Half of us die without leaving a will to dictate how we would like our worldly goods distributed between our family and friends. If you fail to make a will, then the Government will decide who gets what, and that could mean a bigger chunk than necessary for the Treasury. Taking the time to make a will can leave your relatives without extra problems at what will be a difficult time, and could help you to reduce death taxes.
What is a Will?
A Will is just that, a written expression of your will, your wishes and your requirements. It is a legally binding statement of how you wish your assets to be dealt with after you have died.
It is important to keep your will up-to-date because your circumstances change, legacies made in a previous Will may have been impacted by inflation, you may even have arranged to make a gift to someone who has died or your Will may refer to an executor (the person charged with making sure your Will is carried out) who may have died.
You may change an existing Will in two ways: by replacing it with a completely new Will; or by adding a Codicil (this bit of legal jargon is merely a way of adding new clauses to your existing Will).
The person who makes a Will is known as the Testator (male) or Testatrix (female) and what you are doing is creating a Testament in which you can make gifts to whomever you choose. These gifts are legacies and may take the form of:
Specific legacy: a definite object or property
Pecuniary legacy: a gift of a specific sum of money
Residual legacy: (the residue): a gift of the money or assets left when other legacies and expenses have been paid
Life Interest: e.g. 'to my spouse for use in her lifetime, then to charity'
Conditional Interest: a legacy dependent on specified criteria being met
Two witnesses must see you sign your Will and you must also watch both of them sign it. They must also watch each other sign the Will. No beneficiary (or their spouse) should sign the Will as a witness; if they do any gift to them or their spouse will be invalid and will fail.
After your death, the legal process to establish the validity of your Will is known as probate. If probate is not granted then an administrator is appointed by law to settle your affairs as if you had died without a Will.
What is my estate?
Before you sit down to draw up a Will it is worth spending some time thinking about your estate. This may sound grand but it is simply the legal term that describes your net worth, i.e. it is the total value of everything you own at your death, less any outstanding commitments. Basic estate planning is straightforward and will help you plan what you wish to include in your Wills.
It will also give you some idea of what kind of Inheritance Tax liability your estate may face. Finding this out will give you the opportunity to plan the terms of your Will so that you may take appropriate steps to make sure that your assets go to your nearest and dearest and the taxman gets as little as possible!
You should start by adding up the value of your assets and liabilities, which may include the following:
Your home - sole ownership or jointly owned?
Bank and building society accounts
National Savings investments
Life assurance policies
Pension fund and union benefits on death
Stocks and shares (including ISAs)
Unit trust investment (including ISAs)
Premium Savings Bonds
Interest in other people's estates
Property and bank accounts abroad
Any assets which are jointly owned with someone else (a spouse or partner) are usually assumed to be held in joint tenancy. This means that any share held by one automatically passes to the other on death, regardless of any provisions to the contrary in a will. With regard to your property, if this is not what you want to happen then you must make sure that your home is held as a tenancy in common. Do this and you may specify exactly what happens to your share of the property by leaving it to a third party or in trust for their benefit while your spouse continues to occupy the house.
Credit card debts
Subtract the value of your liabilities from your assets and you'll have a relatively clear idea of what you are worth now. It is likely to be more than you think! Bear in mind also that, other things being equal, what you are worth when you die is likely to be an even larger figure.
Why should I make a Will?
There are several good reasons why you should make a Will. First of all, you get to decide to whom you leave your property, money and other assets. Without a Will, the Government steps in and divides everything according to strict rules - which could mean family, friends or charities you wanted to benefit would miss out altogether.
Among other reasons you should make a Will, your partner may benefit. If you aren't married to your partner, he / she could end up with nothing if you die without a Will. Even though the Civil Partnership Act came into force on December 5, 2005 for same-sex couples, it still makes sense to make a Will.
A Will also means that you may choose your children's guardian. Your children's future can be protected if you choose a legal guardian to be responsible for their upbringing in the event of your death. Of course you need to get the person's permission before nominating them. If you don't specify anyone, it will be left to surviving relatives to sort out who looks after them, and it may end up being someone you would not have chosen yourself.
You can ensure your Will is tax-efficient. Make a Will and not only do you get to say who gets what but you may make sure that the taxman gets no more than is unavoidably due.
Finally, to reiterate the first and key point about why you should make a Will, you can ensure that your wishes are carried out. You do so by, when making a Will, appointing one or two executors whose task is to carry out your wishes. Don't forget to ask the people you nominate as your executors.
What happens if I don't make a Will?
No one likes to think about their own death. But making a Will ensures your family won't have to spend months trying to sort out a complicated financial and legal situation after you die. Do you really want them to have the added stress? It seems many of us do - one in three people die in the UK without making a Will while of the two out of three who do make a Will, many fail to do so properly, which can be just as calamitous for those left behind (Source: Daily Telegraph 01/03/2007).
Die without a Will and you die intestate. If this happens, the law of intestacy, which is laid out in the Administration of Estates Act, dictates how your estate will be passed on. It aims, in the first instance, to protect your immediate family - any spouse / civil partner and children. However, bear in mind that unmarried partners and children that are not legally recognised as yours will not be taken into account under the intestacy rules. Quite simply, dying without a Will might not result in your possessions (your estate) being used as you had expected or would have wished.
The intestacy rules assume that all your possessions could be sold by your personal representative to convert your whole estate into cash, which would then be distributed. In practice, most of your assets are likely to be passed on intact according to certain rules.
Your spouse is entitled to all your personal chattels (i.e. personal possessions, such as clothes, furniture, your car etc.). If your estate is valued at £ 125,000 or less, the remaining spouse also inherits the whole estate irrespective of whether there are any children.
If there are children, the surviving spouse is entitled to £125,000 and the household contents and personal effects of the deceased. The rest of the estate is then divided up into two equal parts. One of which will go to the children. The other half goes into a trust. The income from this legal entity will go to the surviving spouse, but the asset will on the death of the surviving partner become entirely the possession of the children.
There are further strict intestacy rules about what happens to your estate if there are no children or if you are single. If you're single with no dependants, your assets go to your nearest surviving living relative. However, if you have no relatives, your estate passes to the Crown (i.e. the Government). Do you really want that?
How do I go about making a Will?
A badly prepared Will - or one that's out of date - is often worse than no Will at all. A poorly worded Will or a Will that does not make adequate provision for unforeseen circumstances can cause endless problems and may ultimately be much more expensive and time consuming to sort out. It is up to you, therefore, to make sure you get it right! Having issued that warning, making a Will is fairly straightforward. You could:
do it yourself
use the services of a will writing company
go to a solicitor
A Will makes sure that your estate, after any taxes and debts have been paid, is passed on as you want. You may need legal advice if you want your share of any jointly-owned assets to be inherited by someone who is not the other joint owner.
According to the Law Society, a fairly straightforward Will to administer a fairly straightforward estate should cost well below £200 to draw up. It may be advisable to use a solicitor because of the potential pitfalls if a Will is not drawn up properly.
When framing the document, you need to have a clear idea of who you'd like to receive what on your death. You need to bear in mind that the people whom you may want to be beneficiaries might actually die before you.
If you have small children it is also a good idea to make it clear in the Will exactly who you would want as guardians were you and your partner both to die together. A fair amount of lateral thinking is required in drawing up an effective Will - you need to be able to take into account all sorts of otherwise unforeseeable events.
Make sure you avoid some of the common Will mistakes such as:
leaving money to charities that don't exist actually like 'Cancer Relief' or 'Dr Barbados'
not distinguishing family members in the Will with the same name
not putting the signature in the right place or not all witnesses being present at the same time
not taking into account any debts owed
Once the Will has been drafted to your satisfaction, in England and Wales your signature needs to be witnessed by two people who are not beneficiaries. In Scotland only one witness is required but, again, the witness may not be a beneficiary. Although they may not be beneficiaries, you may choose a witness as an executor.
Who should I appoint as an executor?
You are able to choose the people who are responsible for passing on your estate. The legal term for these people is executors. You appoint executors by naming them in your Will.
An executor is the person you leave in charge of your estate, to wind it up, pay the taxman (if necessary) and then distribute the balance according to your wishes. This balance is called the residue and is paid out to the beneficiaries, the people nominated in your Will. Being an executor does not stop someone from being a beneficiary in your Will as well.
Most people choose to nominate a solicitor as well as a personal executor when they write a Will. This enables the burden of the work to be shared with a professional who can advise. It also ensures that, if the personal executor is unable to carry out their duties for any reason, there is someone who can carry out the necessary tasks. A solicitor will charge for their advice and work and their fees will be paid out of your Estate.
If you fail to appoint an executor, the High Court will issue a grant of probate and appoint one (generally a bank or solicitor) to act on your behalf.
Can young children inherit?
Children cannot inherit until they reach the age of 18; below this age, any funds of which they are the beneficiaries must be held in Trust.
However, you may feel that 18 is still too young for your children to inherit a large sum of money. If this is the case then, in your Will, you may specify that they do not receive the capital sum until a later age.
Your children will be entitled to receive any income from the trust fund as soon as they reach 18. Apart from this, it is up to the Trustees to decide what income and/or capital may be used for the benefit of the children e.g. to pay school fees.
Budget 2006 revised the tax regime for trusts. If you are considering setting up trust arrangements as part of your Will and Inheritance Tax planning, or if you have previously set up trust arrangements, it is vital that you take independent financial advice.
Who should I appoint as a guardian?
If you have children under age 18, you need to think about who will look after them. You do not have to nominate a guardian in your Will but without nominated guardians, the courts will decide who will look after your children. The law also sets out certain requirements where the parents are unmarried or have divorced or separated.
Assuming that either parent has the power to appoint a guardian or guardians on their death, it is usual for such appointments to take effect on the death of the second parent. Usually, especially with very young children, family members may be appointed. With older children, you may prefer to appoint a friend.
It is best to limit the maximum number of guardians to two, ideally partners, rather than end up with a committee of guardians. What you want for your children is that they be part of a stable environment at what is surely going to be the most difficult time of their lives.
The duties of a guardian are essentially the same as those of a parent although it is quite normal for the financial management of your legacies to your children to be separately run by trustees. In your Will, where your children are under 18 and are to benefit from your estate, you should nominate them as the beneficiaries. The money will be held in trust for them and your nominated guardians may apply to the trustees for any expenses they incur.
What happens if I get married or divorced?
The act of getting married, whether for the first time or on subsequent occasions, automatically revokes any previous Will in England, Wales and Northern Ireland. On the other hand, getting divorced does not of itself cancel a Will although a gift to a divorced spouse lapses, unless a contrary intention appears in the Will.
It makes sense for married couples each to have a Will, even if the terms and conditions are more or less exactly the same. Two similar Wills are called 'mirror Wills'.
My partner and I are not married. How is the law different?
The law on intestacy does not currently recognise partners outside marriage. It is even more important, therefore, that unmarried partners do make Wills. The law also does not recognise same-sex couples that have not undergone a civil partnership ceremony.
The Civil Partnership Act that came into force on 5 December 2005 does give same-sex couples the right to gain legal status for their relationships through forming a civil partnership. This allows same-sex couples to be entitled to bring claims under the Inheritance (Provision for Family and Dependants) Act 1975.
Intestacy provisions are also amended so that if a partner dies intestate the same sex partner, providing there is a formal civil partnership, will be treated in the same way as a surviving spouse.
What is inheritance tax?
Broadly speaking, inheritance tax (IHT) is a tax on 'transfers of value'. IHT technically applies to everybody, and to every gift or transfer of assets they make. When you die your estate is assessed for inheritance tax. The tax has to be paid before your beneficiaries may receive their portion of your Will. If your family cannot afford to pay the inheritance tax, your estate will be frozen until the tax bill is settled.
The main relief against IHT for most people is the nil rate band (£312,000 in 2008/09). This means you may pass on an estate worth up to £312,000 without incurring inheritance tax.
However, bear in mind even all those things that were exempt from Income Tax or Capital Gains Tax during your lifetime (your home, your ISA investments, etc.) will be taken into account in calculating the total value of your estate. In fact, taking into consideration the strong growth in property prices in past years, many of us will now face an IHT demand as the value of the family home may easily, by itself, exceed the £312,000 nil rate limit.
What part of my estate is not liable for tax?
Certain assets may be arranged so as to avoid any inheritance tax liability. You may, for example, have the benefit of a pension plan or life assurance policies. These may be benefits that you have taken out yourself, or they may be benefits provided by an employer.
Generally, these benefits are constructed in such a way so as pass on to your beneficiaries outside the terms of your Will. The benefits from a pension in retirement are usually straightforward. They will either cease on your death or pay a reduced benefit to your spouse.
The position, should you die before retiring, is more complex. You may be eligible for a lump sum payment, either from your pension or a death in service benefit. You may not direct the trustees to make the payment to particular beneficiaries but merely record your wishes for them to take into account when they make their decision, although they will usually follow your wishes. Providing you follow these guidelines, any such benefits will not be liable for Inheritance Tax.
Life assurance written in trust may provide a simple and cost effective way of providing funds to pay Inheritance Tax on your death. However, it is imperative that you take independent financial advice to ensure you are making any trust arrangements in the most tax efficient way that you are able to.
What else can I do to minimise tax on my estate?
Inheritance tax has been described by many as a voluntary tax in as much as you can take a number of steps to ensure that you at least minimise the amount you or your estate is likely to pay.
For example, if you are able to engineer your assets so that you are only worth up to the value of the nil rate band of IHT on your death, then your estate might not have to pay any tax. The main feature of the IHT regime is the potentially exempt transfer - the PET. You could be a millionaire and give away everything you own, but as long as you live at least seven years and are not worth more than the current nil rate band when you die, then there would be no IHT to pay. However, if you died within seven years of each gift then the amounts of the gifts would be added back into your estate for IHT calculation, although the tax would be charged on a sliding scale depending on how long you had lived after making the gifts.
There is also a large variety of gift exemptions. Perhaps the biggest exemption is the fact that no inheritance tax is payable when assets are passed between husband and wife. If a husband leaves everything to his wife, no tax will be payable on his death. But the wife will then be charged on whatever she is 'worth' when she subsequently dies.
It makes sense to look closely at your affairs to see if there is any way of using the nil rate band on the first death, because through the use of correctly established trust arrangements this can be a very valuable way of reducing the eventual tax liability when the second partner dies. Since October 9, 2007 it has also been possible to transfer any unused proportion of the nil rate band to the surviving spouse.
In fact, if you believe your estate is likely to create any kind of inheritance tax liability, it is worth seeking independent financial advice to ensure that you are doing everything you can to mitigate both the tax bill and make life easier for your family at what will be a traumatic time for them anyway.
Where should I keep my Will?
In a safe place! But don't forget to tell people that you have made a Will and where you have put it. In practice it makes sense for your executors to have copies of your Will and you may well want a copy on hand as a reference for your own purposes. Remember that you should keep your Will up-to-date to reflect your changing circumstances and, perhaps, your changing desires as regards legacies.