Beware the rules of intestacy

Insights - 19/10/2020

Earlier this year, the amount of money left to a surviving spouse of a person who dies without a valid will (dying ‘intestate’) and who also leaves surviving children, was increased from £250,000 to £270,000.

This sum of money is known as the ‘statutory legacy’. In addition to this sum, the spouse receives the deceased’s personal possessions and 50% of any remaining balance in the estate. The remaining 50% balance is then divided equally between the deceased’s children.

1.Relying on the intestacy rules is often problematic for various reasons, including the following:

  • Most married couples prefer their estate to pass to the survivor outright, to ensure that the surviving spouse has the maximum available capital in their old age.
  • Even where a couple would prefer to leave some or all of their estate in trust for the survivor during their lifetime, passing down to their children on second death, the intestacy rules provide an immediate arbitrary split of the estate over and above the statutory legacy on death.

2.Inheritance tax allowances are not used effectively.

  • For example, if the deceased left an estate worth £1,500,000, the surviving spouse would receive the statutory legacy and 50% of the balance, being a total of £885,000 and the children would receive the remaining £615,000. The inheritance tax spouse exemption would only apply to £885,000 rather than to the full £1,500,000 if the estate had been left to the survivor under a valid will. Depending on the balance of the deceased’s nil rate tax free allowance (at a maximum of £325,000) and on the basis that there are no other reliefs available, inheritance tax of at least £116,000 would fall due.
  • If the estate comprises mainly of property and there is little available cash, it may be very difficult to find the funds to pay this. If a Will had been made, the inheritance tax liability could have been mitigated or at least delayed until the death of the surviving spouse.

3.With the rise in couples cohabiting rather than marrying, the problem is amplified as a surviving cohabitee is not entitled to anything on their partner’s death, irrespective of the length of time they have lived together or whether they have children. The entire estate would pass straight to the deceased’s children. This is likely to cause extreme hardship for the survivor, who would only be able to hope for a successful claim for reasonable financial provision through the courts.

  • In the event the deceased does not leave a surviving spouse or children, the intestacy rules apply an order of priority, starting with the deceased’s parents, followed by their siblings, and then remoter relatives. This is unlikely to have reflected the wishes of the deceased and no inheritance tax mitigation can be applied where, in the absence of any immediate family, the deceased might have preferred to leave part or all of their estate to charity, thus saving up to 100% of any inheritance tax liability through operation of the inheritance tax charity exemption.

It is therefore vital to ensure that you decide how you would like to leave your assets by making a will, and keep this up to date in light of a change of circumstances, especially on marriage (which automatically revokes your will), divorce, or beneficiaries predeceasing you.

If you have any questions regarding the topic above please don’t hesitate to contact Katherine Purton on [email protected] or another member of our Wills, Trusts & Probate team on 01737 854 500.

 

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.