Real Risks
Times have changed and things are not like they used to be…
People can be forced to sell their family homes to pay for residential care fees
Why? Estimates suggest that between 30,000 – 40,000 people are forced to sell their home to pay for their residential care fees. Our capital and income are included when a Local Authority assesses whether we should contribute to or fully fund our care.
More people may be liable to pay inheritance tax as they won’t be able to use the married spouse exemption
Why? Less of us are now ‘married’ (decrease from 51% in 2001 to 47% in 2011), if your estate is worth over £325,000 it will be subject to inheritance tax at 40%
More of us could be left with nothing at all if our un-married partners do not make a Will
Why? More people are now co-habiting (an increase from 5.3 million to 9.8 million in the last decade). The laws which apply to distribute our estates when we haven’t made a Will do not recognise un-married partners whatsoever.
Our children need to have guardians and proper financial provision
Why? There are 13.3 million dependent children living within many different family households. It is incredibly important that all parents provide financial security and appoint guardians for their young children. In the last 10 years however there has been a huge increase in the number of children living with one parent (3.1 million in total) and so making these plans should really be top of the agenda.
The Government will receive more by way of inheritance tax from us
Why? We probably own more than we think; almost half of all adults aged 45-64 live in a household where the total household wealth exceeds £500,000. Whatever our age and whatever our financial circumstances, being aware of and reducing your inheritance tax liability may save your family thousands of pounds.
With these risks in mind,
whilst many of us would always like to hope for the best,
we can also prepare for the worst and
avoid unintended consequences for our loved ones.
Which risks are you most concerned about?
Click each risk below to understand the problem you face and more importantly………
what we can do to solve it!
If you jointly own your property with your spouse or partner, it is probably owned in a way which means that when one of you dies, the property automatically passes to the survivor.
If you need to go into residential care, your capital and income can be assessed by the Local Authority in considering whether you should pay for or contribute to the cost of your care. These rules are particularly complex but broadly speaking if you need to go into care, it is unlikely (although not impossible) that the capital in the property could be used to fund your care if your spouse/partner or certain other family members resided there. However, in the event that one of you had passed away (and therefore the whole property is in the name of the survivor), should the survivor need to go into residential care, the entire value of the property could be used to fund their care costs, leaving nothing for your family.
The solution?
• We can change the way that you own the property together. You will both remain joint legal owners, but you will each own a distinct 50% share of the property. You may have heard this called ‘severing the joint tenancy’. By doing this, your share of the property passes under your Will and not automatically to the survivor.
• In your Will, we can then ensure that you can then leave your surviving spouse/partner a life interest in the use of property and income from other assets within your estate for their lifetime, whilst avoiding the value of it being ‘in their name’ and therefore being used for any of their future care costs.
If you jointly own your property with your spouse or partner, it is probably owned in a way which means that when one of you dies, the property automatically passes to the survivor.
The solution?
• If you jointly own your property we can change the way that you own the property together. You will both remain joint legal owners, but you will each own a distinct 50% share of the property. You may have heard this called ‘severing the joint tenancy’. By doing this, your share of the property passes under your Will and not automatically to the survivor. (If you own the property in your sole name, we do not need to make any changes to the way that the property is owned)
• In your Will, we can then ensure that you can then leave your surviving spouse/partner a right to reside in the property for their lifetime; but ultimately you decide who should inherit the property thereafter.
a) That my children will inherit my property (not their new spouse or future children) or
b) That my children from a previous relationship will be provided for
Traditionally married couples/partners have left their entire estate to each other. Whilst this is not very efficient for tax planning purposes, the main disadvantage is that your spouse/partner may re-marry at sometime in the future, which is a real risk particularly for younger couples. In the event of re-marriage, they would inevitably make provision for their new spouse and any children they may go on to have together meaning that your own children may not inherit at all, or may have to share their inheritance with new siblings.
If you jointly own your property with your spouse or partner, it is probably owned in a way which means that when one of you dies, the property automatically passes to the survivor. He or she can then fully determine what will happen to the property in the event of their death.
The solution?
• We can change the way that you own the property together. You will both remain joint legal owners, but you will each own a distinct 50% share of the property. You may have heard this called ‘severing the joint tenancy’. By doing this, your share of the property passes under your Will and not automatically to the survivor.
• In your Will, we can then ensure that you can then leave your surviving spouse/partner a life interest in your estate for their entire lifetime (or until such time as they re-marry or co-habit with a new partner if you wish to include this). Your Will also then states that when this event occurs, your share of the property is to be passed to your children.
• This has the effect of providing for your spouse/partner until a certain event, following which your share will pass to your children. It does not rely on your spouse/partner passing on your inheritance to your children; you do this directly through your own Will.
a) Lost from the family through divorce proceedings; or
b) Used in bankruptcy proceedings or to pay creditors; or
c) Taken into account in assessing the financial support a vulnerable family member receives
When asked who you want to leave your property to when you pass away, many people have a good idea of who they want to benefit, for example £5,000 to my neighbour or my house to my Brother. In describing gifts in this way in a Will, they will pass to the person outright and officially be assets ‘in their name’. In some cases there will be very good reasons for doing exactly this.
You should however be aware that when assets pass outright in this way, they may be lost from the ownership you had planned for. This could be triggered in several ways, but most commonly through divorce proceedings or bankruptcy and other financial proceedings to pay creditors. Let’s take the example of leaving your house to your Brother and let’s say it has a value of £250,000; if your Brother then goes through a divorce then some or all of your house may end up in his former wife’s name as part of a divorce settlement.
There are other circumstances where leaving ‘outright’ gifts of value may have unintended consequences for the person you intended to benefit. If, for example disabled family member is in receipt of means tested benefits such as home care services, any capital or income they inherit outright would be taken into account when assessing their eligibility for financial support from the Local Authority. So it is possible that they may not then truly benefit from the intended inheritance.
The Solution?
• Regardless of the reason for not wanting to leave ‘outright’ gifts, the solution in most cases is a Discretionary Trust.
• In your Will, you will leave property/money into a Discretionary Trust and appoint Trustees (who can be friends/family/professionals and often the beneficiaries themselves) to look after the money and ensure that the people who you name as beneficiaries are ‘adequately provided for’.
• Whilst as the name suggests, the distribution from the Trust is entirely at the discretion of the Trustees, its main advantage is that the Trust property does not belong to the beneficiaries legally. As they can only benefit if the Trustees so decide, the funds are not in their name and therefore the assets are protected from a beneficiary being involved in divorce proceedings, creditors, bankruptcy or indeed jeopardising any financial support they are in receipt of, as described above.
• We will also prepare a Memorandum of Wishes, stating how you would like the Trustees to consider using the Trust fund for the benefit of the people you have named. Although the Memorandum of Wishes is not binding, it can be kept with your Will and provides guidance to your Trustees on any priorities you may have. The Memorandum of Wishes is a confidential document between yourself and the Trustees and has the added advantage of not becoming a public document (unlike your Will when you have passed away)
It is often hard to imagine a time in the future when you may not have the mental capacity to make clear decisions about your finances or healthcare, maybe through sickness, accident or dementia in old age. Although we know the unforeseen and unexpected can happen, we usually think (and hope) ‘it wouldn’t happen to me!’.
If you become incapable of managing your affairs, no-one has the authority to do this on your behalf. It would then be necessary to make an application to the Court of Protection asking for an official ‘Deputy’ to be appointed. The Court will decide who is appropriate to do this on your behalf and that person then has the authority to deal with your financial and welfare issues. The Court may not always appoint a family member or friend and therefore it is also possible that whoever is appointed may not deal with your affairs as you would have liked. Whilst this can be a very un-nerving experience for your loved ones, it can only be a significant personal cost for them. As a guideline, costs in the first year alone are likely to exceed £1500 and thereafter annual charges of several hundreds of pounds.
The solution?
Grant legal authority to people you know and trust to be able to make decisions on your behalf should the need arise.
Giving someone this type of authority is officially called ‘granting a Lasting Power of Attorney’.There are two types of powers which can be granted by you:
1. Property and Finance
2. Health and Welfare
Find out more about how these work
