What To Do If Someone Dies Intestate

After reading the first five parts of this series, you could possibly be forgiven for thinking that it would be an absolute nightmare if someone close to you were to die having made no planning whatsoever in their lifetime (notwithstanding the usual trauma suffered during a bereavement). Well, it can be, but the chances are that it probably won't.

I have already (briefly) covered what would happen if there was no Power of Attorney and also (even more briefly) the distribution on intestacy, i.e. if someone dies without a Will. However, current legislation allows people to make some retrospective tax planning. Here is a typical example of how it might work.

Let's say that your parents are both in their 80s, and have not made Wills. Their combined estates add up to £750,000. Suddenly your father dies. The house, we will assume, is in joint names and is worth £250,000, and there are bank accounts and other investments also in joint names (a few privatisation shares perhaps). There is nothing to do on his death as everything passes by survivorship (remember our earlier article), and your mother therefore inherits the lot. Distribution under the Law of Intestacy does not come into effect because there is no Estate to administer.

However, when she dies, assuming she still has £750,000, then there will be an Inheritance Tax bill due of £186,000. Ouch!

Can anything be done about this? Of course.

TA-TA-TA-DA! TA-TA-TA-TA-TA-TA-DA! ENTER THE CAVALRY!

Well, enter the "Deed of Variation", anyway. This is a perfectly legal instrument that can be used to mitigate or avoid IHT provided that it is effected within two years of the date of death. Let me explain how it works.

We have already established that, in our example, your mother is in her 80s and is worth £750,000. The house is worth £250,000 with the rest in cash or liquid investments. Does an 80-something year old woman really need £500,000 cash plus her pension? I would suggest not.

If she was willing then she could enter into a Deed of Variation which could give a sum equivalent to the nil rate band (currently £285,000) to the children and it would be deemed to come straight from the Estate of their late Father. This means that when she dies, her Estate will only be worth £465,000. After deduction of the mother's personal threshold of £285,000, tax is only payable on the remaining £180,000. That would mean a tax bill of £72,000, which is a saving of well over £100,000 and all for a fee of probably only a few hundred quid.

Now, there are some conditions and downsides to this.

1. The Deed must be effected within 2 years of the date of death.
2. The Variation must be made by the person or persons who will be disadvantaged by the Variation, and if they don't agree then it cannot be effected.
3. Care needs to be taken if the principal asset is the matrimonial home, particularly following the recent introduction of income tax for 'pre-owned assets' such as this.
4. The Government may abolish or amend this legislation at any time.

So, all in all, it is probably best to make proper lifetime planning rather than leave it to chance.

In conclusion...

Finally, I must reiterate that this series is only a guide. Each person's circumstances are different and as I have said, professional legal opinion from someone who has the necessary expertise is in my view absolutely essential. Badly drafted Wills can cause irrevocable family arguments and rifts. It is not worth it to save what is a relatively modest cost.

For more on this subject, see our Wills & Probate discussion board. And if you're interested in making a will and helping a charitable cause at the same time, check out Will Aid.