why make a will?
This article was written by the Society of Trust and Estate Practitioners
The only certain way to ensure that your spouse, partner or relative etc. inherits what you intend is by making a Will. If you die without having made a Will, the intestacy rules apply in an arbitrary manner, particularly if there are no children. This may lead to your spouse having to share your estate with relatives (e.g. brothers and sisters, aunts and uncles) whom you may never have intended to benefit. For example, Adam did not bother to make a Will, thinking everything would go to his wife, Eve. He left an estate of £300,000 and no children. He was survived by his wife and two nasty brothers. Eve is only entitled to the personal effects (furniture etc), £200,000 and half the balance giving her a further £50,000. The brothers took £25,000 each. Where the order of death between a husband and wife is uncertain e.g. an air crash certain unintentional consequences may arise. In England and Wales the law assumes that the younger survives the elder. Where a married couple without children die in such circumstances the effect could be that all the family's assets go to the younger brothers and sisters. In Northern Ireland where there is no such presumption, neither is deemed to have survived the other with the result that their estates cannot benefit from each other. This legal presumption can be varied by your will.
At present the intestacy rules do not recognise co-habitees. Therefore, if you live with your partner and die without having made a Will, your partner will not automatically inherit any of your estate. The estate will automatically pass to your surviving family (i.e. children, parents, brothers and sisters) and your partner will have to make a claim on the estate claiming financial dependence if appropriate. If you have children together with your partner then they will automatically inherit the estate, and both your partner and your children will have to get separate legal representation in order to fight for a share in the estate. This is expensive and obviously a situation that should be avoided and a simple Will is all that is needed to ensure that your partner and your children are provided for. The new Civil Partnership Act which came into force on 5th December 2005 will introduce a legal registration for same sex co-habitees that will put their relationship on par with married couples. Civil partners therefore will have the right to inherit if a partner dies without leaving a will. For Inheritance Tax (IHT) purposes civil partners will be able to make gifts or bequests to their partners with the benefit of the IHT exemption. The Civil Partnership Act however will not apply to non same-sex co-habitees with the inherent problems mentioned above remaining.
Home-made wills should be treated with caution and should only be used in the most straightforward of circumstances. Some homemade wills can be disastrous: for example omitting to cover the position if the main beneficiary does not survive to take advantage of the nil rate band referring to assets which are not owned on death. Moreover, have your Will drafted by a properly qualified professional - in particular look to a Member of the Society of Trust and Estate Practitioners.
You can provide for specific funeral arrangements (i.e. burial, cremation, or the use of your body for medical research).
You can safeguard your minor children's interests (i.e. children under 18 years of age) by appointing legal guardians to care for them if both husband and wife have died e.g. in an accident.
You must appoint Executors to deal with your estate in the event of your death and hold property on trust for example while a beneficiary is a minor. These Executors have a very important role to play and should be either business-minded family or friends and/or professional advisers. To some extent Executors can act before grant of Probate, which is when the probate registry sends out a legal document that allows one or more people to deal with the estate. Three is an ideal number made up of, say, two family members and a professional.
Through careful drafting, IHT can be saved on the estate that you leave behind. The effect of spouses leaving everything to each other is that under the Will of the first to die what is known as the "nil rate band" (£275,000 from 5 April 2005, rising to £285,000 from 5 April 2006 and £300,000 from 5 April 2007) will be lost. All the assets passing to the surviving spouse will have been covered by the spouse exemption in any event. The two estates will be bunched into one and the assets exceeding the nil rate band will be taxed at 40% (with some exceptions see in particular business and agricultural property on page 6). Thus, an estate consisting of a home worth £400,000 and a further £175,000 of other assets will pay tax of £120,000 (assuming the nil rate band is £275,000). Also do not forget that if you live together as "partners", rather than marry, the spouse exemption does not currently apply, unless you are able to register a civil partnership under the new Civil Partnership Act.
A simple form of discretionary trust in the Will can be used to ensure that you and your spouse each use your own available nil rate band which saves, at the stroke of the pen, £110,000 of IHT (the current nil rate band of £275,000 at 40%). The surviving spouse is normally included as the principal beneficiary so the arrangement should not give rise to any major difficulties. For example, assume that husband and wife each have an estate of £300,000 and that the husband dies first, wishing his widow to be the primary beneficiary. Under a commonly used, but wasteful alternative, the husband could give his widow his £300,000 estate (absolutely or by way of life interest) ensuring that no IHT was payable on his death. On her death, however, having regard to the bunching effect, other things being equal, IHT would be payable on an estate of £600,000 (currently £130,000 of IHT - over six times as much as need be paid). Why? Because only one nil rate band allowance is available on the two deaths - one having being wasted). Remember that there is at present no specific IHT exemption for the family home (as there is for Capital Gains Tax). Where your home is the major asset, the nil rate band discretionary trust can usually be adapted to cover the situation. It is however of vital importance that the nil rate band discretionary trust is drafted and implemented by a properly qualified professional who quite likely is a member of STEP - as the Inland Revenue is currently challenging a number of such trusts, which were not properly set up and administered.
Since 9th March 1999 and the Budget of 2004 lifetime gifts of the home or an interest in it have been made much more difficult. Great care needs to be taken where you plan on giving away an asset with the intention of retaining some sort of benefit from it (i.e. giving away a painting, but leaving it hanging in your house) as this may give rise to income tax implications or may not be an effective gift for IHT purposes.
Your Will can also direct your business interests (such as shares in the family company) and farming interests to those intended, e.g. a son or daughter who has come into the business. An important IHT relief can apply to these interests giving discounts of either 100% (i.e. complete exemption) or 50%. In most cases, it is only necessary for the individual to have owned these business assets for 2 years: contrast the 7 years for other "potentially exempt transfers". Therefore, why pay a substantial tax bill when this can be reduced through careful drafting in a Will? Such business/ agricultural interests can often be dealt with through the Discretionary Will Trust already referred to.
To own your home or other asset as so called "Joint Tenants" can be an inflexible method because the surviving co-owner automatically takes the whole. Therefore, a co owner cannot during lifetime or by Will give these assets to any other beneficiaries, for example to his children to utilise the nil rate band. The solution: have the asset held as so called "Tenants in Common" and if the holding is already as joint tenants it can easily be severed by a relatively simple procedure. (It may be possible to sever the joint tenancy by a variation referred to below).
Personal items such as jewellery, paintings and heirlooms can be dealt with in the Will and by reference to an informal letter of wishes.
You can benefit good causes by leaving a legacy or share of your estate to charity, free of IHT.
The consequence of dying intestate (i.e. without having made a Will) can prove both complicated and expensive. At a stressful time for your family and friends such worry, complications and expense can be avoided through making a correct Will.
Even if you have already made a Will it is important to keep this under review at regular intervals (at least every five years). The world does not stand still and in particular your family circumstances and relevant taxation laws will change.
Remember also that in a two year period following the death, the terms of a Will can be varied or disclaimed by an appropriate document entered into by the persons involved. This may, however, be prevented by changes in the law.
Making a Will need not be expensive. Most solicitors and STEP Members charge a reasonable fee for a straightforward Will. Where the Will achieves valuable tax savings this will normally be reflected in the fee.
Having read about the advantages of leaving a Will, can you afford not to make one?
©Society of Trust and Estate Practitioners