Willing the way

Julie Hutchison talks about the importance of writing a will to ensure that clients' intentions are respected

For those who fail to take action and put in place a will before they die, the automatic rules of inheritance will apply, potentially with some unexpected results in terms of which family relations will stand to receive an inheritance.

In England and Wales, the position for the surviving spouse has improved since 1 February 2009, with an increase in the statutory legacy figures. However, this should not be seen as a justification for not writing a will, since the ideal outcome is still that a client controls who inherits their estate, when and how. Good estate planning nearly always starts with an up-to-date will.

The key message for clients is that dying without a will could undermine the position of the surviving spouse/civil partner, result in higher legal fees to administer the estate, and generate unnecessary inheritance tax (IHT) as a result of the spouse exemption not applying to the full estate. Does your client really want this outcome for his family?

The new statutory legacy

The increase in the statutory legacy figures in England and Wales is a welcome improvement from the 1993 position, which had been unchanged for many years. The Ministry of Justice consulted on this area with the result that more of a person's estate would be inherited automatically by a surviving spouse or civil partner.

If the deceased is only survived by a spouse/civil partner and there are no children, the statutory legacy figure for that surviving spouse/civil partner is now that they will automatically receive the first £450,000 of estate (up from £200,000). If there are children, the statutory legacy figure for the spouse is now £250,000 (up from £125,000). If the deceased left an estate worth more than those figures, there is then a priority list in terms of who inherits the excess. A few case studies illustrate the details.

Case study one

David was married to Helen and he died without a will. There are no children. David's estate was worth £350,000 and is inherited in full by Helen.

Case study two

This time, David's estate is worth £600,000 and he dies without a will. David is survived by Helen and also David's parents. Helen inherits £450,000 as the statutory legacy as well as one-half of the balance (£75,000). The remaining one-half share of the balance (£75,000) goes to David's parents. A will could have ensured that the full estate was inherited by Helen.

Case study three

David and Helen have twins aged 10. David dies without a will leaving an estate worth £500,000. Helen's statutory legacy is £250,000. Helen also receives a life interest in one-half of the balance (£125,000) which means she is entitled to the income from those assets. On her death these assets pass to the twins. The remaining £125,000 belongs to the twins but is effectively held in a statutory trust for them and can only be accessed by them once they are aged 18. A will could have ensured that the full estate was inherited by Helen and then passed to the children only on her death. It could also have ensured that any funds passing to the children were held in a full trust, with access at age 25 or 30, for example, or even held in a fully discretionary trust with no fixed ages for payment.

Another issue here is that, without a will, some of the nil rate band has been used on David's death in relation to the £125,000 which belongs to the twins. This means that on Helen's death, there is a lower nil rate band transferred to her estate. If instead, David had left a will leaving Helen the full estate, on her death her estate would have benefited from a double nil rate band, potentially saving IHT.

Reasons to have a will

Many clients also wish to leave assets to friends or charities on death. This can only be achieved by writing a will as friends and charities are not on the list of those who could automatically inherit. Standard Life's research showed that 22% of people wanted to leave money to a charity in their will. Assets gifted to a charity are free of IHT. The popularity of leaving a bequest to a charity is also evident in HM Revenue & Customs' own figures, which show that in 2005/6, just over 8,500 estates made some form of claim for the charity exemption.

Aside from creating the desired result for friends, charities and saving IHT, a will can also create a trust which is useful in many cases, not least where there is a family member with special needs. Those special needs could range from a physical or mental handicap to an addiction which could make a cash inheritance a bad idea. A trust can be used to hold property for the individual, to give them controlled access and payments, but without passing property ownership and control over to the individual. A trust can also be used to give an income to a surviving spouse, but again without passing control of the capital to that spouse. In the event of the surviving spouse re-marrying, control of the trust fund remains with the trustees of the deceased spouse, so that children of that marriage remain the beneficiaries in the long-term. This protects the children of the marriage from being disinherited should the assets instead all belong to the surviving spouse outright, who then re-marries and writes a new will.

Overall, there are numerous good reasons to leave a will and clients should be prompted into taking this important step before events intervene.