Most people write a Will and leave money to their children or other beneficiaries. That’s fine – it does what it says on the tin.
After all, a Will is an expression of wishes. Naturally, it’s still not an easy time, but it’ll make your Will clear and ensure things are a lot easier for your loved ones when the time comes.
However, sometimes leaving an inheritance directly to your loved ones isn’t always a great idea. It could, in fact, cause one giant headache.
She Works Hard for the Money
Most people don’t choose when they’re going to die. But when someone comes to inherit, it’s not always the best time for them to inherit that money.
Now imagine you’ve passed away, having worked hard your whole life.
You’ve paid your taxes, your National Insurance and you’ve ensured there’s a nice inheritance left for your loved ones.
You die, it goes through the probate process and your children inherit. Fantastic.
However, if your children are going through a divorce or a rocky time with their marriage, it could mean that the inheritance is at risk.
Because as soon as that money hits their bank account, the Will is done. It becomes a matrimonial asset in the marriage. So, there are several things to think about when leaving a sum of money to your loved ones.
Can’t Buy Me Love
If your son or daughter gets divorced, for example, half of the inheritance meant for them could be going to an ex-partner.
There would be nothing worse than having to share an inheritance with someone you’ve decided NOT to spend the rest of your life with.
Who said romance is dead?
Money’s Too Tight to Mention
Another issue could be that your children are going through financially tough times.
They might be staring down the barrel of bankruptcy, for instance.
So, despite the parents leaving their child some hard-earned cash, as soon as the pound notes hit their kids’ account, it forms part of their estate and could go straight to any creditors to pay off outstanding debts.
Money That’s What I Want
Perhaps you’re in receipt of means-tested benefits.
Mum and dad die, and you inherit the money – but that cash puts you over the threshold and you lose your means-tested benefits.
What a nightmare.
Another danger of inheriting at the wrong time could be that you’re doing quite nicely for yourself, but you’re on the cusp of an inheritance tax problem.
Perhaps you’ve already got this problem because you’ve made a real success of your career.
So when your parents pass away and leave you with that nice lump sum, all of a sudden it creates an even larger inheritance tax issue.
The worst thing that could happen in that situation is that your mum and dad’s estate will have to pay the inheritance tax owed because they are over the threshold.
They’ll pay 40% of that amount to the Government and leave the rest to you. But that will inadvertently cause you an inheritance tax problem.
Because when the children die, you pay 40% to the Government on the money that the parents have already paid 40% on. You guessed it: double trouble.
So there are numerous instances that mean inheriting money directly is not always a good idea – divorce, bankruptcy, means-tested benefits and inheritance tax all put the inheritance at risk.
So, what are my options?
First and foremost, get some professional advice from a specialist paralegal who is an expert in later life planning. They can explain how to leave inheritance to your children in a way that means it’s protected. This is by utilising the Trust Laws that are available to everyone.
Instead of leaving it to your loved ones directly, you can place it in a Discretionary Trust for them – either a Trust created through a Will upon death, or a Trust set up in life and left to the beneficiaries.
The beauty of leaving inheritance to your children in Trust is that they’ll be able to choose a time that’s right for them to take it.
So if they are going through a rocky time with their marriage, they can leave the inheritance in Trust, and once they have their divorce finalised, they can take 100% of what you’ve worked hard for.
Or if your children are going through financially difficult times, the money can be left in the Trust until such time as their finances are sorted. When they are back on their feet, they can take 100% of what you’ve worked hard for all your life.
And if your son or daughter is in receipt of means-tested benefits, the money in Trust is disregarded for any such benefits – provided it is set up in the right way.
It doesn’t form part of their estate, so if they’ve got money in Trust which they have access to, and subsequently die, that money isn’t taxed as part of their inheritance liability.
Remember, this is a way of protecting your money from beyond the grave.
But it can only be achieved by having a consultation with a professional.