Will you or won’t you?

What does half of the UK adult population have in common with Abraham Lincoln, Kurt Cobain and Amy Winehouse?

The answer is probably more prosaic than you’d imagine: they died without leaving a will.

But the 54% of adults and 60% of parents in this country who, reportedly, have not created a will are removing themselves from important decisions about what happens to their own money and assets when they die.

What happens if you die without a will?

Dying intestate (the legal term for ‘without a will’) can raise problems, whatever your marital or relationship status.

Your estate will be divided up according to the rules of intestacy, which don’t take your feelings or family dynamics into account. Your worldly goods could be passed on either to people you’d rather didn’t have them, to people you hardly know or, failing that, to the state.

The rules are slightly different depending which part of the UK you live in, but consider the following if you die without leaving a will:

  • Your partner is not legally entitled to anything unless you’re married or in a civil partnership, however long you have been together
  • This means your children, grandchildren or other beneficiaries can, if they wish, legally cut your partner out of your estate — not only the money you leave but the home they live in, if it’s held in your name only
  • On the other hand, if you are married or in a civil partnership, your spouse or partner could inherit everything even if you’re separated (except in Scotland), leaving your children with nothing
  • If you die with no close relatives, everything could go to the government, who benefited to the tune of £8 million last year from people who died intestate.

However stable and ‘normal’ your personal life may be to you, families and relationships are more complicated than ever these days. It’s not unusual for the offspring of separated or divorced parents to have half-siblings in two different families as well as their own — more if there’s more than one separation down the line. And if relationships turn sour, it could be there are children and grandchildren you don’t even know about, all of whom could be entitled to a share of the estate.

There’s a useful guide on the YouGov website that helps you work out who will inherit if you die without a will.

But a will is about more than money. If, God forbid, you and your partner both die while your children are still young, a will allows you to nominate who will look after them and how the money from your estate may be used to support them before they are old enough to inherit in their own right

Where there’s a will, there is also tax planning

Your estate could be liable to more inheritance tax (IHT) if you have not been specific about distributing your assets, leaving whoever ends up inheriting your estate with an IHT headache which could see 40% of your assets being claimed by the government and clawed back from the beneficiary — probably not something you would have wanted.

An IHT liability can be mitigated by efficient tax planning, which focuses, perfectly legally, on keeping your taxable liabilities below the inheritance tax threshold (currently £325,000 for individuals).

  • Inheritance tax can be reduced by:
    giving away your assets — as well as gifting sums on an annual basis that are free from tax, you can give away any assets (like your home*) and, providing you survive for at least seven years afterwards, the recipients of those assets will not be liable for inheritance tax
  • placing assets in a trust — this will remove them from your estate, and so from an IHT liability (subject to the 7-year rule)
  • insuring against IHT and place the policy in a trust
  • passing on assets that have depreciated — these will not be liable to capital gains tax and, if they do start appreciating again, the gain (and potential IHT liability) will be for the recipient and not your estate
  • leaving a charitable legacy — many people leave money to charity in their will (encouraged not only by philanthropy but by initiatives such as Free Wills Month), and any charitable legacy you leave will be free of IHT. If you leave more than 10% of your residual estate to charity, the IHT liability on your remaining estate will reduce, too.

Don’t forget your pension

If you die before you are 75, your pension policy can pay out a tax-free income or lump sum to anyone who is classed as a dependent (including your spouse or partner and children).

But if you don’t have any financial dependents, other beneficiaries could receive a lump sum which would then form part of their estate and potentially be liable to inheritance tax when they die.

To avoid passing on this tax liability, you must nominate individuals you’d like to benefit from a tax-free income instead.

Taking care of business

Your untimely death, with or without a will, would be devastating for your family. But if you’re also a shareholding director of a business, it may create issues for your fellow shareholders, too.

If you die while still in post, your shares form part of your estate and go to your beneficiaries. And while you’ll want your family to benefit from the value of those shares, it’s likely neither you or your fellow shareholders will want unqualified or uninterested relatives having a controlling share in the business after your death.

You can avoid this by creating a business continuity plan, with life insurance arranged on the life of each of the shareholders to benefit the surviving shareholders. This will mean your fellow directors can rely on having enough funds to buy the shares back from your beneficiaries, while allowing your nearest and dearest to receive the financial value of your shares.

 

March is Free Wills Month, where participating solicitors will create or update a simple will for free. It’s backed by charities who hope you will take the opportunity to remember their good cause in your estate planning.

If you’d like to discuss tax and estate planning, please get in touch with Kevin Wood at Oak Four to arrange a no-obligation consultation.

*There are additional rules around gifting your home to others, and you should seek legal advice before taking any action to reduce your potential IHT liability.

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