Will planning for simple and complex estates

The reason being that November is traditionally “Make a Will month”, with many firms and charities offering a free or discounted service of will writing and wills topics given prominence in financial pages of the popular press. So, this is another opportunity for financial advisers to raise this important subject with their clients.

A basic will for a simple estate

During the month of November making a will was made easier for some people with the annual Will Aid event, which is a scheme involving nine charities and more than 400 solicitors across the UK who offer to write "basic wills" for anyone, waiving their usual fee, and instead invite the client to make a donation to Will Aid. If you have missed it this year, there will be another one next year, and, in the meantime, there are also various online tools for making a will; but how useful is this for the type of client that is (or should be) in receipt of financial advice?

The key is in the word "basic". Using the Will Aid's definition, a basic will covers an estate where you are leaving everything to a few family members, friends and charities; which does not require detailed inheritance tax (IHT) advice; and which has no assets outside the UK. It does not include setting up trusts. No doubt there will be many people for whom such a simple will is going to suffice and a simple basic will is always better than no will at all. However, for those with assets potentially subject to IHT and for anybody with children or grandchildren or on a second marriage, the likelihood is that some form of will trust should at least be considered.

Interestingly, a research and consultancy firm, called Funeral Solution Expert, analysed 26 online will writers and found that consumers are often mistaken as to whether their affairs are 'simple' or 'complex', and that the companies themselves ‘offer very little liability for something going wrong’. According to their research, 65% of consumers who rate their own affairs as “simple” subsequently reveal, through questioning, that their affairs are in fact “complex”.’
Who can advise on wills?
Will writing is not a reserved activity under the Legal Services Act 2007, which means that you don't have to be legally qualified to prepare a will. Indeed, there are numerous "will writing" firms, and, more recently, so-called "online will writing" has become more popular, especially during the restrictions caused by Covid.

Unfortunately, the quality of some of the wills advice currently on offer is not always up to standard. A recent case Technical Connection were asked to advise on involved a trust created by a Deed of Variation created with the help of a "standard" template provided by a will writing agency, where there was doubt as to whether trustees had been properly appointed. Significantly, while the document did clearly state the name of the agency (which did not purport to be a solicitor), the client involved was actually convinced that they had dealt with a solicitor and was surprised that the said firm had gone bankrupt.

Probate experts are concerned that online wills and wills made using "standard templates" without help from a professional may result in an increase in contested probate cases in the future.

Key tax considerations when making a will

Tax considerations are often paramount in will planning, and, to ensure that a will is tax-efficient, it is important to appreciate some fundamental tax points. Here are the key points to always bear in mind:

• While the standard nil rate band (NRB) of £325,000 (frozen at least until 5 April 2026) is available to each individual, it covers transfers both during lifetime and on death. So, gifts made (generally) in the seven years before death will reduce the amount of NRB available to the estate on death.
• If the individual owns, or has owned in the past, a residence and has children or grandchildren who will inherit it, there is available an addition to the NRB, called the residence nil rate band (RNRB) currently of £175,000, if the total estate is not more the £2 million. The RNRB is only available on death.
• If a person is married/in civil partnership and they do not use their NRB or RNRB on their death (for example if all their assets pass to their spouse/civil partner), the surviving spouse/civil partner can claim to have those NRBs effectively transferred to them (by having their own NRB and RNRB proportionally increased). This is called the transferable nil rate band (TNRB) and transferable residence nil rate band (TRNRB)
• If all these NRBs are available this may result in a couple's assets of up to £1 million passing down to the next generation free of IHT.
• If sufficient assets are left to a charity, the rate of IHT on the remainder of the estate may be reduced by 10%.

Many individuals will not be aware of the above and how these provisions may be used to optimise the tax outcome (i.e. smaller IHT bill) in the event of death. Therefore, when dealing with clients falling in any of the above categories (married, in a civil partnership, widowed, property owners, having children, etc.) the above points need to be considered. Needless to say, when advising on any of the above, the adviser will have to have a thorough knowledge of the relevant rules, especially those governing the TNRB and RNRB, as these are often complex.

Will trusts - are they needed?

Clearly, an answer to this question will depend on the circumstances of the client. Some people may shy away from the idea of a trust and would rather “keep things simple”, just leaving outright legacies to their beneficiaries. In practice, an attempt to keep things simple may lead to some considerable complications.

Minor children as beneficiaries

Where the intended beneficiary is a minor child, even the so-called outright legacy will, in effect, have to be held on trust until the child reaches the age of majority - except that the person(s) holding the funds for the child will have no "rulebook" to hand on how to deal with those funds in the meantime. Statutory provisions will then apply, but so much better to have a trust listing all those provisions included in the will.

Furthermore, special rules apply when trusts are created for a minor child on death of a parent, namely, there are two special categories of such trust, i.e. a trust for a bereaved minor (TBM) or an age 18-to-25 trust, which benefit from favourable IHT treatment.

When a legacy is being left to a grandchild or another minor child, there will be more choice, namely a fully discretionary trust, A&M (accumulation and maintenance) trust or an IIP (interest in possession) trust. The choice will of course depend on the wishes of the client; the adviser's role will be to explain the options. Needless to say, the adviser will have to be familiar with the types of trusts and their tax consequences.

It should be remembered that any trust for a minor will be a chargeable transfer for IHT on death, however, not all trusts will be treated in the same way subsequently. An IIP trust will be an IPDI (Immediate Post Death Interest) for IHT purposes and will benefit from income tax assessment on the beneficiary. Any other trust (other than a bare trust, TBM or 18-to-25 trust) will be a relevant property trust for IHT purposes and subject to the higher trust tax rates in respect of trust income. All these factors should be taken into account when including a trust for minor children in a will.

Trusts for surviving spouses/civil partners/partners

One fairly common arrangement is where one spouse/civil partner leaves a life interest to the surviving spouse/civil partner and then to their children. These are especially popular with those on second marriages/civil partnerships where they want the children from the first marriage/civil partnership to benefit from the capital of the estate (often including the couple's residence) while the surviving spouse/civil partner has the continuing use of the property. Such a trust will be an IPDI for IHT purposes.

If the couple are married/civil partners, the transfer will be exempt on the first death but when the value of the IPDI passes to the children on the second death it will be fully taxable. For couples who are not legally married/in a registered civil partnership, the tax position is not ideal, as IHT will be payable on the first death (unless covered by the NRB) and then again on the second death. There will also be complications if the RNRB is an issue (as the couple are not married or in a civil partnership, the children of the first to die will not be lineal descendants of the second to die and so neither the RNRB nor the TRNRB will be available).

Discretionary will trusts

Since the introduction of the TRNB, in 2007, the incentive to include a discretionary NRB trust in a will (so as to bank the NRB, which, prior to 2007, would otherwise be lost) has significantly diminished. However, there are still many reasons why a discretionary trust may be a good idea. Here are some of them:

• Where either spouse/civil partner has previously been widowed, use of the NRB/RNRB on the first death may pave the way for use of a total of three NRBs/RNRBs rather than just two.
• When the house alone is valued at more than the total NRB amount likely to be available on second death (taking account of both NRBs and RNRBs) and there are no or insufficient other assets in the estate. In such a case, a gift of a share of the property to children on first death might seem to be the easiest way to bank the RNRB on the first death.
• Where there is a desire to avoid assets being available to the local authority in the event of the survivor going into care. By leaving assets to a trust on the first death those assets will not count as part of the surviving spouse’s/civil partner’s resources for the purposes of the local authority charge.
• If it is desired to avoid children inheriting assets outright, perhaps to protect them from the claims of creditors and ex-spouses/ex-civil partners.
• If the client has not quite made up their mind as to who should inherit what. An informal letter of wishes left with the trustees of the will trust can be easily changed/updated without having to make a new will/codicil (with all the required testamentary formalities).

Finally, even if a discretionary will trust does come into existence on the first death, and, after the first death, this is not required, there would be, within two years of death, scope to appoint absolutely out of that discretionary trust and achieve the same IHT results as if the assets had passed directly under the will. In particular, an appointment can be made absolutely to the spouse/civil partner or to a life interest trust under which the spouse/civil partner has an IIP, and, in both these cases, the spouse exemption will apply. In effect putting a discretionary trust in your will means hedging your bets.

Comment

Perhaps unsurprisingly, one of the unintended consequences of the pandemic has been an increased interest in will-making. It should follow that this means an increased number of people who should be getting advice on this. Quite a lot of knowledge is required to create an effective estate plan on death. Hopefully, the above key points will help focus on the important issues.