Writing your Will is often viewed as an unnecessary expense – but can it actually save you money in the future?
When planning your finances, you want to leave as much of your estate as possible to loved ones. However, several factors could lead to your assets being lost which is why a well-written Will is recommended.
Mistakes in Wills
DIY Will kits are popular among people starting their estate plans due to their affordability. While they may help you save money in the short term, they can create extra costs over a longer period of time through expensive court fees or inheritance disputes.
Here are some of the most common mistakes in Wills that are not reviewed or written by professionals:
- Incorrectly witnessed – for your Will to be valid, it must be witnessed by two independent people over eighteen. However, it cannot be your spouse or a beneficiary of your Will otherwise it will be automatically invalidated. An invalid Will means you have no say in where your assets go, so your loved ones may not be taken care of financially when you pass away.
- Not accounting for debts – mortgages and debts left when you pass away can consume a big chunk of your estate. If you don’t account for them properly, you might leave less to your friends and family than you expected.
- Invalidation via marriage – Wills are invalidated by marriage. It will no longer be legally binding if you get married or divorced and remarried after making your Will. Instead, your assets will be distributed according to the rules of intestacy, which dictate how your estate should be shared without a Will. This could exclude some of your loved ones entirely or result in others receiving much less than you wanted them to.
After you pass away, your loved ones may need to get a grant of probate to administer your estate. If it is worth more than £5,000, there is a £273 fee for probate, but additional charges can be added for complicated assets. With a clear Will, you can identify whether probate is needed and plan your finances accordingly so your loved ones are not blindsided by high fees.
Lack of Inheritance Tax Planning
A basic Will kit won’t provide advice on Inheritance Tax (IHT) planning. You could lose a lot of money due to high tax rates that could have been avoided with professional legal advice.
A tax-free allowance of £325,000 is given before needing to pay any IHT on your assets, with an extra £175,000 from the residence nil rate band if you leave your home to a child or grandchild. If you leave everything to your partner, IHT does not apply, and you won’t use any tax-free allowance. If you are married, your allowance stacks with your partners, so couples can pass on up to £1 million IHT-free.
IHT is taxed at a rate of 40%, but with clever planning and a professionally written Will, you can save money. Here are some ways to minimise the IHT you pay:
- Use your gift allowance – you get a £3,000 gift allowance every year that can be used to reduce IHT. This allowance stacks for two years, so if you do not use it for one year, you could give a £6,000 gift without any tax implications. You can also give away unlimited small gifts of £250, although you can’t give anything to someone who has received a gift from your £3,000 allowance.
- Set up a trust – when you place your assets into a trust, they no longer legally belong to you. Therefore, when IHT is calculated after you pass away, it won’t be counted as part of your estate.
Trusts and Wills
A Will is a great place to start when planning for later life, but your loved ones could still miss out if you don’t consider trusts as well. Trusts are not just for the ultra-wealthy; they can protect your assets from people you don’t want to inherit and reduce the possibility of paying high care home fees in the future.
For example, you could use a trust to ensure that if your child divorces their partner, anything you leave them will not be counted as matrimonial assets. This would allow your child to keep all of the inheritance you leave them without any being taken in the divorce settlement.
There are many different trusts that you can include within your Will, such as:
- Discretionary Will trust – this type of trust is created upon death and holds the inheritance for a beneficiary, protecting it from divorce, bankruptcy, and IHT.
- Right to occupy trust – if you want to leave your home to your child but also want to ensure your partner can still live there after you pass away, you can establish a right to occupy trust. It can incorporate clauses to ensure that it ends after a certain period of time or due to events like remarriage.
- (Flexible) life interest trust – a life interest trust holds an inheritance for a beneficiary but grants an income, or life interest, to another person. For example, you may leave something to your child but grant your partner an income while they are still alive.
Although it will have an initial cost, writing a Will could save you and your loved ones thousands of pounds in the future. Whether it be reducing IHT, removing errors, or establishing a trust, there are many ways that a comprehensive estate plan will save you money.
Get in touch with The Planning Bee to start your Will writing journey today. Our paralegals will work with you to craft a Will specifically tailored to your needs.