The dangers of delaying inheritance planning


Clients are often tempted to put off planning for the division of their estate on death. However, creating a will can help avoid complications, particularly where complex family situations exist.

There are an estimated 52 per cent of adults living in the UK that do not have a will, the absence of which means an estate will be distributed in accordance with the intestacy rules. The rules create a fixed order of inheritance, determining who can benefit and how much they are entitled to. The outcome may not be as was intended by the deceased.

Take the example of newlyweds Hannah and Dean. They have recently married and for both it is their second marriage. They both have children from their first marriage. Dean has a son, Rupert, and Hannah also has a son, Simon. Hannah and Dean have just had a baby daughter, Felicity. The couple, along with all three children, live in a home belonging to Dean, who also has modest savings.

If Dean dies without leaving a will – with an estate worth, say, £240,000 – under the intestacy rules all assets are left to Hannah. It is only natural for parents to want to provide for their children, however, Dean’s son Rupert has no legal entitlement to any of his estate.

Should Rupert reside in future with his biological mother, she may consider claiming for a share, creating potential for further unrest.

Equally, were both Dean and Hannah to die together, and it not be possible to ascertain who died first, then it is likely Dean’s estate would vest with Hannah under intestacy rules, courtesy of the fact she is four years his junior. As a result the estate will ultimately be split between Hannah’s children, Simon and Felicity, while Dean’s own son Rupert is again left with no legal right to inheritance. It is easy to see how this could result in conflict.

Another possible consequence of dying intestate is the payment of inheritance tax. IHT is generally payable when the value of an estate is worth more than £325,000. Any amount left to a spouse or civil partner is exempt, however. Creating a will, therefore, allows the individual to pass on their assets to a spouse or civil partner in order to defer IHT liability and potentially reduce it over the longer term.

The recently publicised case of Rik Mayall illustrates this point. Mayall died intestate with an estimated estate of £1.2m.

At the time of his death the intestacy rules dictated that his spouse would receive the first £250,000 and the right to receive income on the remainder of the estate, with the remaining capital held for the benefit of his children.

Where children receive more than £325,000 there will be an IHT charge of 40 per cent on the excess amount. However, if a will is created which leaves the entire estate or any amount over £325,000 to the spouse or civil partner IHT liability can be mitigated, increasing the value of the free estate for his family to enjoy.

Much like the creation of a will, clients should be encouraged to formally nominate beneficiaries of death in service benefits and any pensions they may hold.

Working in the financial planning sector it is easy to assume everyone is alert to the dangers of failing to keep personal financial affairs up to date. In reality, many people allow death benefit nomination forms to gather dust in the “to do” pile. However, without a nomination in place, scheme trustees must make a difficult decision on where to allocate pension assets on death.

Cases have arisen in the recent past where an individual with children from two separate relationships has passed away without having completed any sort of death benefit nomination. While one relationship was in the UK, with children continuing to reside here, the young children from the second marriage, based abroad, were highly dependent on the deceased for financial support. The outcome saw the entirety of the substantial pension pot passed to the family abroad, based on their acute financial dependency on the deceased individual. The children living in the UK received no benefits from the individual’s substantial pension assets. Had the member completed nominations, they may have chosen to split those benefits more equally.

The consequences of this inaction and the benefits of building a plan for the distribution of assets on death are subjects advisers should preach about loudly and often. Where clients leave behind a substantial inheritance, those advisers that have supported clients in building a plan for the settling of their estate should be well-positioned to advise beneficiaries on how best to employ that inherited wealth.

Gordon Andrews is life and investments technical manager at Old Mutual Wealth