Blended families and cohabiting couples are commonplace across the UK. Tip soaring house prices into the mix and, with so much at stake, it's easy to see why the number of wills being contested has risen by more than 700 per cent in recent years.
Mark Spash, senior partner at law firm Piper Smith Watton, says: "It used to be that one in 1,000 wills were a problem; now 7-8 per cent are problematic. Where there is a second or even third marriage, I would say there is always conflict relating to the will."
If your will is poorly written or you fail to write one, you run the risk of depriving the very people you intend to inherit, or, conversely, bequeathing wealth to someone you never meant to inherit.
Leaving things to chance or trust can also create problems. It's common in a second marriage for spouses to write wills leaving everything to each other, and then on the second death, to split the assets between their respective children from earlier marriages. But there is nothing to prevent a surviving spouse from writing a new will after the first death in which his or her children inherit everything and the deceased's nothing. A similar situation could arise where the surviving spouse remarries, at which point any previous will recognising the deceased's children is rendered invalid. In cases like this, the courts are almost always powerless to help. If you don't like the idea that most of your wealth, and potentially that of your parents, could end up entirely in the hands of your stepchildren, or a person you have never met then you need to have a smarter will.
Almost all of these and other situations can be defused in advance by making sure your will is carefully written (especially if you have remarried), backed up with a letter of intent and/or scrutinised by a lawyer. Don't assume everything will fall into place just the way you want it - if the legal framework isn't in place, it probably won't. And while challenges often fail, the courts will generally support a dependant, whether child or spouse, who has not been financially catered for.
The first hurdle
More than two-thirds of adults in the UK have not made a will (a figure incidentally confirmed by a straw poll of Investors Chronicle staff with dependants). Does it really matter? After all, that's what the laws of intestacy are for: deciding who gets what, in the fairest possible manner. But fair doesn't include unmarried partners, and it doesn't mean tax-efficient either.
Without a will the law could dictate that your assets go to someone you have not seen for years, or whom you actively dislike, while giving nothing to the person you live with. If you are not married and have not written a will, your partner will not inherit your estate, even if you have children together.
"The rules of intestacy are a safety net, but people wrongly assume that everything they own will simply go to their nearest and dearest, but if they are not married to their partner or in a civil partnership, it won't. The starting point of the new intestacy rules is that if you are not married, you have no rights," says Susan Spash, partner at chartered accountancy firm Blick Rothenberg.
Grappling with issues of death and "who gets what" can make us uncomfortable. It's so much easier to think 'I’ll do it later'. But with around one in three adults in the UK dying intestate, some of us won't have the luxury of time on our side.
And if you have taken the bull by the horns and written a will, don't feel too smug. Most people having written a will never go near it again, despite lawyers and tax experts advising that wills should be reviewed regularly. "These are not documents to be thrown into the back of a drawer and left. They should be reviewed every few years and on life occasions," says Gary Heynes, head of private client at Baker Tilly. That's because not only do tax and inheritance laws change, so do our situations and relationships. For example, a will might specify a sum of money that is to be paid to a beneficiary, but several years on, the amount might be considered inadequate or form a much smaller percentage of the overall estate where the legator's wealth has increased.
The opposite can be true too, points out Mark Spash, where your financial circumstances have changed dramatically. "By way of example, let's say a wealthy husband leaves £1m to his children with the residue to his wife. At the date of death he only has £1m. The specific gifts take precedence over residue and therefore the wife would not inherit anything."
Pre-2008 wills are likely to include arrangements for trusts to be established to the value of the nil-rate band but now that the nil-rate band can be used on the death of the second spouse, this is no longer necessary to avoid 'wasting' a nil-rate band. However, trusts are still useful, particularly in cases of second marriages - see below.
Getting your will right
People make assumptions: for example that everything will go to their other half, or that somehow people will know what they wanted to happen. "But it's like telling a builder to build you a kitchen: without direction from you, there's no telling what you'll end up with,” says Susan Spash. A will lays down exactly what you want to happen. Below we've outlined what writing a will can achieve for different groups of people and how to ensure that your aims are achieved.
Cohabiting couples
If you and your partner are cohabiting, a Will can ensure that your partner inherits all your assets, or whatever proportion of your assets you wish. Otherwise, with the exception of assets that are jointly owned, your partner will not be entitled to any part of your estate no matter how long you have lived together or how many children you have.
If you cohabit, have children, and die intestate, your children rather than your partner will inherit your estate. Your children from any relationships are treated equally.
Where your only children are from an earlier relationship, your partner could be at the receiving end of a nasty shock if you die intestate - under intestacy laws the child will inherit your property.
How you own your property makes a huge difference. Couples can own property either as tenants in common or as joint tenants. Tenants in common own individual shares of the property whereas joint tenants own the property together. If you have no children, your assets - including property that is in your name only, or which you own as a tenant in common - will go to your parents or siblings. Clearly this could leave your partner in a stressful situation. However, jointly owned property, that is where there are joint tenants rather than tenants in common, will automatically go to the surviving joint owner. You cannot in fact leave your share of a jointly owned property to anyone other than the joint owner.
But there is a further problem for unmarried couples that even a will cannot solve and that's the problem of inheritance tax. Unmarried partners might believe they will be treated like a spouse - particularly if they have children together - but that is not the case. They will be liable for inheritance tax at a rate of 40 per cent on assets inherited over the £325,000 threshold and this includes jointly owned property.
If you leave your cohabiting partner a £1m house which you both live in but which you own, she or he can expect to face a tax bill of £270,000. Even if the property is jointly owned, whether as joint tenants or tenants in common, there will still be a tax bill. Assuming that the whole of the nil-rate band is available for use against the property and each share is worth £500,000, the tax bill will be £70,000 (£500,000 less £325,000 = £175,000 x 40 per cent). Sometimes a small discount of up to 5 per cent to the valuation can be agreed with HMRC to reflect the fact that the half-share is not worth the full valuation on the open market, says Susan Spash.
…for married couples where neither spouse has been married before
If you are married with children, a will can be used to make sure that the surviving spouse inherits the assets that you own, either outright or in trust with the right to all income and usage. It's far less common in a first marriage for spouses to build in protection for their children in case their spouse remarries but some do consider doing this, especially where one spouse is in poor health or a good deal older. Instead of hoping the surviving spouse does the right thing later, you can instead arrange for them to have a life interest in, rather than outright ownership of, your assets and, when your spouse dies, the assets will be distributed according to what is set out in your trust so can be directed to your children, says Susan Spash. "The surviving spouse can take income from the life trust but cannot change the ultimate outcome. What happens to the assets in the life trust is predetermined."
If there is no will in place, and you have children, your spouse will inherit the first £250,000 of your assets and share the rest with your children. Children will therefore get half of your estate above £250,000. If there are no children, your spouse will automatically inherit everything.
Married couples often choose not to use the nil-rate band allowance on the first death but it can make sense to use it. We will be looking at minimising inheritance tax and using the nil-rate band to maximum effect in the second part of this article at a later date.
…married couples where one or both spouses have been married before
If you are married for the second, or third time, a will can be used to make sure your children from a previous marriage inherit something while at the same time leaving your spouse financially secure. There have been several high-profile cases in the UK courts featuring children who have been deprived of an inheritance by their step-parents following the death of their parent. If you want to avoid this risk, don't use a 'mirror will' - this is where you leave everything to each other and then to your and their children after the second death. Instead, if you want to exercise control beyond the grave, do the following:
*Own your property as tenants in common not joint tenants. This doesn't mean turfing your spouse out of your home - you can write your will giving him or her a life interest in your assets rather than outright ownership. This is known as an Immediate Post Death Interest and it allows the spouse to live in a property or receive an income from your assets until they die. When they die, your assets pass to your child(ren) - if you have specified this. With this safeguard, whatever your surviving spouse does (eg remarry or write a new will), your children's interests are protected.
* Keep assets separate if possible when you remarry so that what's yours stays yours and can be passed to your children. Just remember, says Mark Spash, that proper provision must be made for surviving spouses.
*Consider passing on assets during your lifetime rather than after death. This way ownership is established and cannot be altered after your death.
If you have no children and you die intestate everything you own will go to your spouse so if you intended to leave something to your siblings or parents, you need to write a will.
Deeds of variation: under review
Deeds of variation can be used to share wealth more fairly and or to reduce or avoid inheritance tax. For example two children are named in a will but not a third child who was born after the will was made. A deed here will split the assets between all three. Deeds can also be useful where a parent with short life expectancy inherits an estate which, added to his or her estate, would tip the combined estate into the inheritance tax net. A deed here can allow a whole property to be passed directly to the grandchildren without creating a massive tax bill.
Deeds of variation have to be done within two years and with the agreement of all the beneficiaries. However even if those hurdles can be cleared, the chancellor has kick-started a review of how deeds are used and it may be that in future, while changes can still be made under the deed of variation, the IHT outcome will be as if the deed had never been written.
Golden rules for wills
■ Don't make your parents the executors; they probably won't outlive you.
■ If you use a high-street bank to write your will they will probably write themselves in as the executors for a considerable fee.
■ Use codicils to make straightforward changes to a will.
■ Minors cannot inherit absolutely - you will need to create a trust.
■ Be careful about the wording. If your intentions are not clear the will could fail.
■ Make sure you own your property (as tenants in common or as joint tenants) in a way that corresponds with your wishes. You cannot leave a share of property that you jointly own to anyone other than your co-joint-owner.
■ Use a side letter of wishes to explain your intentions. This is highly recommended where you do not wish a family member to inherit or where your family might claim that you were unduly influenced.
■ If you have made a promise to someone and do not keep it they might be able to claim successfully.
■ Wills require proper witnessing: that means two independent witnesses who are present when you sign.
■ Marriage revokes wills although it is possible to write a valid will ahead of an impending marriage.
■ Divorce does not invalidate wills. Mark Spash explains: Divorce only revokes part of the will relating to the divorcing couple.
■ Remember the value of your estate could rise or fall in future years. Keep your will up to date.
This is the first part of a two-part article on Will and inheritance tax.
