Many of us put off making a will, although we know it’s something our loved ones will need one day. But your will is more than deciding who gets the golf clubs, or even who takes over the family home – it is the key to intergenerational planning, and to preserving your family’s wealth.
Why you need to act to preserve your family’s wealth.
Thanks mainly to the constant increase in the price of property, many more of us will have Inheritance Tax (IHT) deducted when we pass on our estates. At 40% of everything we leave above £325,000 (excluding an allowance for the family home) it means a substantial reduction in what you can pass on. At the same time, many younger people face a whole new level of financial challenges, with high house prices, and stagnant wages. They’ll need your help when you are gone.
Most of us would prefer to leave our wealth to our loved ones, rather than the taxman, which is why intergenerational planning has become an important part of financial management. It means that more of the wealth we worked for will go to those we care about.
Your will is your first, and most important tool for intergenerational planning.
How a will helps your family
If you don’t make a will, your estate will be divided according to the intestacy rules, which are looking increasingly out of touch with modern life.
If you are married with children and your estate is worth more than £250,000, your partner will only get the first £250,000 in England and Wales. The remainder will go to your children and your spouse will get a life interest in half of the remaining estate. They can’t spend it, but they are entitled to the interest.
If your assets are worth less than £250,000, your children will get nothing.
But half of marriages end in divorce. Many families include step children. Unmarried partners may not receive anything at all. And if you have loved ones, but no blood relatives, the state might take all of it.
At the very least, making a will can ensure that your wealth is distributed in a way that reflects your family and the people you care about.
How a will help reduce IHT
Your will also let you take various measures to reduce IHT liabilities.
Certain charitable donations can let you reduce the rate of IHT, although this will mean giving more money away.
If you run your own business or own shares these could be exempt. There are also exemptions for agricultural land and woodlands, and your pension. You’ll need to talk to an advisor to see how best to use these allowances.
Another solution is to place assets into trust. An absolute or bare trust would allow the beneficiary access to the assets in the trust at 18 or 21. A discretionary trust can offer more control, and allow parents or other trustees to control how investments are managed and paid out.
Trusts can go on working for many years. If you have enough wealth, they can provide financial support for several generations, delivering income while leaving the capital untouched.
Making a will is actually very simple, but most things to do with IHT tend to become complicated. It is essential to get professional advice from experts who understand the complex rules involved. Naturally, at Continuum, we would be pleased to provide the help you need.
The Financial Conduct Authority does not regulate wills, taxation and trust advice.
Levels and bases of reliefs from taxation are subject to change and depend on your individual circumstances.