The Will, the Farm and the Missing Beneficiary
You are instructed in the administration of the estate of Margaret, who died last month. Her will leaves a life interest in the family farm to her second husband, Derek, with remainder to her three children from her first marriage in equal shares. The farm is worth £1.2m and is subject to a mortgage of £250,000. Margaret's estate also includes £80,000 in savings and a small share portfolio. Derek is 78 and in poor health. One of the children, Sarah, has not been in contact for 12 years and her whereabouts are unknown. The other two children want the farm sold now and the proceeds divided. Derek wants to remain in the farmhouse. The estate's Inheritance Tax liability is estimated at £180,000, due in six months.
1. Explain the interests created by the will and whether the farm can be sold now.
Read the worked answer
The will creates a life interest for Derek in the farm, with the remainder to the three children in equal shares. Derek's interest is a qualifying life interest for IHT purposes; the farm will be treated as part of his estate on his death unless the interest is terminated. The children's remainder interests are vested, subject to Derek's life interest. The farm cannot simply be sold now to divide the proceeds: a sale would either require Derek's consent to surrender or commute his life interest, or a court application. The trustees have powers of sale only if the will or statute confers them, and even then a sale of the whole farm would defeat Derek's right to occupy the farmhouse. Advise the two children that their wish to sell now cannot override Derek's life interest; the practical routes are negotiation, commutation, or an application to court.
2. Sarah cannot be found. What steps are required before the estate can be distributed?
Read the worked answer
Sarah is a beneficiary with a vested remainder interest, so the trustees cannot safely distribute her share without either locating her or obtaining protection. Take reasonable enquiries: last known address, electoral roll, tracing agents, social media, and enquiries of known relatives. If she remains missing, consider an application to court for directions, or a Benjamin order permitting distribution on the footing that she is dead or has not survived, which protects the trustees. Alternatively, retain her share in the estate pending resolution. Do not distribute the residue without addressing her interest; doing so risks personal liability for the trustees. The costs of tracing are properly estate expenses.
3. How should the IHT liability and the mortgage be funded, given Derek's position?
Read the worked answer
IHT is due six months after the end of the month of death; interest runs on unpaid tax. The estate has £80,000 in savings plus the share portfolio, which may be insufficient to meet £180,000 and the mortgage. The farm is mortgaged at £250,000, and the life interest means the farm is not readily realisable without Derek's cooperation. Consider paying IHT by instalments if the farm qualifies as relevant business or agricultural property, or by using the savings and portfolio first. The mortgage must be serviced from estate income or capital; if the farm generates income, that income belongs to Derek as life tenant, not to the estate. Advise the trustees to apply for a grant promptly, fund the IHT from available liquid assets, and negotiate with the lender. A sale or charge over the farm may be necessary, but only with Derek's consent or court approval.