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Who can inherit if there is no will – the rules of intestacy
When a person dies without leaving a valid will, their property (the estate) must be shared out according to certain rules. These are called the rules of intestacy. A person who dies without leaving a will is called an intestate person.
Only married or civil partners and some other close relatives can inherit under the rules of intestacy.
If someone makes a will but it is not legally valid, the rules of intestacy decide how the estate will be shared out, not the wishes expressed in the will.
For more information about what is a valid will, see Wills.
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Married partners and civil partners
Married partners or civil partners inherit under the rules of intestacy only if they are actually married or in a civil partnership at the time of death. So if you are divorced or if your civil partnership has been legally ended, you can’t inherit under the rules of intestacy.
Partners who separated informally can still inherit under the rules of intestacy. Cohabiting partners (sometimes wrongly called ‘common-law’ partners) who were neither married nor in a civil partnership can’t inherit under the rules of intestacy.
If there are surviving children, grandchildren or great grandchildren of the person who died and the estate is valued at more than £270,000, the partner will inherit:
- all the personal property and belongings of the person who has died, and
- the first £270,000 of the estate, and
- half of the remaining estate.
For example: Susan was in a civil partnership with Fang and they adopted a daughter called Jia. Susan died without leaving a will. Her estate is worth £450,000. After Fang inherits her share of £270,000, the estate that is left is worth £180,000. Fang can have half of this – £90,000.
If there are no surviving children, grandchildren or great-grandchildren, the partner will inherit:
- all the personal property and belongings of the person who has died and
- the whole of the estate with interest from the date of death.
Determining the Effect on the Partnership Tax Year
The tax year of the partnership closes for a partner whose entire interest in the partnership is terminated for any reason, including death, sale, exchange, or liquidation (Sec. 706(c)(2)).
Example 1: G was a minority partner in Q Partnership, a cash-method, calendar-year partnership. She died on Sept. 1. The distributive share of partnership income allocable to G’s interest through the date of death was $80,000; for the entire year, it was $120,000.
G’s death causes the partnership year to close with respect to her interest. Accordingly, $80,000 of income is included in G’s final income tax return, and the remaining $40,000 of income for the year is reported by the successor(s) in interest to G’s partnership interest. The $80,000 allocable to G also would constitute self-employment income reportable on G’s final return.
Allocating Distributive Shares of Partnership Income/Loss in the Year of Death
A decedent partner’s distributive share of partnership income or loss will be reported on the decedent’s final tax return, and the distributive share for the portion of the year during which the interest was owned by the decedent’s successor(s) in interest would be reported by the successor(s) in the same manner as in the case of other transfers of partnership interests.
Computing Self-Employment Income in Year of Death
A decedent’s self-employment income attributable to his or her share of partnership income for the year of death will be determined on the same basis as for years prior to death, i.e., based on the decedent’s status as a partner (general or limited, etc.) and the character of the income.
Determining Income in Respect of a Decedent
The determination of income in respect of a decedent (IRD) can have significant estate tax and income tax implications for the decedent’s estate and successor in interest. In general, IRD is income that was earned by the decedent but was not subject to income tax prior to the decedent’s death (Sec. 691). More specifically, IRD includes the following types of partnership income:
- Income earned by the partnership but not recognized for tax purposes as of the date of the partner’s death because of the partnership’s accounting methods (such as installment sale income and cash-method receivables), regardless of whether it was earned in the year of the partner’s death (Woodhall, 454 F.2d 226 (9th Cir. 1972); George Edward Quick Trust,444 F.2d 90(8th Cir. 1971)).
- Sec. 736(a) payments included in the income of a successor in interest to a deceased partner (Sec. 753).
Items constituting IRD are included in the estate of the decedent as assets and are subject to income tax when received by the estate or other successor in interest.
Example 2: G was minority general partner in Q Partnership, a cash-method, calendar-year partnership. She died on Sept. 1, when her distributive share of partnership income was $80,000. The distributive share of income for the entire year that was allocable to her interest was $120,000. G’s spouse was designated as her successor in interest, and there was no provision for liquidation of her interest.
The partnership year closes for G on her date of death, so the $80,000 would be includible in G’s final return and would not be IRD. The remaining $40,000 distributive share of income from the year of G’s death would be reported to her husband. Her share of any accounts receivable held by the partnership at the date of her death would be IRD and would be reported as income by G’s spouse when collected by the partnership.
Using Buy/Sell Agreements
Service partnerships, such as law firms and accounting firms.
often prohibit the interests of deceased partners from being transferred to anyone but an existing partner. To ensure this result, the remaining partners (as opposed to the partnership itself) may be required to acquire.
the interest from the decedent’s estate immediately after his or her death. Similar buy/sell agreements may be entered into by partners in partnerships engaged in other types of businesses to provide a market for a deceased partner’s interest or ensure the remaining partners can purchase a deceased partner’s interest for a price agreed upon by the partners at some earlier point in time.
In such cases, the partnership’s tax year ends with respect to the deceased partner on his or her date of death, and he or she is allocated his or her ratable share of the partnership’s income for the portion of the tax year occurring prior to that date. The annual proration or interim closing of the books method can be used to determine the amount of such income required to be reported on the decedent’s final tax return.
Note: Because the partnership interest must be included in the decedent’s gross estate at fair market value (FMV), a buy/sell agreement that results in the sale of the partnership interest for less than FMV may cause the deceased partner’s successor in interest (e.g., his or her estate) to receive an amount of cash that is less than the estate tax assessed on the transferred interest.