When was the last time you discussed the family’s finances?
The unexpected death of a spouse can lead to considerable financial problems if the surviving partner is not fully aware of the state of the family’s finances. All too often, couples do not fully discuss the implications of the death of a spouse or partner, and this can create additional stress that could easily have been avoided. So it’s worth taking some time out to consider the following areas of your family’s finances.
Inheritance Tax (IHT)
If you own your home on a joint tenancy basis and are married, there will be no tax liability on the first death, because anything left to a spouse or registered civil partner is not subject to IHT. The same applies when you each own half the home as tenants in common and each of you leaves your share in your Will to the surviving spouse. However, a surviving spouse must be UK domiciled for an unlimited amount to be IHT-free, otherwise a reduced amount is IHT-free.
But IHT could be a problem once the second spouse or registered civil partner dies. Under the IHT rules for the 2015/16 tax year, once a chargeable estate is worth more than £325,000, the excess becomes subject to IHT at a flat rate of 40%.
If an IHT bill looks likely, it is more sensible to make some provision to meet it, otherwise your heirs may be forced to sell the family home or other assets simply to raise enough money to pay the tax bill. A popular solution is the purchase of a whole-of-life insurance policy written in an appropriate trust and designed to pay out when the surviving spouse dies.
You also need to consider what death benefits will apply if you die before drawing your pension benefits under your current and any earlier pension arrangements. Will a lump sum death benefit be payable? Will provision be made for a pension to be payable to a surviving spouse, registered civil partner or dependants?
If a lump sum is payable to any one or more of a range of potential beneficiaries at the discretion of the trustees of your scheme, establish that your desired beneficiaries fall within the eligible group of beneficiaries and notify the trustees of who you would like them to consider when making any lump sum payment. Schemes typically have a benefit nomination form for this purpose.
Provided you say so in your Will, investments (such as unit trusts), investment trusts and shares can revert to your spouse or registered civil partner when you die, although in some instances the tax advantages of certain investments may be lost. If you have a substantial investment portfolio, it may be advisable to bequeath some of the investments in your Will directly to your children or grandchildren to make use of the IHT nil rate threshold, provided you leave enough for your surviving spouse or registered civil partner to live on. If a discretionary trust is used with your surviving spouse or registered civil partner named as a beneficiary, the trustees can pay capital or income or make interest-free loans to that spouse.
Don’t assume everything will automatically go to your spouse or registered civil partner when you die. Ensure that you have a properly drawn-up Will. Ask someone else as well as your spouse or registered civil partner to be an executor, and, finally, don’t forget to tell them and other family members where they can find a copy. ν
INFORMATION IS BASED UPON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.
ESTATE PLANNING, TRUST PLANNING, TAX PLANNING AND WILL WRITING ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.