Jane is forty three years-old. She owns a house inherited from her parents, living there with her partner of seven years, Tom, and their infant children.
Someone has mentioned that Jane should prepare a Will and a Lasting Power of Attorney (‘LPA’), but Jane has no real idea why, and so has done nothing about this, believing that there must be a law to sort out her affairs when she dies or if she loses mental capacity. Jane does not want to think about her family’s financial position on her death, or the possibility of losing mental capacity. But Jane should do so now, as the alternatives are often unpleasant and costly…
If Jane dies without a Will
1. Who will take care of Jane’s estate?
A Will is a legal document which sets out how an individual would like their assets to be dealt with, after their expenses and debts have been paid, once they have died.
A Will allows an individual to choose a person to act as executor to his or her Will. An executor’s job is to administer the deceased’s estate. This involves finding out the values of the assets and debts of the deceased (together, the “estate”), reporting this to HMRC, paying any debts and distributing the remaining assets according to the terms of the Will.
During the administration period, an executor makes sure the assets of the estate are preserved. For example, if the roof of Jane’s house springs a leak during this time, the executor will be the person to arrange for it to be fixed.
The intestacy rules (the rules governing estates where there is no valid Will) contain a list of people eligible to do the job of executor (then called “administrators”). The person whom the deceased may have preferred may not be eligible to do so.
In Jane’s case, if the intestacy rules apply, despite Tom being the person who would probably know the most about Jane’s affairs, Tom would not be the person eligible to be her administrator. Jane would need to appoint Tom by Will if she wanted him to do this job.
2. Who will benefit from Jane’s estate?
A Will allows an individual to decide who should benefit from his or her estate. However, if there is no Will, the intestacy rules provide for an order of distribution from the estate which must be adhered to by the administrators.
The order of distribution means that most family members will not receive anything if the deceased is survived by a spouse/civil partner or child.
The current intestacy rules do not give any entitlement to an unmarried partner of the deceased. If the intestacy rules apply, Tom will receive nothing from Jane’s estate. As the house belongs to Jane, Tom will not necessarily be entitled to stay in the house after her death.
If Tom wanted to benefit from the estate, he would have to apply to the court to vary the estate entitlement. Such an application would be costly for Tom and the estate, would delay the administration and could cause friction with Jane’s family.
All this potential cost, complexity and conflict could easily be avoided. Jane could specify how Tom, her children, her siblings, friends or charities, or anyone else should benefit from her estate, simply by making a Will.
A Will could also allow Jane to incorporate inheritance tax efficient trusts to protect her children’s interests in her estate while they are minors, and to choose appropriate people (“trustees”) to look after those interests until her children come of age.
3. Does Jane need to worry about inheritance tax (“IHT”)?
People who own their own homes may well find their estates liable to IHT, as a result of the increase in house values over the last couple of decades. Jane should certainly check the value of her house.
Currently, an individual’s estate can be worth up to £325,000 (the “nil-rate band”) before IHT is payable. Generally speaking, a married couple’s joint estate can be worth twice this before any IHT will be payable.
Jane may want to find out what IHT exemptions, allowances and reliefs she may have and ensure that these are fully utilised both in her life and in her Will, particularly as she is unmarried and, therefore, does not have access to possibly the most useful exemption – the spouse/civil partner exemption.
This is an exemption which applies to all transfers between spouses, during life or on death, and prevents any IHT being payable for such transfers. Potentially significant IHT liabilities sometimes prompt a discussion between cohabitants as to whether it is worth getting married to secure the exemption!
If Jane loses her mental capacity without an LPA (or Enduring Power of Attorney) in place
When a person loses mental capacity, the financial and property institutions holding that person’s assets will not allow those assets to be dealt with by anyone without the production of an appropriate authority.
In the absence of an LPA (or Enduring Power of Attorney), an application to deal with these assets would have to be made to the Court of Protection. The application process for a “deputyship”, is time consuming and costly, and can include lengthy forms, proposals, medical reports, hearings, court fees and bonds. This process can be an unpleasant additional burden for a family already having a very difficult time, especially if the loss of capacity was unexpected.
Even if Jane and Tom should marry, this would not change the position. People often think that a spouse is legally allowed to assist in circumstances where capacity has been lost, but this is not the case.
Compared to applying for a deputyship, the LPA process is both straightforward and relatively low cost.
Jane would choose who should be the person (or persons) to look after her affairs (her “attorney(s)”). She can choose attorneys to look after her property and financial affairs, or to take decisions regarding her health and welfare, or both. Additionally Jane can specify conditions, restrictions and guidance for her attorneys in relation to key decisions. Once completed, an LPA can rest dormant for years, until such time as it is needed.
Can Jane afford not to make a Will or LPA?
Having to acknowledge that death will happen or a loss of mental capacity might occur is unpleasant, and often a deterrent to preparing a Will or LPA.
However, Jane has realised that preparing these documents does not mean that death and illness will come upon her any faster. Instead, she will feel secure that if and when the worst happens, her affairs will be run by those she loves and trusts, in a way that she would like.
For Jane (and most of the population), finding the few hours it takes to put a Will or LPA in place, or indeed to review once they are created, should be a top priority while they are fit and healthy.