usually from inheritance tax (IHT). In this article, we will look at what effects including a survivorship clause can have on IHT.

The survivorship period is commonly construed as 28 days, 30 days, or one calendar month, though any period not exceeding 6 months is acceptable. If a survivorship period exceeds 6 months, then this has the effect of creating a settlement for IHT purposes. This is due to the operation of section 92 of the Inheritance Tax Act 1984 (IHTA 1984). During the survivorship period the assets are held on trust, but as long as the gift takes effect within 6 months the trust is ignored, and the gift is treated as though it had taken effect immediately. 

There are two main reasons that survivorship clauses are used: 

• To avoid the first estate passing through probate twice in quick succession, saving on administration costs and; 
• To impose some control over the eventual destination of assets. 

This control is only minimal, considering most survivorship clauses are expressed as 30 days. While these seem compelling reasons to use a survivorship clause, unfortunately, the potential negative consequences often outweigh the positives when we add inheritance tax (IHT).

Scenario 1) Unmarried couples

Inheritance tax is certainly the most beneficial reason to consider using a survivorship clause, especially for unmarried couples, as they do not benefit from spousal exemption or the TNRB. If their collective estates exceed the Nil-Rate Band (NRB), including a survivorship clause could potentially assist in avoiding IHT becoming payable or at least reduce the amount payable should both testators die in quick succession. Without a survivorship clause, then any gifts of the estate on the first death would need to pass to the survivor before they can be distributed to any further beneficiaries. This means the assets of the first testator will be calculated for IHT on the first death and again on the second death.

Example

John and Jane are an unmarried couple living together, and they have mirror wills, leaving everything to each other on the first death, and then to both of their siblings on the second death. John’s estate is valued at £350k while Jane’s estate is valued at £200k. John dies first, and his will has left everything to Jane absolutely. Unfortunately, Jane also dies shortly afterwards and neither of their wills contained a survivorship clause. Because John died first, his executors will need to transfer his estate to Jane’s because of this. Due to his estate being over the NRB, when his estate transfers to Jane’s IHT will be payable. Jane’s estate will now be over the NRB, too, because of the inheritance her estate has received from John, therefore, IHT will be payable, and some assets will be calculated for IHT and paid twice. If John and Jane’s wills contained a survivorship clause, IHT would have only made payable on John’s estate as it was only his estate that had an IHT liability, and the survivorship clause would have allowed his estate to bypass Jane’s as she would not have met the survivorship condition.

Scenario 2) Married Couples

In the case of married couples, the situation is the opposite of unmarried couples and including a survivorship may not be advisable. This can have IHT consequences if one spouse has assets above the NRB and one below, as it could mean that the benefit of the spousal exemption and TNRB is not fully utilised. If the survivorship clause is included and the testators both die in quick succession, under a survivorship clause, the estate of the person who died first would bypass the surviving spouse, so the NRB cannot be transferred to them.

Example

Using the example of John and Jane as before (except they are married now), if John died first with a survivorship clause in his will and Jane died shortly afterwards, IHT will be payable on his estate passing to his reserve beneficiaries. By not having a survivorship clause in the will, John’s estate could have passes to Jane’s which would have been free of IHT due to spousal exemption. When Jane’s estate passes to the reserve beneficiaries, her estate will also benefit from the TNRB from John with a total tax-free allowance of £650k. The allowance will be greater than the size of the estate (£550k) therefore there will be no IHT to pay.

Scenario 3) Uneven value of estates

Where one spouse has an estate above the nil rate band (NRB) and the other has an estate below the NRB, the survivorship clause can be detrimental as it will waste one spouse's NRB.

Example

Harold and Wendy are married and have wills, leaving everything to each other. Their children are the substitute beneficiaries. Harold’s estate is worth £600,000, and Wendy’s £300,000. They have full NRB and RNRBs available. They were involved in an accident in May 2019, and Harold died first, followed by Wendy five days later. Harold's estate would pass to their children if they had a 30-day survivorship clause. His NRB will be used against the first £325,000 passing from his estate to his children and £150,000 RNRB against his share of the property. He will pay £50,000 IHT. Wendy’s estate will also be passed on to the children, and there will be no IHT. If they didn’t have a survivorship condition, then the situation would have been better for them. Harold’s estate would have passed to Wendy IHT-free. Wendy would then pass £900,000 worth of assets to the children but would have had her full NRB, RNRB, and transferable allowances available so that she would have paid no IHT.

Scenario 4) Unknown order of death

A survivorship clause can also create an IHT problem if it overrides commorientes and the couple dies together in circumstances where it’s not possible to determine who died first. This is due to an interesting interaction between section 184 of the Law of Property Act 1925, which determines how the order of deaths is determined, and section 4(2) of the Inheritance Tax Act 1984, which determines how estates are valued for IHT when deaths are simultaneous. Under the Law of Property Act 1925, if two or more people die together, the younger person is presumed to have survived the older. However, the Inheritance Tax Act 1984 states that when two people die together, they are considered to have died simultaneously. 

Example

This has implications for married couples who leave their estates to each other. John and Judy are married and have wills, leaving everything to each other with no survivorship clause. Everything passes to their nieces and nephews in default. They have an estate of £600,000 each. They die in a car accident, and it can’t be known who died first. John is the eldest, so under s184, it is presumed that he died first, and his estate passes to Judy. There is no IHT on his estate, as the spouse exemption is available. Judy’s estate passes directly to the children as John has predeceased her. For IHT purposes, she and John are deemed to have died simultaneously, so her estate excludes the value of John’s estate. Judy has her own NRB and the transferable allowances from John’s estate. This means that £1.2m of assets have passed to their beneficiaries IHT-free. In this example, if their wills had included a survivorship clause, the IHT saving would not have been possible, and there would have been a combined IHT bill of £220,000! 

If a survivorship clause is used, the issue of override commorientes can be avoided by including a simple statement to negate the survivorship condition if the testator and their spouse die together in circumstances where it cannot be known who died first.

Scenario 5) All beneficiaries

If a beneficiary survives the testator but dies within the time limit set out in the survivorship clause, then the gift to them will fail. It will pass as though they had predeceased, so the beneficiary dying within the survivorship period never takes a vested interest.  Survivorship clauses are usually specific to particular gifts, commonly the gift of residue. More general clauses imposing a survivorship condition on all beneficiaries are also possible, though, for 

Example (clause)

“Every person who would benefit under this Will but who fails to survive me by 30 days shall be treated for the purposes of the devolution of my estate as having predeceased me.” 

Summary

It’s not fair to say that survivorship clauses have no valid uses in modern will drafting, as they’re still useful for unmarried couples without transferable NRBs. Consider, though, that where married couples are leaving their estates to each other and have the same default beneficiaries, there’s a good argument that a survivorship clause is unnecessary or, at worst, can cause issues in situations where they die together or in quick succession.

The use of survivorship clauses should be considered closely as they could save a testator's estate money, whether this is by including them or not. 

It is dependent on the circumstances of the clients. Generally, best advice is to include survivorship clauses for

A) all unmarried partners or

B) spouses when joint estates are below the NRB with little likelihood of exceeding it for IHT efficiency. 

and not including them for married couples.