Inheritance and passing your money on

Almost 60% of adults don't have a will according to a survey by children's charity Barnardo's⁽²⁾. A will is an essential part of your financial planning. Not only does it set out your wishes, but, die without a will, and your estate will generally be divided according to the rules of intestacy, which may not reflect your wishes.

This can be particularly problematic for unmarried couples, as the surviving partner doesn't have any automatic rights to inherit, but it can also create problems for married couples and civil partners.

As an example, if you live in England and are married but don't have any children and your estate is worth more than £450,000, only the first £450,000 plus personal possessions and half of the remaining estate will automatically pass to your husband or wife. Anything else will go to your parents or, if they're not alive, your brothers and sisters and their children. Only if your estate is worth less that £450,000 will your spouse/civil partner receive the whole of your estate.

If you lived in Scotland under the same circumstances, your spouse would only be given the full house value if it was less than £473,000, furniture to the value of £29,000, a cash sum of £89,000 and a third of the remaining estate. Anything else would go to your parents if they were still alive, or your brothers and sisters and their children if not.

You can write your own will but this is rarely recommended unless your affairs are exceptionally straightforward. Instead it's worth seeking professional advice from a solicitor or will writer.

They'll ensure you consider everything and suggest the best way to divide your estate. For example you might want to give set amounts to some people but leave a percentage to others.

The will writer will also make sure your will is legal. This includes checking you're not under any undue pressure to write your will and that there are two witnesses, who can't be beneficiaries.

While a will helps to ensure your estate is distributed according to your wishes, the IHT rules mean that one of your beneficiaries could be the taxman.

Your estate is made up of everything you own minus any debts such as mortgages, loans and your funeral expenses. If the value of your estate exceeds the IHT nil rate band (currently £325,000), the surplus will be taxed at 40%.

An extra rule applies to married couples and civil partners. The transferable nil rate band means that the surviving spouse or partner can use any of their partner's unused nil rate band (NRB). As an example, John dies in 2011, leaving all of his estate to his wife Mary. When Mary dies the NRB is still £325,000, but the NRB available to her estate is £650,000 (Mary's NRB of £325,000 plus 100% of the NRB as the proportion John had not used).

Having paid tax throughout our lives, few of us want to leave the taxman more when we die and there are a number of ways to reduce the amount he receives.

Gifts

Giving away your estate can be an effective way to reduce a future IHT liability.

1. Exempt Transfers: these are gifts where IHT will never be payable.
2. Potentially Exempt Transfers: these can become exempt from IHT if you survive for seven years from when you make the gift.
3. Chargeable Lifetime Transfers: these may incur an immediate IHT charge of 20%. Further IHT may be payable if you die within seven years of making the gift.

To avoid making a Gift with Reservation, which will not reduce your estate for IHT, you must give the asset you are gifting away completely. If, for example, you gave your car to your son or daughter, but still use it from time to time, the taxman could class this as a Gift with Reservation and it would remain within your estate for IHT purposes.

You can find out more about IHT allowances at www.hmrc.gov.uk.

Trusts

Sometimes giving money outright might not be the best solution. For instance you might want to give money to a child, but be worried about how they might spend it: or you might want to leave some money for grandchildren, but do not yet know how many you'll have.

In these situations, a trust can be a good option. These can allow you to reduce the value of your estate but retain some control over who receives the gift and when.

A number of ready-made trusts schemes are available including gift plans,discounted gift plans and loan plans. How these work and their tax treatment varies so it's sensible to seek financial advice when considering these options.

If you have a large amount to give away or your situation is particularly complicated, you could have a trust tailor made for you. A solicitor will be able to do this but there will be additional costs involved.

You can find out more about trusts at www.direct.gov.uk.

Insurance

If it is likely that IHT will be payable on your estate, a whole of life policy can be used to ensure that funds are available to pay all or some of any future IHT bill.

Provided you pay the premiums, the proceeds of the policy will be paid to your estate when you die. It is vital to have the policy written under trust to ensure that the money paid out by the policy is outside your estate. This then ensures that the money can be used to settle the IHT tax bill and not add to it.

Pensions

In certain situations, a lump sum may be payable from a pension plan when the member dies. Depending on the scheme rules it may be possible for the member to nominate an individual or a trust to receive this lump sum and to make this payment tax efficient.