Simple is good, like motherhood and apple pie, as long as it accurately reflects your wishes.
But in a society where family structures are getting more complex, a “simple” will often does not achieve what is required. The intestacy rules, which apply if you have no will in place, are even less likely to reflect your wishes.
Under the current rules your assets would go to your spouse and possibly your children at age 18 (not just your spouse, unless the estate is less than £250,000) or, if you have no children, to your spouse and parents, and, if you have no spouse, children or parents, to your brothers and sisters – even those you do not get on with.
The rules will be changing this October. The spouse’s life interest in half of the residue has been changed into an outright interest, and he or she will get everything if there are no children. But the new rules are still very restrictive and do little to reflect modern family life and asset values.
Nothing goes to a life partner unless he or she is a spouse or registered civil partner, and nothing to charity. The rules do not allow for the possibility of your child not being capable or responsible enough to inherit funds at 18. They do not ringfence funds against the possibility of means-tested benefits, care fees or financial provision on divorce, and they do not allow you to choose who deals with your estate.
The new rules also do not allow for ensuring that funds left to your parents do not get eaten up in inheritance tax on their death, or in care fees during their lifetime. And they do not allow for you and your spouse dying together. If your spouse is younger than you, he or she may inherit all of your assets and then pass them on to his or her own family, with nothing going to yours.
Perhaps most importantly for those with minor children, the new intestacy rules do not appoint a guardian of your choice. So let us look at how a will can fill the gaps.
Cohabitee: A cohabitee (the common-law spouse) has no automatic status in English law. If your will does not benefit your partner, he or she would have to make a claim to the court to receive anything. They do not benefit from the spouse exemption for inheritance tax purposes, so leaving funds to them outright or in a flexible trust makes no difference to the IHT bill on the first death but will make a significant difference to the tax bill on the second death. The funds in a flexible (discretionary) trust will not aggregate with the survivor’s estate, but he or she can still have full access to them.
Second families: Using a revocable life interest trust in your will if you wish to give funds in excess of the nil-rate band to your children – even if your second spouse survives you – ensures that the spouse exemption is available on the first death. When the life interest is revoked, shortly after the death of the first to die, the funds are passed to the children, and if the surviving spouse lives for seven years after the revocation, the funds pass to the children tax-free.
Minors: You may feel that if your children were to receive significant funds at 18 (the default age) they would not be able to cope with them. There is a minor tax downside of keeping funds in trust for a child after the age of 18, but many parents take the view that this is outweighed by the dangers of “too much, too soon”.
Alternatively, you can leave a letter of wishes to the trustees of the funds, explaining circumstances where you would like funds to be given out earlier – for education, for example – by the trustees before the child reaches the age when they would be entitled to receive the funds.
Children with disabilities: You may wish to benefit a child who is not capable of looking after his or her own funds. A flexible will, giving trustees discretion over the funds, enables them to deal with the funds and use them for the beneficiary’s benefit, without being brought into account in calculating means-tested benefits.
Similar trusts can help avoid funds being treated as a matrimonial asset in divorce proceedings.
Pilot trusts: Since flexible trusts can give rise to a 10-yearly charge of the amount in the trust that exceeds the nil-rate band, there is the option of dividing the estate equally between lifetime trusts (pilot trusts), which can each have their own nil-rate band. HM Revenue and Customs is reviewing this, but it is not clear yet whether any changes it makes will be retrospective. It may be worth setting up pilot settlements now, if any change is not backdated.
Charitable giving: If you wish to make gifts to charity on your death – perhaps to give a cushion to charities to which you have been giving regularly during your lifetime – you will need to do so by will.
The 36 per cent rate of IHT that applies to your non-exempt estate (assets not going to your spouse or to charity) is to incentivise charitable giving of 10 per cent or more of one’s estate. There is a tipping point where, if you were going to make a gift to charity in any event, the increased amount given is offset by the saving in IHT.
Although the courts have indicated that a gift from a residuary beneficiary by a deed of variation to charity does not benefit from Gift Aid, there are ways, through careful drafting of a will, to enable what is known as a “double dip”. This means getting both IHT exemption for the charitable donation and Gift Aid relief for income tax purposes.
Gifts to family: If you wish to make gifts to your parents, you may wish to consider doing so through a flexible trust so that the funds do not form part of their estate for IHT or, say, care fees. Including a survivorship clause in your will can help ensure that if you die only a short time before your spouse, your assets pass in accordance with your wishes, not theirs.
Appointing a guardian: If you do not appoint a guardian to look after your children in the event of your death, the court will. The need could arise as a result of you and your partner dying at the same time. But with an increasing number of children born to parents who are not married, who are raised in same-sex couples or looked after by step parents, it is important to be clear about the rights the person you would want and expect to look after your child would have, and to supplement them if necessary by a provision in your will.
Leaving it to chance as to who would look after your children if you were not there, or to fate to decide who benefits from your assets on your death, may suit you. If not, do not rely on the intestacy rules – make a will.
Susan Midha is a partner in the London office of law firm Adams & Remers
Key points
Many people know they need to make a will and are looking for something simple.
A cohabitee (the common-law spouse) has no automatic status in English law.
If individuals do not appoint a guardian to look after their children in the event of their death, the court will.
It is important for parents to be clear about the rights the person they would want to look after their child should have, should something untoward happen.
