Deeds of Variation: For the next generation

A Deed of Variation is an effective estate planning tool for beneficiaries of an estate who wish to bypass themselves in favour of others.

An adult beneficiary can redirect their inheritance to other people or charities and it will be as if the deceased made the redirected gift, rather than the beneficiary. This could be beneficial for inheritance tax (IHT) purposes because without a Deed of Variation it will be the beneficiary making the gift and if he fails to survive it by seven years there could be adverse IHT consequences that could have been easily avoided.

Aside from the IHT benefit that a Deed of Variation can provide, they also allow beneficiaries to reorganise their inheritances at potentially no real loss to the Exchequer, but of real benefit to families and younger generations.

For example, where a parent inherits under a deceased child’s estate, the parent may have no need for a windfall inheritance. The funds would swell their own estate giving rise to additional IHT or even a tax charge where one would not have existed if it were not for the windfall.

Using a Deed of Variation, the parent could redirect the funds to a younger generation, who could really benefit from the money. The IHT position on the estate of the deceased child is not changed, but the funds have efficiently moved on to those who have more use for the funds.

As with all things, there are some potential traps and pitfalls if the Deeds are not prepared properly. It must be signed within two years of the date of death. A redirected gift to get the tax benefit that ultimately ends up in the original beneficiary’s hands is likely to fail as a sham gift. Spouses need to take care because in some cases with transferable IHT exemptions it is better to not make a Deed of Variation. It is also possible to vary an entitlement into a trust, if desired, although other tax issues must be considered. The moral here is to get professional advice.