Toby Harris Tax Consultancy : Why Make a Will?

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		Whats New? / Why Make a Will? A Will gives you control. A Will gives you options. A Will means that you can give other people opportunities. Some common misconceptions: ‘it is too expensive’ ‘everything I own will go automatically to my spouse or my children’ ‘my assets are too insignificant’. How often in your own life have you thought that you would have done something, taken a journey, taken a course but that you couldn’t because you didn’t have the money? A Will can allow others to enjoy opportunities that you never had. In essence a Will is the tool that allows you to pass on your possessions to benefit others. 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. 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. A simple Will is all that is needed to ensure that your partner and your children are provided for. The Civil Partnership Act provides a legal registration for same sex couples that puts their relationship on par with married couples. Civil partners therefore have the right to inherit if a partner dies without leaving a will. The Civil Partnership Act, however, does 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 home-made wills can be disastrous. STEP have gathered large numbers of examples where things have gone wrong. For example, people omit to cover the position if the main beneficiary does not survive; or refer to assets which are not owned on death. Instead, have your Will drafted by a properly qualified professional – in particular look to a Member of the Society of Trust and Estate Practitioners (STEP). Members are specialists in this field and can give expert advice. To find someone near you, visit their website: www.step.org/findapractitioner). This article is a brief guide to making a Will. It includes: what a Will allows you to do, practical advice on the process involved, and a section on how more complex family or financial situations can benefit from well drafted Wills. Practicalities You must appoint Executors to deal with your estate in the event of your death and hold property in 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 which 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. You can provide for specific funeral arrangements. This is particularly important for some clients. Some people ask for their body to be donated to medical research. Often people who have suffered from prolonged illness want to help reduce other people’s suffering by helping to find new treatments. 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. Personal items such as jewellery, paintings and heirlooms can be passed on 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 Inheritance Tax (IHT). Charities receive billions of pounds per year through money left to them in wills. It is an important source of funding for them and it means that you can give opportunities to others that you did not necessarily enjoy yourself. Recent changes Prior to 9th October 2007 married couples were advised to make best use of both their nil rate bands for IHT (currently £312,000) on death. This involved including nil rate band discretionary trusts in their respective wills. While this ensured that both nil rate bands were preserved on second death, it often involved complex arrangements, especially if a share in the family home was used to fund the nil rate band discretionary trust. In October 2007 the Government introduced the transferable nil rate band (TNRB). This provides that the unused proportion of NRB of the first to die can be passed to the survivor. This can best be illustrated in an example: The husband died in 1992. Having made no lifetime gifts he passed his whole estate to his surviving spouse. When the spouse dies in 2012, the nil rate band for IHT has increased to £450,000. The surviving spouse can leave £900,000 free of IHT. The simplicity of the new arrangement will be welcome by many married couples. Couples with existing nil rate band discretionary trusts should take advice before deciding to redraft their wills, as the flexible nature of the nil-rate band discretionary trust may be have other benefits and can offer solutions to more complex arrangements. Wills can offer flexible solutions to practical problems The inclusion of a trust within the will, whether it is discretionary or gives the surviving spouse a right to income or occupation of the family home, may be attractive for a variety of reasons. Family arrangements Wills can be used to provide for complex family arrangements, for example to include children from previous marriages. A will can give a second spouse the right to occupy the family home, while protecting the capital for children of an earlier marriage. This will ensure that the assets will not pass outside the immediate family and may pre-empt potential challenges to the distribution of the estate. Asset protection An ever-ageing population means that tens of thousands of homes are sold each year to fund the cost of residential care. A carefully drafted will can provide that a share of the family home passes into a trust on first death, which may give the survivor a right to occupy. The trust will ensure that the capital will be preserved from nursing home fees and instead pass to the intended beneficiaries. A trust of this type can be drafted flexibly to allow the survivor to “down-size” or move property. Trusts can protect assets should future generations suffer financial or matrimonial difficulties, or if the beneficiaries are not mature and responsible enough to own large sums of money. The trustees will be able to take each beneficiary’s personal circumstances into account. There may be ongoing IHT charges and this will have to be weighed up with the benefit of asset protection. Reducing the tax burden Trusts may have long-term tax advantages in cases where capital appreciation is anticipated to outstrip future increases of the nil rate band. Trusts can also be used to benefit future generations by potentially by-passing children to benefit grandchildren. Businesses Your Will can also direct your business interests (such as shares in a family company) or a farm 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 per cent (i.e. complete exemption) or 50 per cent. With your house or other non-business assets you can give assets away without paying an IHT charge if they are ‘potentially exempt transfers’ (PETs). The main point of interest here is that PETs have to be given away seven years before your death. This is to stop people avoiding IHT by giving away a house on their deathbed. With business assets, in most cases, it is only necessary for the individual to have owned these business assets for two years, in contrast with the seven 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 a discretionary will trust. However 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 under the pre-owned asset legislation. It is of vital importance that trusts are drafted and implemented by a properly qualified professional – who quite likely is a member of STEP – as trusts which are not properly set up and administered can be challenged. Other considerations Many people own their house as ‘joint tenants’. This is one of two ways in which you can own your house. You could own it as a ‘tenant in common’. To own your home or other asset as ‘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. The solution is to hold as ‘Tenants in Common’ and if the holding is already as joint tenants it can easily be severed by a relatively simple procedure. 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 but the savings might be vast. NOTE: This article has been prepared by the Society of Trust and Estate Practitioners. STEP brings together solicitors, accountants, barristers, bank trustees and probate practitioners who specialise in, and have particular experience of, this field. This article assumes that English and Welsh law is applicable. Different laws apply in Northern Ireland and Scotland. This article is available as a booklet from http://www.step.org/leaflets as are its companions ‘Why Make a Trust?’, ‘Why Make an Enduring Power of Attorney?’ and ‘What to do When Someone Dies’.