When you have a family, part of the reason you work tirelessly throughout your adult life is to ensure that they have appropriate financial security in later life. Many children use their inheritance to stabilise their lives and set themselves up for the future, whether by using money to buy property, save, or invest.
However, you may have several concerns when it comes to what you’ll leave behind. The biggest of these is inheritance tax, which earns the government more than £5 billion every single year. While some people choose to minimise the amount of inheritance tax that will be paid on their estate, there are still other costs which you, your partner, and your children should all be aware of.
Inheritance tax is paid on the estate of someone when they die. However, unlike income tax, you don’t only pay inheritance tax on the actual money; you have to pay it on everything. Your estate (your money, possessions, and property) will be valued, and an inheritance tax bill will have to be paid based on its total value.
Inheritance tax does not have to be paid if the total value of the estate in question is below £325,000, or if everything above the £325,000 threshold is left to a spouse, civil partner, or charity.
There are other rules to consider regarding inheritance tax - for instance, if you give your home away to your children or grandchildren, this threshold increases to £500,000 - but it is the main cost to be aware of. Above the £325,000 threshold, the standard inheritance tax - 40% - will be charged.
However, there are several other potential threats to the value of your estate.
The new care fees funding framework means that if your assets exceed a certain point, you will have to fund any care you require yourself. The government will generally not subsidise it, and care bills can be costly - often tens of thousands of pounds.
Remarriage & Sideways Inheritance
You also have to consider marriage after you are gone, in many different contexts. Firstly, if you pass your estate onto your spouse or partner, and they remarry, your children may inherit less than you intended. Secondly, if your children are married and divorce after you die, their inheritance may be covered in the divorce settlement.
Finally, you have to consider what happens in the event of the unexpected. If you do not have a will that specifies where authority lies if you are incapacitated medically - in a coma, for instance - your family may have to seek a court order to make decisions about your health or will. This can be a lengthy, emotionally draining, and incredibly costly process.
Protecting Your Children’s Inheritance
Inheritance tax is a complicated thing, but there are ways of mitigating how much you will end up paying. Aside from the simple answer of leaving the money to a spouse or partner, you also have several tax relief options.
You may want to consider speaking to a will writer and ask for advice on your estate planning. They may be able to provide you with some support to minimise the amount of inheritance tax payable on your estate. A specialist solicitor with experience in inheritance law may also be able to help you.
Remarriage & Sideways Inheritance
Setting up a “mirror will” with your spouse will mean that you jointly agree to leave the combined value of your estates to your children or another party. However, you need to consider that remarriage often revokes a mirror will. Consider that your will should reflect your wishes as well as those of your partner/spouse and family.
It may be worth speaking to a specialist will writer if you have concerns about remarriage or divorce among your children. By specifying specific points in your will, you can safeguard your estate if the unexpected occurs after your death. Once inheritance tax is paid on an estate, a spouse or partner can technically do whatever they see fit with your assets - even if you disagreed with it before
Setting up a lasting power of attorney for your next of kin will allow them to intervene if you are incapacitated. It is also likely to be a lot less expensive than seeking a court order.
A financial advisor who specialises in later-life planning may also be able to help you mitigate the potentially high cost of care. You may want to put some money away ahead of time to fund your care if you need it. Although you might be healthy today, there’s no telling what might happen tomorrow.
If you already have a financial advisor or accountant, it may be worth bringing the topic up with them; they may have good ideas or specialists to recommend. In some cases, they may even integrate the discussion with your wider financial strategy and retirement planning.
Take Steps to Protect Your Children’s Inheritance Now
When it comes to navigating inheritance law and futureproofing the value of your estate, preparation is key. It can be emotionally taxing to have these difficult conversations with legal or financial professionals, as well as your family, but it is often worth it in the long run. You may even find that taking control by planning for later life is empowering; it may be something that you have subconsciously been concerned about for some time.