WILLS AND TRUSTS

Every adult should have a Will to ensure that they have control over what happens to their assets and to ensure that their families are sufficiently provided for. Wills can also be used to help minimise your estates liability to inheritance tax upon your death. Further making one Will in your lifetime may not be sufficient. Wills should be regularly reviewed as circumstances change and certain events can lead to the whole Will or parts of the Will being invalid. This article sets out briefly to explain what could happen if you die without making a Will, particular circumstances in which you should review your Will and how simple tax planning can be implemented by use of the Will. We further explain how establishing trusts in your lifetime can also enable you to control your assets (during your life and after your death) and minimise your tax liability.

What Happens If You Die Without Making A Will?

If you are married with children your spouse will receive your personal chattels a statutory legacy of £125,000 and a life interest in half the remainder of the estate. The capital of the spouse's half of the estate (following their death) and the other half of the estate will be given to your children absolutely.

If you are married without children your spouse will receive the personal chattels a statutory legacy of £200,000 and half of the remainder of your estate absolutely with the remaining half being given to your parents and if they predecease you your brothers and sisters of the whole blood (or their children if they predecease you). If no parents brothers or sisters of the whole blood or nieces or nephews survive you everything will go to your spouse.

If you are not married but have children then everything will go to your children. If you have no children then everything will go to your parents and if they are both deceased then to your brothers and sisters of the whole blood and if they predecease you to their children in substitution and if you have no brothers and sisters of the whole blood to brothers and sisters of the half blood and their children in substitution of them. If this is not applicable to grandparents then uncles and aunts of the whole blood and their children in substitution then uncles and aunts of the half blood with their children in substitution and finally to the Crown.

Therefore if you have a partner but you are not married they will not automatically receive anything on your death if you do not have a Will. Further if you have step-children which you treat as your own but have not legally adopted they will not benefit from your estate unless you make a Will.

Even if the intestacy rules would result in your estate benefiting the people that you would like to benefit it may do so in a unnecessarily complex way. For instance if you have a spouse and children and your estate is worth more than £125,000, a large proportion of the value of your estate may be made up by the value of your house. This may result in your trustees having to own part of the house to hold it for your spouse for his/her life with the other part being held by your children (or on trust for them if under 18). This may result in your spouse not having the security that you may like them to have. Further if you do not have a Will you cannot control the age at which your children inherit as they will automatically inherit at 18. Many parents may feel this is too young particularly if there are substantial assets.

One of the most fundamental reasons for making a Will is therefore to gain control. Without one you will have no control over not only who will benefit from your estate but also over how they benefit.

When Should I Review My Will?

If you get married any Will that you made prior to marriage will be revoked (unless that Will was made specifically in contemplation of marriage) and you will be intestate. If you get divorced then any gift that you made to your ex-spouse will lapse and if your spouse had been entitled to all or part of your Residuary Estate this could also result in you being intestate.

You also need to review your Will as other circumstances change. For instance you may have children, a person that you wanted to benefit may have died or you may be separated but not yet divorced. Further throughout your life your financial circumstances may change and you may want to consider whether to undertake some tax planning by use of your Will. Further you may acquire property in another country which may not be covered by any UK Will and you may require advice on the intestacy laws and the possibility of making a Will in that country.

The tax legislation may also change regarding Inheritance Taxes that may require you to update the provisions in your Will to maximise any tax advantages.

How Can A Will Assist With Tax Planning

If you are domiciled in the UK (broadly, if you were born in the UK and regard it as your home or if you have lived in the UK for 17 years) your estate will be liable to pay inheritance tax, on all your assets worldwide (although this is subject to the laws of other countries). If you are not domiciled in the UK you will pay inheritance tax on any assets situated in the UK (such as property or bank accounts). You will not pay inheritance tax on the first £255,000 of your estate (the nil rate band) and certain other reliefs are available for example on business property and agricultural property. A Will may enable you to take full advantage of all available reliefs for instance by enabling both married couples to benefit from the nil rate band. Otherwise if a married couple leave everything to each other there will be 100% inheritance tax relief (assuming both are UK domiciled) but the first to die will have lost the benefit of sending the nil rate band free of inheritance tax to the next generation (if there are sufficient funds to do this). Further your Will can be drafted to include trusts for your children which may be more tax efficient than simply leaving funds to your children absolutely at 18.

There are also various things that can be done outside of your Will, which will save inheritance tax on your death, which can be advised upon at the time of making a Will. For instance pensions and insurance policies can be written into trust so that they pass outside of your estate so that no inheritance tax may be payable on them.

How Can Trusts Assist Me in My Lifetime?

Trusts can be used in your Will for tax planning and other reasons, such as to enable property to be held on trust for your children until they attain a certain age (eg 25). Similarly trusts can be established during your lifetime both for tax planning purposes and to enable you to provide for members of your family.

If you make a gift to certain types of trusts and you survive by 7 years after making that gift the property that you have given away will be outside of your estate upon your death and therefore there will be no inheritance tax to pay on those assets. Gifts can be made in this way to a life interest trust whereby your trustees will hold the assets to pay the income to somebody (or allow them to reside in a property) for their life with the capital going to another person after their death. Alternatively a gift could be made for the benefit of your children or grandchildren into an accumulation and maintenance trust, which also has other tax benefits for your children. Further making gifts into a trust allows you more control than simply giving assets to friends and family outright.

Individuals who are not domiciled in the UK can in particular take advantage of discretionary trusts in order to ensure that they do not become liable to pay IHT in the future and some capital gains tax savings may also be made.

As well as being useful for tax planning trusts can also be useful as a method of creating a pot of money for a particular class of people you would like to benefit (eg your children) as all trust assets will be invested. Trusts may also be useful as a means of asset protection from creditors.

Conclusion

Instructing a solicitor to prepare a new or a revised will not only enable you to ensure that your family and friends are provided for upon your death but may also assist you in saving tax both in your lifetime and upon your death.