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by
Mark Veitch
Senior Partner
Thames Valley Wills
(Note- this article was written in 1996. The main point is still valid (ie Make A Will) but some of the detail may have changed.)
It's an unfortunate fact that every day around 2,000 people die in the UK, and two-thirds of them don't have a Will. But they needn't have worried - the state provides an invaluable service and will write one for them. After they're dead, of course.
But does the state know what that person would have wanted to happen to their estate? Of course not, so they write it according to the very strict Rules of Intestacy. These basically say that the estate of someone who has died intestate - the legal term for failing to draw up a Will - will be distributed fairly and equally amongst certain members of the family, and anybody else who might prove their claim. Regardless of what the deceased may have wanted or what the financial implications may be.
So what do these rules say exactly? Well, if the deceased was a married man with two children under eighteen, his wife would inherit the first £125,000 (as of 6 April 1996) plus half the balance, with income only from the other half. The children will be entitled to the second half of the estate when they reach eighteen, or if they marry earlier.
If the deceased was a married man with no children, his wife would inherit the first £200,000 (as of 6 April 1996) and half the balance of the estate - the other half would go to her husband's brothers, sisters, nephews, nieces, etc. There are of course other permutations, but these are the most common situations. The least likely, but possible, is when there is no next of kin; then it all goes into the government's coffers.
Worst of all, if the deceased was an unmarried or divorced man living with a partner, that partner would inherit nothing unless specific provision had been made in a Will. His estate would be treated as though he died a single person, and be distributed around his family, and probably any children from a previous marriage. In such matters, there is no such thing as a 'common law marriage'.
On the face of it, these rules don't seem too bad, but there are lots of 'what ifs' to consider. What if his wife died before him? What if there's not enough money in the bank for his widow to pay off his family? Who would look after the children if Mum and Dad both died? What if one or more of his children died before him? What if he won the lottery a day before he died? - the list is endless, and the Rules of Intestacy could never satisfy every situation.
Most Wills are written in such a way that these 'what-ifs' are adequately taken care of, with 'IF-THEN' clauses that deal with the devolution of an estate, usually down to the grandchildren, even if the Testator (the person writing the Will) is only twenty-five today. So, IF his wife died before him THEN it can go to his children, but IF they die before him THEN it could all go to his grandchildren, and so on.
A Will generally falls into four categories: a) naming Executors (the people who will carry out the instructions in the Will), b) naming Guardians for any children under eighteen, c) legacies (specific items or money to specific people), and d) distribution of the Residuary Estate (what's left after debts, funeral expenses and legacies have been paid). In addition, things like funeral wishes, organ donation and exclusions can also be mentioned.
Of course, it is quite possible to write your own Will, and many people do. However, unless you have researched the subject well, there are many pitfalls for the unsuspecting author to drop in to. A typical example is when "I leave everything to my wife, and when she dies I want it all to go to my children". In this instance the man's wife would inherit nothing of her own, as she will merely be keeping it all in trust for her children. She could only benefit from any income generated from the estate (bank interest, rent, etc.), but she could never dispose of any assets. Again the questions could be asked, what if she needed to sell the house to support the children, or the children did not survive her? And remember, a failed Will has the same effect as not writing one at all.
Nobody knows when they will die, nor what their situation will be when they do. Without a Will, the surviving family could end up in all sorts of financial, and emotional, hardship. Many people we speak to often say that they have nothing to leave, so a Will would be pointless, especially when all that comes to mind are their liabilities. Rarely do they consider the value of their home, their life insurance policies or their future potential. Also, many are under the impression that everything they own will automatically pass to their spouse - which is not true, as the examples above show.
By making a Will, a person is able to do many things, such as leaving specific gifts to specific people, appointing guardians for their children, which hymns are to be sung at their funeral, and, with the right advice, reducing or even avoiding a tax liability.
I would like to relate an instance where reputation and esteem took precedence over common sense. It happened to a member of my own family.
My uncle died a few years ago, and this made my aunt realise she ought to make her own Will. She went to the family solicitor and said she wanted to leave everything to her daughter when she died.
This is what the solicitor prepared for her:
1. I hereby revoke all former Wills and declare this to be my last Will.
2. I wish to leave all my possession to my daughter, X, and name her as my Executor.
The formalities of identification and witnessing took up more space than the body of the Will, but it only cost her £10. Of course, there's no mention of what should happen if her daughter died before her, as there would be no-one to execute the Will nor anyone to leave anything to. In fact, if this happened, she would effectively die intestate because her Will would fail entirely, and her estate would be distributed around her surviving family (she has had no contact with two of her sisters for over twenty years) instead of her grandchildren, as she wishes. We have since rectified the situation.
In all instances alternatives should be put to someone preparing their Will - they should be reminded of the 'what-if' situations. The moral of the story is to choose your Will drafter carefully, and not assume that because they may be expert in some aspects of the law they are expert in all aspects of the law, nor that a Will is always written by a solicitor (ever heard of legal secretaries or solicitor's clerks?).
When a person dies somebody has to deal with their estate (the money, property and possessions left) by collecting in all the money, paying any debts and distributing the estate to those people entitled to it. The term probate often means the issuing of a legal document to one or more people authorising them to do this.
The Probate Registry issues the document, which is called a grant of representation.
There are three types of grant of representation:
The term grant is used in this section to mean whichever type of grant of representation the Executors or personal representatives may need.
Organisations holding money in the deceased's name need to know to whom that money should be paid, and the grant is proof that the person named in it may collect the money. The estate left when a person dies passes to the people named in his or her Will. If there is no valid Will it passes to his or her next of kin. The distribution of the estate to the correct people is the responsibility of the person named in the grant. The grant is proof to anyone wishing to see it that the person named in it is entitled to collect in and distribute the estate.
Sometimes a grant is not needed and the Executors may wish to ask anyone holding the deceased's money whether they will release it to the Executors without seeing a grant. If they agree they may attach conditions. It is for the Executors to decide which is the cheaper or easier option. The following are examples of when a grant may not be needed:
There are organisations who may release the money to the Executors without a grant if the amount held is small and there are no complications. Among these are Insurance Companies and Building Societies. The Executors will not usually need a grant when a house is held in joint names and it is clear that the house automatically becomes the property of the surviving owner. If the Executors are in doubt on this point they may need to ask a solicitor whether a grant is needed to change the ownership. The Executors will need a grant to transfer or sell a property held only in the deceased's name. A house must NOT be advertised for sale too soon after the owner's death as a sale cannot be completed until the Executors have obtained the grant. The date of issue of the grant cannot be guaranteed to coincide with the final stages of any sale.
There are rules which govern who may be given a grant, and whether or not one is issued may depend on the circumstances in a case. If there is a Will with named Executors they are the first people entitled to a grant. If there are no Executors or the Executors are unable or unwilling to apply, the next person entitled to a grant is any person named in the Will to whom the deceased gives all his estate, or the remainder after gifts have been paid. If the deceased has not made a valid Will, application for a grant should normally be made by his or her next of kin in the following order of priority:
A grant cannot be issued to any person under the age of 18. Illegitimate relatives other than sons or daughters may not be entitled to a grant. If there are no Executors and potential beneficiaries are not sure whether they are entitled to apply they should still complete and return the forms and the Probate Registry will let them know. When more than one person is entitled to a grant the Executors may all obtain a grant together, however there is a maximum of four applicants allowed. In most cases only one person needs to obtain a grant, but there are circumstances when the Executors and another person may need to obtain a grant together. If this is the case the Probate Registry will let them know as soon as possible after they have received the application.If the representatives are asked by someone else to apply on their behalf, a note should be sent with with the application giving the etails of that person, and the reason why they are not applying. If it is not possible to issue the grant to the Executors the Probate Registry will explain the reasons.
The five stages for applying for a grant are:
The following forms may be obtained from the nearest Probate Registry.
To be sent with the forms:
When the Executors return the forms they should also send;
The Executors must send the forms and any other post either to the Probate Registry where the Executors wish to be interviewed or to the Probate Registry which controls the local offices where the Executors wish to be interviewed. Post must NOT be sent to the local offices which will delay the application. The Executors must attend at least one informal interview to enable a grant to be issued. The Executors must state on the probate application form which is the most convenient place for the Executors to attend. After the Probate Registry have received the application they will send the Executors an appointment for an interview. The interview can take place either at a Probate Registry or at one of its local offices.
The purpose of the interview is to confirm the details the Executors have given and to answer any queries the Executors may have. To complete the application the Executors will be asked to sign a form of oath, and to swear or affirm before the interviewing officer that the information the Executors have given is true to the best of their knowledge. In most cases only one interview is required.
If the application is complicated there may be additional documents to be signed, or the Executors may be asked to contact other people (for example a witness to the Will) so that the Probate Registry can interview them or obtain their signatures to documents.
In all cases a fee has to be paid. The amount of the fee depends on the size of the estate involved, and cannot be worked out until the details are confirmed at the interview. The grant will not be issued until the fee is paid.
In cases where Inheritance Tax is payable a grant cannot be issued until tax has been paid. If the deceased's estate is very close to or exceeds the limit at which tax becomes payable the account of the estate will be sent to the Capital Taxes Registry after the interview. After the Capital Taxes Registry has returned the account to the Probate Registry, the Executors will be notified in writing of the amount payable.
Arrangements for payment will be explained to the Executors at the Executors' interview. The issue of the grant does not imply that all values submitted are agreed by the Inland Revenue and correspondence may take place when the account is returned to the Capital Taxes Registry. Tax becomes due 6 months after the end of the month in which the deceased died. Interest is charged on unpaid tax from and including the due date whatever the reason for late payment. If the Executors have any queries about tax and interest which the Executors want to deal with before the Executors apply for a grant, the Executors should contact:
The Capital Taxes Registry, Minford House, Rockley Road, London, W14 0DF Tel: 0171 603 4622 Ext 204After the interview the grant will be prepared by the Probate Registry and sent to the Executors by post. The interviewing officer should be able to give the Executors an estimate of how long it will be before the grant is issued. When the Executors receive the grant the Executors should show it to any person or organisation holding the deceased's money or property who has asked to see it. The money and property will then be released to the Executors. Copies of the grant may be obtained from the Probate Registry and are only valid if they bear the impressed seal of the Court. If the Executors have any questions about the figures in the estate, or the amount of tax payable, they should contact the Capital Taxes registry.
The Probate Registry is responsible for making sure that an applicant is entitled to be given a grant, and that any Will produced appears to be properly made. If there is any doubt as to whether the Will left by the deceased is valid, or where it appears a Will has been altered or amended the Probate Registry may wish to interview at least one of the witnesses. The Probate Registry has to prepare the documents needed to complete the application and to issue the grant itself. The responsibility of the Probate Registry ends when the grant is issued.
No matter how much or how little you have, you can't take it with you. When you go, and we all do, you have to leave your worldly wealth behind. Whether you leave it to your nearest and dearest, your favourite football club or the tax man is up to you. But if you want to keep to a bare minimum the amount the Inland Revenue get their hands on, a certain amount of tax planning is needed. What you are trying to avoid is Inheritance Tax. That's the tax that has to be paid if you leave more than £200,000 to anyone other than your spouse or a charity. Any taxable gifts made in the previous 7 years will also be included - and with the surge in house prices over the last twenty years in most parts of the country, many people who would never have dreamt they would be so wealthy are now in the inheritance tax bracket.
When you die all your assets and any gifts made over the last seven years will be added up, and if they come to more than £200,000 the excess will be taxed at 40 per cent.
Under £200,000..........No tax
Over £200,000...........40% tax payable on the difference
To avoid paying tax the easiest thing to do is to give your money away while you are alive. To stop you handing over the estate on your death-bed, the tax rules insist that you live seven years after you make any gift, with some exceptions. You must also give away any property, cash or investments absolutely. You can't, for example, continue to live in a house that you have 'given' to your daughter - the seven years will not start to run until you have moved out. Nor should you 'give' your ICI shares to your grandchild, but keep receiving the dividend yourself.
If you die within seven years of making a gift, and you are leaving over £200,000 (including taxable gifts given in the last seven years), your estate will be liable for some tax on the value.
The Inland Revenue uses the following scale:
| Years between gift & death | Percentage of tax payable |
| Up to 3 years | 100% |
| 3 - 4 years | 80% |
| 4 - 5 years | 60% |
| 5 - 6 years | 40% |
| 6 - 7 years | 20% |
| More than 7 years | 0 |
If you live for seven years after making the gift, it will be free of all inheritance tax provided the money went to:
If the gifts total more than £200,000 and do not come within the above four categories, then inheritance tax has to be paid when the gift is made - but only at half rate, or 20%, and subject again to the seven-year rule.
There are some exemptions and reliefs. No inheritance tax need be paid if the gift is:
There are steps you can take now so that less inheritance tax is paid on your estate - but remember, it is not you that pays the tax, but the people you leave your money to.
John Smith dies leaving £400,000 to his wife Ethel
No inheritance tax is paid
One month later Ethel dies
She leaves £400,000 to her son Jim
Inheritance tax bill is:
£200,000................no tax
£200,000................40% tax
To Inland Revenue.......£80,000
John Smith dies leaving £400,000 to his wife Ethel
He bequeaths £200,000 each to his wife Ethel and son Jim
No inheritance tax is paid
One month later Ethel dies
She leaves £200,000 to her son Jim
Inheritance tax bill is:
£200,000................no tax
To Inland Revenue.......nil
Total saving............£80,000
Of course Ethel might have lived another twenty years, so it is important not to leave too much to your children at the expense of your surviving spouse.
What you cannot do is give something away and maintain an interest in it. For example, you couldn't give your home to your children, but continue to live in it. If you want to give them your home to avoid it coming into your estate, you would have to pay your new landlords - your children - a full market rent. Alternatively, you would have to move out and live elsewhere......for another seven years at least.
If you don't want to give your money away while you're alive, or you worry about not living for the necessary seven years after you've made gifts, then you can take out some insurance, in the form of a decreasing term insurance. To cover the potential inheritance tax bill that will be due on your estate, you will need a whole life policy. If you are a couple, take out a joint-life, second death policy. It will pay out on the death of the last survivor, and is cheaper than taking out two separate policies.
If you want to cover the liability to inheritance tax on your estate, you'll need a 'back-to-back' policy. It is a complicated concept, but if you are over seventy and have an estate worth more than £250,000 it is worthwhile taking the time to understand it. All you really need is a life insurance policy that will pay out a lump sum on your death equal to the projected inheritance tax liability on your estate. The problem is, that because of your age, that policy would be very expensive. The premium is paid monthly or annually, so if you confound all the statistics and live to ninety-five - still paying the regular premiums - you will pay much more than the expected pay out.To avoid this, take out an annuity at the same time. An annuity is a life insurance policy in reverse. You pay in a lump sum, and the insurance company pays out a monthly income to you.The clever thing is that the annuity will pay the life insurance premiums and give you an additional after-tax income of around 5 per cent of the money - and both keep going until your death.Of course, there's a catch - you have to put up the lump sum for the annuity. But that lump sum would probably have been left to your heirs when you died, and would therefore been liable for inheritance tax. It's not as big a lump sum for your heirs to lose as it might seem at first sight. It is the only way to give and receive at the same time. All of these policies are written in trust for your beneficiaries and are on the lives of both partners if the couple are married and pay up on the death of the survivor.
Because you are younger, you may be able to afford life insurance on its own. You will need a high level of life cover quickly, so you should go for a low-cost, or an appropriate unit-linked, policy, rather than a full with-profits policy. You don't need the extra life cover.
Mark Veitch
Senior Partner
Thames Valley Wills
END