No Will? No Way! (Part 1)
A few weeks ago, I met with a new client in his City office to discuss his making a Will. He had a young family and was happily married.
He admitted that he had only made the appointment under pressure from his accountant as he thought the meeting was unnecessary as if he should die without making a Will, his wife would surely ‘get everything’ anyway.
Had he not signed a Will and died, his wife would certainly not have received ‘everything’. The current position is that if you die as a married person with one or more children but without a Will, your spouse will get the first £125,000 free of inheritance tax (‘IHT’) plus your personal chattels and an income interest in half of what is left of your estate. Your children will get the other half of what is left of your estate outright at 18 in equal shares and also the underlying capital of the surviving parents’ income share on that parents’ death. If you die as a married person without children then your spouse will get the first £200,000 free of IHT plus the personal chattels and half of what is left of your estate outright with any surviving parent(s) taking the other half of your estate outright.
For most married couples, with or without children, dying without a Will is likely to throw up unfortunate consequences both from a practical and a taxation perspective, not to mention the additional stress suffered by your spouse and other dependants by not knowing how you wished your assets to be distributed. My client for example is the main bread winner. His estate is currently valued at considerably more than the threshold below which an estate will have no IHT to pay(commonly known as the nil rate band (‘NRB’)), for 2008/9 it is £312,000. If an estate – including any assets held in trust and gifts made within 7 years of death – is more than the threshold, IHT will be due at 40% on the amount over the NRB. My client felt strongly that his wife should inherit everything outright rather than him only giving her an income interest. It was important to him that the family’s lifestyle should be maintained, at least in the short term, and that financial stress should not be heaped on top of the trauma of them losing a husband and father.
As my client wanted to leave his entire estate to his wife, under current legislation, there is also a full IHT exemption available to them on death as both are UK domiciled. Furthermore, as from 9 October 2007, spouses are now able to transfer their NRB allowance so that any part of the NRB that is not used when the first spouse dies, can be transferred to the surviving spouse on their death. What this means in practise for my client is that on his death there is no IHT to pay and when his wife dies, the unused proportion of his NRB may be added to her own NRB which will reduce the IHT liability on her estate when it passes to the children.
I asked what would happen, however, if both my client and his wife died in a common accident? Of course everything should go to the children he suggested. There are tax consequences of leaving assets to children in a trust under a Will, depending on what age they receive these assets. Put simply, a child can receive assets that are IHT free on the death of a parent or step parent under their Will or on intestacy so long as the child becomes absolutely entitled to that property at 18. If this is too young and an age entitlement of between 18 and 25 is more suitable, there will be a charge to IHT if the property leaves the trust when the child is between 18 and 25. The maximum charge in this case will be 4.2%. Should an age beyond 25 be more appropriate, then the child’s share in trust will be subject to a charge to IHT of up to 6% of its value every 10 years as well as an exit charge when the property leaves the trust. The option to keep the age contingency flexible is also worth considering like for example giving a child an income interest initially with capital passing at a later age, but this did not appeal to my client who favoured the simplicity and tax efficiency of his children receiving an equal share of his estate at 18.
My final question to him was whether had he considered what should happen to his estate should he, his wife and children die in a common accident. Unsurprisingly, he had not. We agreed that another meeting was necessary to cover this and other points that we had not had time to discuss like appointing guardians, executors and trustees, disposing of chattels and cash gifts. These will be covered in Part 2 of this article in the next edition of this newsletter.
My client recognised that it is the responsibility of every spouse and parent to make a Will and we therefore agreed that his wife would join him at the next meeting to make her own Will.
By Millie Brenninkmeyer
millie@wenstan.com