What Are Equitable Estates?

In the majority of cases, the handling of estates after the death of an individual is fairly straightforward. Generally, assets pass from the deceased to their spouse or children. Where no will exists this will normally be the pattern of inheritance anyway, as it is dedicated as such by law.

The law of estates becomes more complex, however, with the introduction of trusts. Trusts are frequently established to ensure that inheritance occurs in as tax efficient a manner as possible; it may well be possible to entirely avoid an Inheritance Tax liability through the effective use of such an instrument, as is discussed in articles elsewhere on this site. In order to fully understand the practical implications of trusts, it is necessary to understand the concept of the ‘equitable estate’ or ‘equitable interest’ and, therefore equity law itself.

The Law of Equity

At a basic level, the law of equity is that which is left to the discretion of a judge. A judge may make a decision ‘in equity’ in which they will decide what is fair in the individual case. As such, the concept of equity exists only in common law, as opposed to statute law; that is, to the law as outlined in court decisions and precedent as opposed to the written statutes.

Trusts and estates are the most illustrative examples of equity. When a trust is established, the beneficiary is said to have an ‘equitable interest’ in whatever property has been settled in trust. The trustee, on the other hand, has a legal interest; that is, they own the legal title to the property.

This has occurred more frequently as house prices have risen. In order to combat the inevitable Inheritance Tax (IHT) implications, many individuals are choosing to leave the legal title of their family home to their children, while making their spouse a beneficiary of that property.

The full IHT implications of such a decision are, again, explored elsewhere on this site. In these situations, however, the children have a legal interest in the property, while the spouse has an equitable interest.

Testing in Court

As trustees the children have certain responsibilities to the beneficiary, even though these might not be laid out in writing. The children must not, for example, refuse to allow the spouse to benefit from the property that has been settled – in this case, to live in the house.

If this were to happen, the beneficiary would be entitled to sue the trustees, and the case would likely be upheld as the judge would suggest that their equitable interest had not been considered. The importance of the discretion of the judge cannot be overestimated in these cases; the law of equity gives significant power to these individuals as they are bound by few steadfast rules.

Equity law is a potentially complex area. If you are considering establishing a trust, or if you are a trustee or beneficiary, it is vital that you have a working knowledge of this area of the British legal system. As such, you may find it helpful to seek independent professional advice before taking any action.