By JASON BUTLER
Do you know if your grandparents, parents or adult children would leave a financial mess for you or others to sort out if they pass away or become incapacitated? More to the point, will you leave them with a financial mess if you pass away or become incapacitated?
Wills aren’t just for older people
Television presenter and actress Caroline Flack died in tragic circumstances in early 2020. Media reports suggest that Caroline’s estate was worth about £2M when she died. But because she died without a will – known as being intestate – and was unmarried without children, all her wealth will pass to her parents.
We don’t know if that is what Caroline would have wanted. There may have been people or causes that she’d like to have benefited. But what we do know is that a fair chunk of Caroline’s wealth will be subject to 40% inheritance tax before being passed to her parents under the rules of intestacy.
Caroline’s parents will see the value of their combined estates increase by the value of their inheritance from their daughter, which will also potentially be subject to further inheritance tax when they pass away.
Dealing with someone’s estate without a will can be more than time consuming, expensive and complicated. It can also create emotional and mental stress for family members acting as executors (the people who oversee the deceased’s legal and financial affairs), as they try to cope with unfamiliar procedures, rules and obligations.
Unmarried couples with children are in a complicated situation as they have few rights over their deceased or incapacitated partner’s financial affairs and assets.
This free UK government online wizard shows who benefits when someone dies without a will.
Lasting Power of Attorney
Imagine that someone close to you is mentally or physically incapacitated and unable to make decisions about their medical treatment or financial affairs. Worse still, you are powerless to make decisions for them.
Bank accounts, even joint ones, will usually be frozen, making it impossible for you to pay bills or access funds for other needs. And all medical decisions will be taken by the health authorities, even if you know it to be contrary to the wishes of your loved one.
This is the situation faced by Good Morning Britain TV presenter Kate Garraway, since her husband fell into a COVID-related coma last March.
“One of the practical problems – which a lot of people would’ve experienced if they’ve got the absence of someone in their life – like many things, the car is entirely in Derek’s name, the insurance is in Derek’s name, a lot of our bank accounts.”
– Kate Garraway, wife of Derek Draper
The answer to this potential problem is to put in place a Lasting Power of Attorney (LPA). You can create an LPA for Property and Financial affairs and a separate one for Health and Wellbeing. The authority can be very narrow or wide-ranging.
A Property and Financial LPA allows you to deal with the financial matters of your loved one if, like Derek Draper, you are unable to do, due to mental or physical incapacity. A Health and Wellbeing LPA enables you to make critical health and medical decisions, rather than leaving it to the medical professionals.
Think about tax
Suppose you die before the age of 75 with an investment-based personal pension. In that case, the fund is available to provide dependants or other beneficiaries with either a tax-free lump sum or a tax-free income.
The pension trustees will decide who will benefit from your fund. They will take into account both pension rules and whether or not you have given them a written indication of who you’d like to receive benefits. This is known as a pension nomination.
If you haven’t given the trustees a written nomination, they can only pay benefits to someone who was a financial dependant at the time of your death. This means your spouse, civil partner or a person who you were living with as a spouse. It also includes any of the deceased’s children aged under 23 or anyone else who was financially dependant on you.
Suppose there are no financial dependants and no written nomination of other beneficiaries. In that case, the trustees can pay to other beneficiaries. But they can only pay them a lump sum, not an ongoing tax-free income. And the lump-sum payment will fall into the beneficiary’s estate for inheritance tax purposes.
It makes sense, therefore, to nominate those who you’d like potentially to be able to benefit from a tax-free income from your pension, but who won’t count as a dependant. This flowchart explains pension death benefits in more detail.
Invest a little time and money to avoid a mess
You, your parents and other close relatives must make sure that the three essentials are in place: a will, LPAs and a pension nomination.
Which? has an inexpensive online will and LPA service, with the option of telephone-based support. For less than £1.50 a day a couple can get these important documents created and finalised. If your affairs are very complicated, then you might prefer to take personal advice from a local solicitor or estate planning specialist. Expect this to cost at least £1,000.
All online personal or workplace pension providers allow you to nominate beneficiaries quickly and at no charge. Older style plans might need you to sign and return a paper form. Either way, it is easy.
No one wants to think about dying or becoming ill. But if 2020 has taught us anything, it’s that life has a habit of throwing up curve balls when we least expect it.
JASON BUTLER is a former financial planner, based in Suffolk. He is a personal finance columnist for the Financial Times, and is Head of Financial Education at Salary Finance. You can find out more about him on his website.
If you’re interested in reading more from Jason, here are some other articles he’s contributed to TEBI:
Is going to university worth the cost?
Should you buy or rent in the current housing market?
Seven positive changes you can make post-lockdown
Your retirement could be longer than you think
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