Must Do for August: sort out that Will

www.citywire.co.uk – 04/08/08

Now that the Finance Bill has received Royal Assent, and new inheritance tax (IHT) rules are ‘on the books’  it is worth lifting your head from the holiday sand and taking some time to consider what would happen to your property, money and possessions on your departure.

This most sensitive of subjects still fills many with dread despite the fact that preparing a Will doesn’t make us die any sooner. If you are old enough to vote you should have a Will. Why take the risk that what you value falls into the wrong hands – at worst the grim tax reaper?

Who gets what?
First, if you die without leaving a valid Will there is a rigid hierarchy in law to decide who gets what. It does not matter what you may have wished for or promised while you were alive. If there is no valid Will then the intestacy rules apply.

This means that your family face extra work, delays, confusion, cost and possible family disputes at an emotional time when decision making isn’t always easy or rational.
The full intestacy rules make easy reading, so take a look now. In essence, unless you are married with no children, in which case your spouse still gets everything, there is an issue ready to rear it’s head – in some situations your estate could spread as far as your Aunt Mary’s husband.

Note that the rules on intestacy do not recognise ‘common law’ partners, and that ‘children’ includes natural, adopted and illegitimate children, but excludes step-children. Twenty-first century families are more likely than not to have this mix.

You will accept that doing nothing is not ideal, so to save your family potential heartache get the job done this month, then you can forget about it.

Inheritance tax (IHT)
A trigger for putting a Will in place is often to deny the tax vulture who sits patiently waiting to collect from an increasing number of us. Until the latest changes it was often prudent to set up a Will with a discretionary trust in it to make use of the ‘nil-rate band’ – the amount we can all leave before tax is an issue. In this tax year that figure is £312,000.

With one bold slash of the pen the rules have been changed and for husband-and-wife estates the need for this complication has ebbed because the nil-rate band can be inherited by a spouse.

So what should you do if you were organised and well advised and set up Wills to avoid inheritance tax, possibly changing the way you and your spouse own your home?  Frustratingly this arrangement may now be redundant in terms of tax saving for married couples with a total estate worth less than £624,000.

Whilst in agreement that nil-rate band discretionary trust Wills are not very straightforward, it seems solicitors vary in their views on their merits for retention under the new IHT rules.

Trust me?
Reasons given for retaining nil-rate band discretionary trust arrangements centre on the fact that these Wills are very flexible and can be used for reasons other than tax saving - for example to ensure beneficiaries other than the spouse inherit, or to remove assets from a spouse who might in future be means tested for long term care benefits. There is flexibility to allow the trust to be wound up if not required within two years of death and the whole estate can pass to the spouse. On this basis, there is no pressing reason to revert to simpler Wills other than to remove the need for professional advice with the associated costs for dealing with the trust.

Trust me not?
The other side of the coin is that it is likely that very few people will opt for the discretionary trust route now because there is no tax advantage in having it in a Will.  Many people set this up because they felt it was the ‘right’ thing to do to save some IHT.

For estates less than twice the nil-rate band there is a strong argument for reversion to 'old fashioned Wills' whereby husband and wife initially leave everything to each other. These ‘mirror Wills’ are straightforward and more easy to understand and it can be a relief to remove a complication with which you may not have been entirely comfortable.

It is of course important to consult your legal adviser to obtain information so that you can take an informed decision about your own circumstances. Do it soon!

© 2008 Associated Newspapers. All rights reserved
Date: 04/08/08
Publication: www.citywire.co.uk