It may be a case of stating the blinding obvious that having a will is important, but it remains a stark fact that a significant number of adults, including high net worth individuals, don't have a will and aren't prepared for transferring assets upon death.
A majority of the UK population don’t have wills, and this publication has even seen evidence at conferences, where people are asked to vote by a show of hands, that high net worth individuals don’t have up-to-date wills. It is, on its face, extraordinary that an industry devoted to protection of wealth, and secure transfer of assets, isn’t doing enough to ensure one of the most basic steps of all is taken. There are a number of reasons why there could be a gap: inertia, complacency (“I’m young and fit and have no need to worry”), fears about legal complexity and costs, cultural issues around traditions of transfer, and other factors. In any event, there is a need for persons in jurisdictions such as the UK to get to grips with having a will and keep it updated. In this article, Stuart Price, a solicitor in the private client team of Thomson Snell & Passmore, examines the issues. The fact that a significant share of the population doesn’t have a will surely proves that Price and his peers are not just repeating obvious facts, but must continue to do so. The editors of this news service are pleased to share these views; they don’t necessarily endorse all the opinions expressed and invite readers to respond.
Preparation of wills
There are few people that like to think about death and, unfortunately, this often means that people don’t get around to making a will or do not take advantage of the tax planning options that are available to them.
A will is likely to be one of the most important documents an individual will ever sign and it’s extremely important that it is given due thought and prepared correctly.
Wills allow control over what happens to property after a person has died. If a person does not make a will, they die intestate. The intestacy rules determine how property will pass and set out a strict order of entitlement to estate assets. This order might meet the person’s requirements, however this is very unlikely in the case of a person with “non-traditional” family circumstances or complex assets. Why leave it to chance? Assets may pass to unintended individuals or, if an individual has none of the specified blood relatives, to the Crown (the government). There are few people who would be happy with that outcome.
Keeping a will up to date is just as important as creating one in the first place, and sometimes more so. While wills are usually drafted to be effective for many years (indeed indefinitely) they should nevertheless be reviewed every few years to take into account changes in your circumstances and the law. The imminent introduction of the residence nil rate band, mentioned below, is a good example of a change that might prompt a will review.
Challenges to a will
Allowing assets to pass at the mercy of the intestacy rules, or indeed in accordance with the terms of an outdated or inappropriate will, risks inviting challenges against the estate after death. Disappointed beneficiaries may make a challenge to a deceased’s will (which when admitted to probate becomes a public document) under the Inheritance (Provision for Family and Dependants) Act 1975. These challenges can be very costly to the estate, demanding on the estate executors or administrators and distressing for people connected with the deceased at what is often a difficult time anyway. Following the death of Paul Daniels earlier this year, it emerged that Mr Daniels left everything to his widow and nothing to his son. As has been reported, this is causing public family disagreement and may lead to a challenge to Mr Daniels’ estate. Although Mr Daniels may have had legitimate reasons for leaving his estate as he did, it is important that people are alerted to potential challenges so that they may take whatever steps they deem appropriate to prevent them.
Correct preparation of a will does not necessarily mean involving a solicitor or other professional. However, the advantage of this is that they can use their experience to advise you on the options and highlight issues which people may not be aware of. Involving a professional also allows the discussion of tax and estate planning options. Indeed, many people like to ‘get their affairs in order’ by discussing such matters at the same time. Wills should certainly be written in light of any past, or anticipated, estate planning.
Tax, estate planning
When making a will it is important to note that inheritance tax is charged at 40 per cent against a person’s assets in excess of their IHT free allowance. Currently the IHT free allowance is £325,000, but this is due to be increased by the new residence nil rate band being introduced in stages from April 2017, subject to several complex conditions. There are various legitimate ways in which an individual can reduce the size of their estate or reorganise their affairs for IHT purposes so as to reduce the final IHT bill against their estate. Whether each option is appropriate will depend on the individual and their circumstances, but some very simple steps, taken in good time, can save large amounts of IHT.
An estate planning review also provides the opportunity to consider other taxes, such as capital gains tax and income tax, and consider what steps might be taken, if any, to mitigate current or potential future liabilities.
Foreign assets, beneficiaries
Will writers should take special care when leaving assets to foreign beneficiaries. Some jurisdictions impose a recipient tax which will be charged in addition to UK IHT. It may be worthwhile taking specialist advice from an advisor qualified in the foreign jurisdiction, especially in the case of large estates. Where a UK estate includes property overseas, it is sensible to consider drawing up a foreign Will to work with a UK Will to effectively dispose of the foreign property.
When considering Wills and tax planning it is sensible to consider the use of trusts. Trusts are useful, and often tax efficient, ways of protecting assets for vulnerable and unascertained beneficiaries. They are also useful for individuals who wish the division of their estate to be flexible on their death to take into account the specific circumstances at the time, or to create a family fund by skipping a generation to benefit grandchildren.
What if you lose capacity?
It is important that matters are considered in a timely manner. If a person loses capacity, they will no longer be able to make a will or amend an existing one. It is possible for the courts to make a will for that person (or indeed authorise tax planning arrangements for them), but this is a lengthy, and potentially expensive, process. With advances in medicine, conditions like dementia are being diagnosed earlier and earlier and this does grant some people the opportunity to make a “last minute” will. However, if an individual prepares a will when their capacity is in doubt, this might be all the encouragement somebody needs to challenge the will. Such challenges, whether spurious or not, are likely to be very costly to an estate.
Saving money, time and effort by choosing not to prepare a will is unlikely to be a cost effective decision in the long term. Horror stories published in main stream media about post-death litigation are raising awareness about the importance of a properly considered will, but a significant number of people, many of them very wealthy, remain without one. Make sure it’s not you.