About Wills and Trusts
What if I die without making a Will – Rules of Intestacy
The reason to make a will is to control how your estate is divided. But it isn’t just about money.
Your will is also the document in which you appoint guardians to look after your children or your dependents.
The place to start is to look at what happens if you don’t make a valid will (in legal terminology, if you die intestate).
Two administrators are appointed by the Probate Registry, a division of the High Court, to wind up your estate. They have the same function as executors (people you appoint to wind up your affairs), but they are appointed by the Court.
Any person may apply to be appointed as an administrator. To be appointed, an application must be made to the Probate Registry. Occasionally more than one person or one set of people apply. In that case a judge must decide who has priority. Generally it is clear from the relationships of individual people who has the best qualification.
Why Make a Will.
Coming back to the central question of why make a will, the reason is to (as far as possible) override the law that defaults if you die intestate. Reasons why you might want to do this are:
So as not to give your estate to an estranged husband or wife
Your surviving spouse comes top of the list of beneficiaries if you leave no will. So, if your marriage has broken down but no divorce has been finalised, your surviving spouse (now your ‘ex’) might inherit the whole or a share of your estate.
So as not to ignore your unmarried life partner
If you live with someone with whom you are not married nor in a formal civil partnership, and you die intestate, your life partner has no automatic right to inherit anything from you.
To allow your spouse or partner to keep living in your home
If your home makes up a high proportion of the value of your estate, your surviving spouse or life partner might be compelled to sell it to fund payments for tax or your bequests to children or other relatives.
To avoid paying more tax than necessary
Do you really want to give your money to the state?
At the time of writing this article, inheritance tax kicks in at £325,000. That includes gifts you have made in the seven years before your death.
The fact is that if you own your own house, and have a mortgage protection, endowment or life policy, and you are contributing to a pension, you could well find that under intestacy, your estate may well pay IHT on much of what you leave.
You probably know that what your spouse or civil partner (but not an unmarried partner) inherits from you is free from inheritance tax on your death, but in the longer term that is of no help. When he or she dies, the value will just make his or her estate even larger.
To control who doesn’t receive your estate
It can be easy to disinherit the people about whom you care the most, or who need your estate the most.
If you die intestate while you are married, your estate passes to your spouse. If he or she remarries, then dies intestate, his or her estate (which would include yours) would pass to his second wife or her second husband.
He or she might leave the estate to children (all from his or her first marriage to someone else). The remainder of your estate would be inherited by the children of someone you may have never met.
The only way to ensure that certain people receive certain gifts (particularly ones with sentimental value), is to create a will or gift the items well before you die.
To nominate who will look after any young children
This important issue cannot be covered entirely in your will, of course.
Ideally, you should consult with friends and relatives and obtain their acceptance of whatever decision seems best for your family. Your will remains the best place to record this.
Suppose both parents die in the same accident. Without this record, your children could be brought up by people you consider quite unsuitable, or even taken into care.
If you are an unmarried mother, you can appoint a guardian to your children by will. This is important because your children’s father does not necessarily have the legal powers of a parent nor become their guardian.
The Inheritance tax threshold is currently £325,000 (2020/2021) and many people are still getting caught in the trap of property inheritance tax as the threshold has not kept pace with the inflation of property prices, and so is affecting more and more people.
There is also an additional ‘main residence’ allowance which applies if a person’s home is given to their children (including adopted, foster or stepchildren) or grandchildren. This is set at £175,000 (2020/2021) and is added to the IHT threshold providing a total allowance of £500,000 (2020/2021).
When a relative dies and leaves an estate worth more than £325,000 (2020/2021) or £500,000 (2020/2021) if the ‘main residence’ allowance applies, families are required to pay tax on a proportion of the money and property left to them within six months. After that, they are charged interest at a rate of 2.6% (2020/2021).
However, there are ways to lessen the burden of property IHT.
When you die, it is likely that you would wish to leave as much as possible for your loved ones. Unfortunately this is often not as simple as you might believe. HM Revenue and Customs (HMRC) will apply 40% tax to the value of your estate over and above that of the current threshold.
No IHT is applicable if the estate is being passed to a spouse, as the law sees your property as one estate together, unless there is a will stating otherwise, so nothing is being passed from one to another, it is merely no longer held jointly.
Your estate could include more than you originally realise. It is often easy to dismiss IHT as something that may not affect you as your property may not be over, or much over, the IHT threshold. However with all your other assets, such as investments, life cover, bank accounts, as well as physical property such as cars, furniture and family heirlooms, many estates are considerably over the threshold without the individuals being aware of it.
For assets passed between spouses and civil partners, the nil rate band allowance will pass along with the assets. This gives a couple available allowances (nil rate bands) of up to £650,000 (2020/2021), which increases to £1,000,000 (2020/2021) with the addition of the ‘main residence’ allowance detailed above.
With effect on and after 21 March 2012, if a person enters into arrangements through which they acquire an interest in excluded property such that the value of their estate is reduced, the reduction will be charged to IHT as if that person had transferred assets of that value directly to a relevant property trust.
The assets settled in the offshore trust will cease to be treated as excluded property and will instead become subject to the relevant property regime.
These provisions will also apply to existing schemes or arrangements entered into before 21 March 2012, but only in relation to periodic charges and exit charges that arise on or after that date.
INHERITANCE TAX PLANNING, WILL WRITING, TRUSTS AND TAXATION ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY
There are several ways in which you can protect yourself and your family in the event of an untimely death.
When you put money or property in a trust, provided certain conditions are satisfied, you don’t own it any more. This means it won’t count towards your Inheritance Tax bill when you die.
A trust is a legal arrangement where you give cash, property or investments to someone else so they can look after them for the benefit of a third person.
So, for example, you could put some of your savings aside in a trust for your children.
There are two important roles in any trust that you are important to understand
- The trustee is the person who owns the assets in the trust. They have the same powers a person would have to buy, sell and invest their own property. It’s the trustees’ job to run the trust and manage the trust property responsibly.
- The beneficiary is the person who the trust is set up for and is usually unable to manage the trust assets for themselves because they are too young or they are not good at managing their own money. The assets held in trust are held for the beneficiary’s benefit.
Another potential advantage is that a trust is a way of keeping control and asset protection for the beneficiary; a trust avoids handing over valuable property, cash or investment whilst the beneficiaries are relatively young or vulnerable.
The trustees have a legal duty to look after and manage the trust assets for the person who will benefit from the trust in the end.
When you set up a trust you decide the rules about how it’s managed. For example, you could say that your children will only get access to their trust when they turn 25.
There are several types of trust, The kind of trust you choose depends on what you want it to do. Here are some of the most common options:
- Bare trust – this is the simplest kind of trust. It just gives everything to the beneficiary straight away as long as they’re over 18.
- Interest in possession trust – the beneficiary can get income from the trust straight away, but doesn’t have a right to the cash, property or investments that generate that income. The beneficiary will need to pay income tax on the income received. You could set up this kind of trust for your partner, with the understanding that when they die the investments in the trust will pass to your children. This is a popular trust structure used in the will of a person who remarries after divorce, but has children from the first marriage.
- Discretionary trust – the trustees have absolute power to decide how the assets in the trust are distributed. You could set up this kind of trust for your grandchildren and leave it to the trustees (who could be the grandchildren’s parents) to decide how to divide the income and capital between the grandchildren. The trustees will have the power to make investment decisions on behalf of the trust.
- Mixed trust – combines elements from different kinds of trusts. For example, a beneficiary might have an interest in possession (ie, a right to the income) of half of the trust fund. The remaining half of the trust fund could be held on discretionary trust.
- Trust for a vulnerable person – if the only one who benefits from the trust is a vulnerable person (for example, someone with a disability or an orphaned child) then there’s usually less tax to pay on income and profits from the trust.
- Non-resident trust – a trust where all the trustees are resident outside the UK. This can sometimes mean the trustees pay no tax or a reduced amount of tax on income from the trust.
In England and Wales, probate is the legal and financial process involved in dealing with the property, money and possessions (called the assets) of a person who has died. Before the next of kin or Executor named in your Will can carry out your wishes, they may have to apply for probate.
Oakhills IFA can offer advice and support to the Executor or Administrator of the estate. Alternatively, we can be appointed by you to handle the various aspects that need to be dealt with as part of the administration.
Probate (Estate administration)
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