What happens if you die without a Will?

Jane and Tom have been together for a decade and share their family home in Surrey with their five-year-old son Josh.

If Tom were to die without a Will, Jane and Josh could find their home and lifestyle in serious jeopardy. It’s a common misconception that assets would automatically pass to a surviving partner, but in fact there are rules set out by the government which set out what happens in these circumstances. As Tom and Jane were never married, Jane wouldn’t automatically inherit a penny under the ‘intestacy rules’.

The family home was owned as ‘tenants in common’, so his part of their home forms part of his estate, rather than being passed automatically on to Jane.

Instead five-year old Josh would receive his father’s share of the house and other assets after any Inheritance Tax (IHT) had been paid. Depending on the value of the estate and assets outside the home it may be necessary for the family home to be sold just to cover the IHT bill. The remainder of Tom’s assets would be held in trust for Josh until he turned 18, although it may be possible for some assets to be paid from the trust for Josh’s benefit prior to this.

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The importance of Wills

As the above example shows, if someone dies without a Will, what happens to their estate under the intestacy rules might differ significantly from what they would have chosen.

While it’s not possible to reduce the emotional blow of losing a family member or partner, having a valid Will can lessen the practical and financial impact.

A professionally drafted Will is the cornerstone of making life easier for those you leave behind. The way you write it can affect the IHT your loved ones may have to pay, and it gives you greater control as to who receives what and when.

Taking action to formalise your wishes now means they’re not forgotten or ignored when you’re gone.

The rules of intestacy: who can inherit?

Under these rules, only a spouse or civil partner and some other close relatives can inherit. Please note the rules described below only apply to England & Wales; intestacy rules in Scotland and Northern Ireland are different. This is a brief overview, you should seek professional legal advice if you are unsure.

Partners: Only a spouse or civil partner can inherit. Co-habiting partners who are not married cannot inherit automatically. If there are no surviving children, the spouse or civil partner will inherit the whole of the estate.

Joint-owned property: If the couple own the property as beneficial joint tenants, the partner will automatically inherit the other partners’ share of the home. However, if they are ‘tenants in common’ they cannot inherit automatically under these rules.

Children: If there is no surviving spouse or civil partner, the children will inherit the whole estate. However, if there is a surviving spouse or civil partner, the children will only inherit part of the estate if it is valued at more than £250,000. Children receive their inheritance when they reach 18 years old, or marry or form a civil partnership under this age. Until then, trustees manage the inheritance on their behalf.

Close relatives: If there is no surviving spouse, civil partner or children, close relatives such as grandchildren, great grandchildren, parents, brothers and sisters will inherit.

If there are no surviving relatives: If there are no relatives who can inherit under the rules of intestacy, the estate passes to the Crown. Just last year the government banked £8m because people without living close relatives didn’t leave a Will.

Pass money to your loved ones sooner

Each tax year anyone can give away up to £3,000 IHT free. But there are also lesser-known gift allowances, like £5,000 when a child gets married (£2,500 for each grandchild), and £250 to any number of individuals, provided you haven’t already given them a gift using a different exemption. It’s also possible to make unlimited gifts from surplus income.

Outside these exemptions, any gifts you make will normally fall outside your estate provided you live for seven years, so planning early can help reduce your estate’s IHT liability. Tax rules can change and benefits depend on individual circumstances.

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Gifts to trusts

You might feel uncomfortable making gifts which can be immediately accessed by the beneficiaries, for example if you want to give money to grandchildren but feel they are too young to inherit a lump sum at present. In these cases a trust can be used to give greater control. Making a gift to a trust usually starts the ‘seven-year clock’ ticking, though gifts to some types of trust could also trigger an immediate tax liability of 20% (2016/17). Trusts can also be liable to pay some IHT periodically and when money is paid out.

There are many different forms of trust, all with different rules, and it is sensible to seek personal advice to assess which is right for your circumstances. As a trust is a legal arrangement, it is important not to rush into any decisions without knowledge of all the implications and terms as it may not be possible to unwind them, you should seek legal advice if you are at all unsure.

Normally, you have to give up access to any money you give away absolutely – if you retain any rights to the money it will be included in your estate at death. But there are some arrangements that allow limited access to ‘gifted’ money – for instance a right to a fixed income for life from the funds – while still being effective for IHT planning.

Seek financial advice

As estates get larger and more complicated, advice from a professional will help navigate your way through your options to find the best combination for you. This becomes more relevant with extended families, or where your estate has multiple properties or business interests. A professional financial adviser could work with you to help you to plan your estate, taking into account your personal situation and desired outcomes.

Credit: www.hl.co.uk