Many assume that their estate will be passed on to their nearest and dearest on death however this may not always be the case. A Will is the only way to control inheritance and having no Will in place means an estate is dealt with by the rules of intestacy. These rules will determine who will manage and benefit from a deceased’s estate.
Here is an example of the ramifications of not having a Will in place.
Joe’s Estate
Joe is married to Diane, has two children, Jack (17) and Jill (10), and a step-daughter, Angela. Joe treats Angela as his daughter and an equal of Jack and Jill. His son Jack is disabled and incapable of looking after his own finances.
Joe owns the family home worth £400,000. He also has a share portfolio worth £300,000, bank accounts holding £50,000 and 60% of the shares in Joe and Barry Limited (a property investment company operated with his brother, Barry) valued at £600,000. Joe and Barry run the business together.
Joe dies without a Will.
Executor
As Joe dies without a Will, no executor is appointed to deal with winding up his estate. A beneficiary can be court appointed, but this can be a costly process.
Diane
His wife can inherit from two branches of the estate.
The first branch is “Prior Rights”. As the surviving spouse, Diane will be entitled to the family home (which is worth less than the available maximum of £473,000) as well as contents up to the value of £29,000 and the £50,000 held in Joe’s bank accounts.
The second branch is “Legal Rights”. Legal Rights is an entitlement to a share in everything which is not land or buildings (moveable estate). As Joe had children, Diane is entitled to 1/3 of the net moveable estate (1/3 of est. £900,000).
Jack
Under intestacy laws, Jack and Jill share the remaining estate equally.
Even though Jack is disabled and lacks full capacity as he is over 16 and an adult he is immediately entitled to his inheritance.
Jill
Jill will receive the same from the estate as Jack, but as she is a child her inheritance comes under the remit of the Accountant of Court until she turns 16 when she will become absolutely entitled to it. The Accountant of Court performs an important protective function and may monitor and administer Jill’s inheritance. The Accountant of Court’s involvement can be restrictive.
Angela
As she is not Joe’s biological daughter Angela has no right to a share in Joe’s estate.
Tax
Only Diane’s share (Prior Rights and Legal Rights of £300,000) is exempt from Inheritance Tax.
The remainder of the estate attracts no exemptions, only the excepted nil-rated amount applies which is currently £325,000. The remainder is taxed at 40% on the gross chargeable estate less the nil-rated amount (£600k - £325k = £275k), meaning tax of £110,000.
The Company
Joe’s executors now hold his controlling interest in Joe & Barry Limited and their dealing with the shares may be restricted by the company’s rules.
If Barry cannot raise funds to buy Joe’s shares they will be sold or given to the children who have little interest in the company. These possible consequences may have implications for the management, reputation and value of the business.
What if Joe had a Will?
- The executors would have been Joe’s choice;
- tax reliefs could have been used to ensure no exposure to tax on Joe’s death;
- Diane’s future could have been better protected;
- Joe could have ensured that all three children benefitted equally;
- Joe’s executors could have managed funds for young or incapable beneficiaries;
- Joe’s Will and the Company rules could have been aligned to ensure succession of the business and;
- the business interests and Barry could have been protected.
Joe and Diane both preparing Wills would have been the more effective means of protecting family wealth, maximising tax reliefs and directing estate appropriately.
