Sometimes, people may wish to give their children their inheritance before they die, rather than waiting for the inevitable to happen. The Inheritance Act does allow for this in some circumstances. Nobody wants to see the wealth that they have accumulated during their lives going to waste, but assuming that it will go to their children can be a mistake – with inheritance tax and the potential for needing it to be used to pay off creditors, there may be a lot less than you might think, and that can be a big shame.
Which is why it is sometimes a much better idea to give your children’s inheritance to them before you pass away, in the form of a gift. This can work particularly well if your estate would otherwise be worth more than £325,000 (or £650,000 if you take a spouse’s tax free limit) which is the threshold for having to pay inheritance tax. As long as you survive for seven years or more, there will be no tax to pay. If, however, you die within seven years of giving the gift, then it will be counted as part of your estate, and subject to a forty percent inheritance tax rate.
Giving your saved up wealth away earlier than you might otherwise have done is also better for your children. People are living much longer, with the numbers of those over the age of 90 in the UK having tripled since 1980. This means that people are having to wait much longer to receive their inheritance, and often receive it at a time in their lives where they don’t necessarily need it as mortgages are often already paid off and there is not much debt. If they were to receive it younger, in their 30s, perhaps, rather than in their 50s or 60s, it would be much more helpful, enabling more people to get a foot on the housing ladder, for example.
If the inheritance is not given at an earlier stage, then it can simply be added to savings, and this is then passed to their own children, but again, at a time when it is not going to do much good. Money can pass down through generations without ever being put to good use in this way, which is a waste and a shame.
If you are considering giving money away to your children while you are alive rather than leaving it in a will, then it is wise to speak to a financial planner. You don’t want to leave yourself short by giving away too much or not considering your own needs. Will you still want to go on holiday? Treat yourself to meals out? Make sure you can still enjoy your own life too.
Legacy letters, otherwise known as ‘ethical wills’ have been around for a long time. 3,500 years, if estimates are correct. And it’s quite incredible that so few people have heard of this interesting and heart felt way of letting loved ones know exactly what is expected of them, or exactly how they are thought of, after someone has passed away.
The term ‘ethical will’ is a little misleading; it’s not a will in the sense of it being a legal document that will distribute your earthly material possessions to friends and family once you have passed away. That’s why ‘legacy letter’ makes more sense as a title. But whatever you call it, it is an excellent way to share your values, hopes, dreams for the future, life lessons, advice, and of course your love with anyone whom you wish to read it.
You may have considered writing a legacy letter without even realising what it was you wanted to do. Many people find that when they come to a turning point in their lives – perhaps they have been diagnosed with a terminal illness, maybe they have had children and want those children to know how special they are, or they want to make a big change – they also want to write a legacy letter so that, should anything happen to them, their friends and family will know they were loved.
It’s a way of saying all those things we all want to say but feel slightly strange and embarrassed actually speaking out loud. It can be a cherished and lasting memory for your friends and family.
In medieval times, legacy letters were common practice, and it was usually fathers who wrote them to their sons. They were used to teach lessons that would be useful when the father passed away. These ‘wills’ were, in fact, popular right up until the 18th century, when they were used to ensure that certain beliefs were passed on through the generations. They fell out of favour somewhat after this, but they have never disappeared completely. You may even have written a legacy letter without knowing it!
You can write anything you want in a legacy letter – it doesn’t have to be about passing on beliefs (religious or otherwise), and it’s certainly not restricted to fathers and their sons. Whatever words of wisdom or information you want to write down to be discovered once you have died, you can. What about including a family history or family tree? How about some favourite inspirational quotes? And what about all those things you wanted to say but somehow never found the words for?
The only thing that can’t be included in a legacy letter is anything of a legal nature; you will need a valid and legal will for that as any bequests within a legacy letter are not considered legal.
Well… although that might be the assumption that many people make, it’s not entirely the truth. In fact, it’s far from it. If you die with debts still outstanding then they may – and probably will – still need to be paid off, which can make a big impact into your estate. Debts can be anything from small loans or credit for a store card to something much bigger such as a mortgage. If you’ve borrowed money and you die before you pay off the debt, then chances are either your estate or someone else will have to foot the bill.
Once someone dies, their estate is valued. And, unless any debts outstanding are in joint names, or a guarantor signed the documents (in which case the other person named must continue to pay the debt back), the debts will be paid using the value of the estate.
But what happens if there isn’t enough money in the estate to pay off the debts in full? The answer is that the estate must pay when it can, until the money runs out. There will be a specific order for the debts to be paid off – this must be agreed with the creditors – and the beneficiaries must also receive their share.
Property is a slightly different matter. Sometimes a property will need to be sold in order to release the funds that are tied up in it. What happens when a property sells, however, depends on whether the partners are tenants in common or joint tenants. Tenants in common means that the share of the property that belonged to the deceased will be used to pay off the debts rather than becoming the property of the other partner. They will then need to negotiate with the creditors and pay the debts in some other way. If, however, the couple were joint tenants, then the deceased person’s share of the property immediately reverts to the living partner, and it is ‘safe’ and cannot be sold to pay off debts (unless the creditor applies for an Insolvency Administration Order, which must be done within 5 years of the date of death. This order forces the sale of the property).
It is an emotional and financial minefield, and assuming that all debts will be written off once you have died has been the undoing of many. It has forced spouses into selling family homes and turned many perfectly solvent people bankrupt overnight.
So how to avoid these problems? No one wants to leave their spouse homeless. The best way is to ensure that you have adequate life insurance which will cover your debts and/or pay off your mortgage once you have died.
A recent survey carried out by a legal website has revealed that just under 20% of you would find discussing your will with relatives to be an extremely uncomfortable prospect.
Indeed, less than a quarter of Brits under the age of 50 have actually had a will prepared, indicating that either we think that we’re not likely to die for a few more decades or that it’s simply too awkward a subject to think about. This figure rises to 26% over the age of 50 and 41% for those in their sixties and above.
From those in their sixties and over, only 13% of you still felt uncomfortable with discussing your will.
Around one in five people have discussed their funeral arrangements and how they would want their estate to be distributed, but have not documented their wishes formally in the form of a will. 30% however, including 19% of those aged under 50, say that they have even not thought about their demise and what will happen to their families afterwards.
Despite the discomfort felt in discussing your mortality, surely the wellbeing of your children and loved ones must come first in all cases. Few of us have any idea of when the end will come but at least we can make some kind of preparation, so that we have a degree of control as to what will happen to our hard earned savings and assets, after we’ve gone.
Many people of differing ages prefer to either postpone drafting a will or choose not to do it at all, rather than face the inevitable prospect of their death.
Sadly, this of course means that the loved ones they leave behind are all too often faced with unforeseen costs, family battles, financial worries and uncertainty amidst their grief.
Intestacy, when a person doesn’t leave a will, means that the court decides who will be natural beneficiaries and what they will receive – which may not be what the family or the deceased would have wanted.
It is sensible then, to consider making a will as soon as you have any dependents and/or assets which will need to be distributed after your death. In England, the minimum age for writing a will is 18.
I would certainly advise that if you have significant savings, own a property outright or have a mortgage on a home, then you should consider making a will and sparing your loved ones the heartache and stress of having to pick up the pieces, should the worst happen.
A will writing professional advises what’s best to include in a will to suit your particular circumstances and wishes. However, it’s always a good idea to have some prior knowledge of what would normally be included, so you can plan your will effectively, in your own time.
Of course the first thing you need to think about when drawing up a will is who should get what. Among your assets, include property, cash, savings, pensions, policies, shares and all your personal possessions including jewellery and collections.
If you have children under 18, you certainly want to know that they’ll be well taken care of, should the worst happen. It’s never a pleasant subject, but it’s worth discussing arrangements both with the child if appropriate, and the selected and agreed guardian before including this in the will, too.
The person who will be in charge of ensuring that the wishes in your will are carried out and that everyone receives what they should is known as the executor. You can choose who should take on that role (remembering that it’s always best to ask beforehand).
If you make your will well in advance, your advisor may be able to help you find ways now to minimise the amount of inheritance tax which will eventually fall due on your estate. These could include gifts and transfers.
Once you’ve made your will, you should be advised to change it every three years or so, to reflect any change in circumstances. This must be done formally through either a codicil or preparing a new will altogether, signed and witnessed. Simple additions in pen or strikethroughs will not be classed as official and will be ignored.
We are often asked whether it is worth not only leaving the family home to a spouse or partner in a will, but adding them to the deeds, too.
Although whilst you’re alive, your other half may feel more secure by having their name added to your property’s deeds, it makes no difference when it comes to probate.
So long as you have left explicit instructions in your will that you want your partner to inherit your house, this will then be carried out to the letter. If, however, you have not made out a will giving these instructions, then the law of intestacy may reveal other claimants and the property could then be divided among these individuals, even if it has been placed in joint names.
Nor can any inheritance tax advantage be gained by having deeds in joint names, as assets will automatically be transferred to the surviving spouse, in accordance with English probate law.
If your wife, husband or partner have been provided for in your will, and are happy for deeds to remain in your sole name, then why not save yourself the money and effort of changing the property deeds?
An unexpected windfall, even if it comes as an inheritance, can sometimes provide a little happiness and relief amidst the sadness of death.
So what would you do if you woke up one morning to be told that Aunt Jean had left you £400,000 in her will?
You’d only be human if you’d immediately consider paying off your mortgage, settling your bills and planning a holiday to some far off island.
Unfortunately money tends not to stretch too far these days and many people are caught unawares, when they realise that the thousands they had in the bank only a couple of years ago, has dwindled to hundreds, and they’re back to square one, facing financial difficulty
Paying off debts
Firstly, financial experts recommend that one way of managing your inheritance is to immediately pay off any debts, which are likely to be costing you a considerable amount each month, in interest. Begin by identifying the largest and most costliest debts, and paying these off first.
Paying off the mortgage is also a good idea, if your monthly payments cripple your household budget.
It’s a cliché, but always remember to put some money aside for a rainy day. That doesn’t mean spending it on a holiday in January, when you’re feeling depressed, however. Ensure that you have the funds available, should your car break down and need new parts, if your pet falls ill and needs surgery or, if you’re self employed, that you have the money set aside for when you need time off or if you fall ill.
One way of managing your inheritance is to consider a high interest savings account, this will ensure that you’re making money from interest without actually doing any work at all. You may have decades left, so consider how you’re going to fund any additional care you’ll need in your old age.