‘I’m married, do I still need a will?’
The last thing people want to think about on their wedding day or in the honeymoon period of their marriage or civil partnership is what would happen to assets upon death.
However, statistics from charity Willaid reveal that nearly half of married couples in the UK don’t have a will.
For those who believe their estate will simply pass to their surviving spouse if they do nothing, they may be in for a surprise. This is especially the case where children are involved or you’ve remarried.
As such, the only certain way of ensuring all your loved ones are provided for is to write a will. Here’s what you need to know when it comes to the rules of marriage, wills and estates.
Dying without a valid will
When you die without a will (intestate), the rules of intestacy come into force. If you’re married or in a civil partnership and you have no children, your spouse will receive everything.
However for married couples who do have children, whether together and/or from previous relationships, then the intestacy rules state that your spouse will receive all your personal possessions, plus the first £250,000 together with interest on that amount from the date of death, plus one half of anything that remains.
This means your children will receive the other half of anything that remains whether they’re from a remarriage or the deceased person’s previous relationship. If your spouse has children from a previous relationship, upon your death, the remaining balance will go to your children, not the child/children from your partner’s former relationship.
Unintended beneficiaries may lose valuable tax-free allowances
When you die, your estate will normally pay tax at 40% on anything above the inheritance tax (IHT) nil-rate band, currently £325,000 and the residence nil-rate band (RNRB) of £100,000. However, transfers between UK domiciled spouses are exempt from IHT and married couples and civil partners can pass their nil-rate band to the surviving spouse. This means that, jointly, there will normally be no IHT to pay on the first £850,000.
For larger estates, the decision not to bother with a will carries the additional risk of triggering an IHT liability, according to Steve Eggleton, a consultant at Mattioli Woods.
“The strict rules of intestacy and the creation of unintended beneficiaries [such as children] will mean part of the estate will not benefit from the exemption applicable to inter-spousal transfers on first death. Anything falling into the taxable estate will be taxed at 40% which may not be part of the intended plan in the absence of a will,” Eggleton says.
“Working on the ‘do nothing’ approach, it is possible for both a husband and wife’s RNRB to be lost by allowing the rules of intestacy to dictate the distribution of the estate on death. This area of planning needs very careful consideration as it may require thought around restructuring ownership of jointly owned property and utilising the RNRB on first death – but with a potential joint IHT saving of £140,000 (from 2020 onwards) there is a strong incentive to get the right advice in place now.”
Providing for children from a previous relationship
Nearly four in 10 marriages in the UK are second or subsequent marriages and for anyone remarrying, they’re often concerned with balancing the need to provide for their surviving spouse with the need to ensure that any children from a previous relationship are also looked after.
Hannah Jean, solicitor in the tax, trusts and estates team at Hugh James, explains the various options available to those what want to make provisions for children from a previous relationship:
- Prepare mutual wills
These are wills which create a binding agreement between the couple that they will not change their wills, so the survivor can’t subsequently change their will after the first of them passes away. However, wills of this nature are rarely recommended.
- Leave a legacy to children from the first marriage, with the remaining assets to the surviving spouse
This ensures that both the children and surviving spouse are provided for, and the surviving spouse is free to leave their estate as they wish. For this to be workable, the deceased spouse would need sufficient enough assets in their sole name to provide a legacy for the children.
- Ensure the marital home is owned as “tenants in common”
A will allows a person to deal with solely owned assets or assets held with distinct and separate shares, such as a home. This type of ownership is known as tenants in common and it allows them to leave their share of the property to their children and ensure they are provided for, while stipulating that the surviving spouse is protected with a right to live in the property during their lifetime, for instance.
- Leave the estate of the first to die on trust under a will
In this scenario, any assets are usually held in trust for the ultimate benefit of the children but, while the surviving spouse is alive, the income generated from the assets can be passed to the surviving spouse. This provides them with income they may need, whilst protecting the capital for the children.
A trust can also be discretionary, allowing the trustees i.e. those entrusted to look after the trust fund for the beneficiaries, to use their discretion to apply the fund to the various beneficiaries as and when appropriate. A “letter of wishes” can be prepared to keep with the will stipulating how the person making the will would ideally like the trust assets to be applied.
What about pensions?
It’s worth remembering that pensions don’t automatically transfer to a spouse when someone dies and it’s important to note that pensions fall outside of the estate for tax planning purposes.
Andrew Johnson, money expert at the Money Advice Service, says: “It’s possible that they may benefit but the amount would depend on the type of pension, the age of the deceased and their beneficiaries.”
As such, Eggleton says it’s important not to overlook pension death benefits. “While individuals with final salary arrangements may be restricted to the benefits payable under the scheme rules, for anyone with a money purchase plan they are advised to keep their Expression of Wishes forms with their pension provider under review in line with changing circumstances.
“This is particularly important following the introduction of the new flexi-access drawdown rules as, without a new nomination in place, the scheme may not have all the available options open to it in terms of the type of death benefits which can be paid to beneficiaries.”
He adds that it’s worth investing some time in this area, by taking professional counsel to help you make the right choices for you and your loved ones upon your death.