I like the simple things in life. When it comes to wills, most of my married couple (and civil partnership) clients want to keep things simple too. ‘Everything to my spouse and then to my children equally, please’ is a common refrain. There is nothing wrong with that.
The only problem with keeping things that simple, though, is that you can be wrong-footed if your family’s circumstances have changed by the time you die, or afterwards. The child’s marriage doesn’t work out. The child’s ex-partner wants a stake in your child’s home. Your spouse loses capacity to manage finances after your death. Lawyers have a tendency to look on the black side and chances are none of these things will happen. However, the fact is that a simple will, leaving everything to heirs outright, gives no protection against any of these things, so you are taking a risk.
A simple will also has nothing to offer if Inheritance Tax (IHT) is of concern. If spouses leave everything to each other, that paves the way for the IHT transferable nil rate band to exempt, currently, the first £650,000 from IHT on the surviving spouse’s death but no more.
For married couples and civil partners, I often return to broadly the same will format as it is hard to beat, and possible planning opportunities with this format after a death occurs are numerous. It consists of a discretionary trust of the available IHT nil rate band and a life interest trust of the rest – the residue. Both will trusts must be subject to powers of appointment which allow the trustees to be super-flexible with how they apply trust income and capital, including getting rid of the will trusts if they are not wanted or needed after the death of the first spouse. As all will trustees would have to agree to termination, it is essential that a spouse-sympathetic board of will trustees is appointed.
With this type of will, after the surviving spouse’s death, assets pass into trust for the children, not to them outright. This may be a necessity if the children are too young to inherit but even financially responsible adult children can benefit from this arrangement. The trust offers a degree of protection if a child faces threats to his wealth after his surviving parent’s death. A simple will would just tip the child’s inheritance into his lap automatically, whether that was a good idea or not. Equally important, the trust gives a child the option to enjoy his inheritance by way of a loan from the trust. This creates the opportunity for the child’s inheritance to pass IHT free to his own children. A neat example of generation-skipping IHT planning, without requiring a child to forgo his inheritance.
The discretionary trust/life interest trust combination after the first death also creates IHT planning opportunities for couples who own properties. It is notoriously difficult to mitigate IHT on the home. However, you can safely achieve some IHT mitigation using these will trusts. The simplest example of this is to allow the will trusts to retain some of the half share of the home owned by the first spouse to die. As a consequence, the remaining share, held by the surviving spouse, will be valued at less than its pro rata market value on the surviving spouse’s death and less IHT will be payable on it. Shares of property attract a discount for IHT – the will trusts allow advantage to be taken of this without affecting the surviving spouse’s security of occupation, or the availability of Capital Gains Tax principal residence relief.
More sophisticated IHT planning with properties, such as reversionary leases, lose their pre-owned asset tax disadvantage if implemented via the life interest trust after death too.
The key to this type of will is to take good advice promptly after the first death to see what the will trusts can do. If they don’t work for you, just get rid of them. You can’t get much simpler than that.