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Should I Use a Last Will or a Living Trust to Distribute My Estate?

Estate

Even if you didn’t think a will was important in the past, the last 18 months of Covid-19 will undoubtedly have changed your mind! But the other topic that’s being discussed at length is trusts. Both are legal documents that detail how you want your assets to be distributed but there is a fundamental difference between a trust and a will.

Whilst estate planning via a will is vitally important, a trust could be just as beneficial, if not more so; or, indeed, combining the two may be the ultimate solution. So, to help you decide whether you need a will, a trust or both, let’s clarify what a will is, what a trust is, and how they may be beneficial for you.

What is a last will?

A last will details your wishes and who benefits from assets and/or property, i.e. your estate, after you die. In the majority of cases, you will appoint an executor, or executors, in your will and it is their job to manage your estate upon your death, including selling any property, paying outstanding bills, as well as dealing with HMRC to pay any inheritance tax due. One thing to point out; before you assign an executor(s) to your will, make sure you have asked that person, or persons, if they are happy to take on the role as it is demanding and involves a lot of paperwork!

You are only allowed to include any assets or property that you own, i.e. they are in your name only. So, if the property you live in is jointly owned with your spouse or partner, it will automatically revert to them upon your death.

What is a living trust?

A living trust is a form of will in which your beneficiaries will benefit from your property and/or assets but while you are still alive. You appoint trustees to oversee the management of the trust and hold legal title to the assets defined in the trust upon your death. There are a number of reasons why you may choose a trust over a will, including:

● You’d like your beneficiaries to benefit from your assets while you are alive, i.e. paying school fees
● You want to protect your property and/or assets from paying less, or no, inheritance tax
● Your beneficiary is not able to fully benefit from your assets as they are incapacitated.

Differences between a last will and a living trust

The main difference between a last will and a trust is that a will only comes into force when you die, whilst a trust can start to benefit your chosen beneficiaries while you are still alive.

The main benefits of a will over a trust is that you can name guardians for any minor children, appoint an executor to handle your estate upon your death to relieve the burden from your loved ones, and detail your final wishes.

Just because there is a last will doesn’t mean the executors of your will don’t have to apply for probate. If your estate is valued at more than £5,000 in total, they must apply for probate. If there are very few or no assets in your estate and its value is less than the £5,000 benchmark, probate is not always necessary.

With a living trust, you maintain control over the trust and how it is managed until your death, at which point the appointed trustees take over and administer the trust according to your wishes. For example, if a beneficiary receives an interest payment from the trust and it is your wish that they don’t have access to the trust in full until they are 21 years of age, but you die before they reach this age, the trustees will continue to ensure the interest payments are made until that person reaches 21 years old.

Assets in a living trust are not part of the probate process and are therefore protected from inheritance tax. In addition, jointly owned assets and property can also be included in a trust, whereas they can’t in a last will.

Whereas a last will ‘leaves’ assets and property to a beneficiary and is therefore subject to probate as well as inheritance tax, assets and property in a living trust are owned by the trust, i.e. they have been transferred to the trust. This means they are not subject to probate as they can’t be ‘passed on’. The grantor is a trustee of their own living trust and manages the assets and property within it until they die, at which point successor (named) trustees take over the role. They will administer the trust and either continue its management for a period of time or distribute its property to your named beneficiaries in the trust documents.

Because of the probate process, your assets and property detailed in a last will are a matter of public record. It is filed at the courthouse and anybody can access the details. However, a trust is a private record that only you, the appointed trustees and the beneficiaries have access. The only time that this would change is if a beneficiary or heir challenges the trust’s validity and files a lawsuit, at which point the trust documents become evidence.

Can I have a last will and a living trust?

Estate planning via a will is just one option of protecting your assets and property upon your death and ensures the people you wish benefit actually do. But combining it with a living trust, particularly if your estate is large and complex, ensures the best financial and legal protection for your estate.

However, to combine the two, it’s better to have a Pour Over Will which is designed to specifically work with a living trust. Essentially, it means that any assets or property you own that isn’t included in your trust will be transferred to your trust upon your death.

If you’re not sure what type of will or trust is right for you, contact us at Probates Online. We offer a professional online probate service that is efficient and affordable. If you are an Executor of a will or a trustee, or a close relative of a deceased person and you need to apply for a Grant of Probate, or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.

Inheritance Tax: How Does It Affect You?

Inheritance Tax

When you pass away and leave assets to family or any other beneficiaries, they are liable for paying tax on those assets, known as Inheritance Tax (IHT).  However, it is possible to significantly reduce the amount of IHT payable or, indeed, pay nothing at all depending on the value of any assets, known as your estate.

How much is inheritance tax?

How much IHT your beneficiaries pay largely depends on the value of your estate, or your assets which include any investments, life insurance policy payouts, property and even cash in the bank. 

If the total value of your assets is less than £325,000, your beneficiaries will not be paying any inheritance tax.  But if your assets value is above this threshold, they will pay 40% on the value of the assets above the threshold.  For example, if your estate is valued at £500,000 and your threshold is £325,000, you will only pay IHT on the estate value above the threshold, i.e. £175,000.

However, there are exceptions to this basic rule.

  • If you leave your entire estate that’s above the £325,000 threshold to your spouse or civil partner, charity or a community amateur sports club, your beneficiaries will not pay IHT.
  • If you bequeath your home to your children, and this includes children that are fostered, adopted or stepchildren, the threshold may increase to £500,000.
  • The IHT rate will drop to 36% on some of your assets if you choose to bequeath at least 10% of your estate’s net value to charity.

Inheritance tax for married couples

If you are in a civil partnership or are married the thresholds are different. If you die before your spouse:

  • Assets left to your spouse/civil partner are exempt from IHT, if they are living in the UK.
  • Any assets above the threshold are passed on to your spouse and added to their threshold, as well as their main residence allowance.  So, potentially, your spouse’s/civil partner’s tax-free threshold level could be as much as £1 million.

Inheritance tax relief

There are various exemptions and tax reliefs that may apply to your estate, such as the nil rate band (NRB), taper relief and business property relief. 

  • Residence nil rate band (RNRB) – any part of the estate that is over the nil rate band (NRB) – every person’s threshold of £325,000 – that is passed on to the spouse/civil partner, as well as any gifts, can be passed to the surviving spouse/civil partner and is exempt from IHT.  In April 2017, the residence nil rate band was introduced and is an additional amount to the NRB, which can be transferred.
  • Taper relief – it is applicable when inheritance tax is due to be paid on a ‘gift’ that was granted 7 years prior to your death.  Essentially, any gifts passed on before your death are subject to IHT but the longer it is since you made the gift prior to your death, the amount of tax your beneficiary has to pay is based on a sliding scale, i.e. it is tapered.  For example, a gift made 3 years before your death is liable to 40% tax.  Gifts made 7 years before you died are tax-free unless they are part of a trust.  Known as the 7-year rule, you must keep a record of what you gave, how much it is, when you gave it and who you gave it to, and your executors must know these details as well.  However, a ‘gift with a reservation’, i.e. the gift is still in use by you, is considered part of your estate.
  • Business property reliefbusiness property tax relief can reduce the amount of IHT paid on any business assets, such as shares, buildings or any business machinery.  If you own a business, or are a partner in a business, it forms part of your estate on your death and your beneficiaries will be liable for tax on that asset.  However, it is possible to reduce the amount of tax paid by claiming business relief by 50%, or even 100%.  For example, if you are a sole trader and bequeath your business to family that’s valued at £400,000, the £325,000 threshold applies and is eligible for business property relief on the remaining £75,000; therefore, zero tax is paid. However, if you only owned 50% shares in the business, i.e. voting rights, or 50% shares in an unlimited company, i.e. 50% of the land, buildings and/or equipment/machinery, only 50% business relief is claimable. 

How do gifts work in terms of inheritance tax?

There are some ‘gifts’ you can make prior to your death which will reduce the level of inheritance tax payable and, in some cases, mean no tax is paid.  A gift includes:

  • Personal items, such as jewellery or antiques.
  • Household items, such as furniture.
  • Property, including a house, buildings or land.
  • Stocks and shares, as listed on the London Stock Exchange.
  • Unlisted shares, i.e. shares in an unlimited company, if you have held them for less than 2 years prior to your death.
  • Money; this also includes money that remains should you sell a gift for less than it is worth.  For example, if you sell your property to a spouse or child for less than the market value, the monetary difference is considered a gift.

Gifts do not include any assets you leave to beneficiaries in your will.  Those assets, such as cash in the bank, possessions and any other property, are considered part of your estate and are valued accordingly for inheritance tax purposes.

Any gifts to your spouse/civil partner during your lifetime are exempt from inheritance tax as long as you are legally married or in a civil partnership, and they permanently live in the UK.  In addition, any gifts to political parties or charities, if they are before your death, are exempt from IHT.

Every person is allowed to give away up to £3,000 worth of gifts in any tax year and they won’t be added to their estate, and therefore be liable for IHT.  Known as an ‘annual exemption’, you can gift £3,000 to one person or distribute the amount between different people.  You are also allowed to carry it forward to the next tax year, but only for a single year.

This inheritance tax exempt rule also applies to annual birthday or Christmas gifts, up to the value of £250, as well as gifts towards a wedding or civil partnership ceremony.

At Probates Online, we are able to offer a professional probate service online that is efficient and affordable.  If you are an executor of a will and need to apply for a Grant of Probate or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.

Is It Ok To Do Probate Online?

Probate Online

There have been changes in recent years in the way executors, will administrators and solicitors are able to apply for probate.  Since 2017, it has been possible to apply for probate online via a digital service that was launched by HM Courts and Tribunal Services (HMCTS). 

Initially, the service was only available for executors of a deceased’s estate as long as they were acting on their own, and they had a copy of the deceased’s will. It was later expanded to include applications from solicitors, including more complex estates.  Indeed, since October 2020, the online probate service has considerably expanded their services, including applications by legal professionals for intestacy and letters of administration.

The coronavirus pandemic over the past 18 months has driven a significant rise in the number of online probate applications.  People are now able to apply for probate online quickly and easily, but how do you apply for probate online?

Who applies for probate online?

If there is a will, an executor or executors will have been named and it is their role to administer the deceased’s estate and apply for probate.  The executor(s) can be a family member, a trusted friend of the deceased or family, or a solicitor.  If there is more than one executor, the application for probate online should include all their names. 

Only the executor(s) of the deceased’s estate can apply for a Grant of Probate.  If there is no executor, the deceased’s next of kin or a close relative must apply for a grant of letters of administration in order to handle the estate.

If there is not a will, and therefore no executor(s), the deceased’s next of kin or a close relative must apply for authority to administer the deceased’s estate.  They will need to apply for a ‘grant of letters of administration’ which allows them to deal with probate, and they will then become the administrator for the estate.

There are other circumstances where letters of administration are required:

  • You have left the entire estate;
  • There are no executors named in the will;
  • The executors are not prepared to accept the role.

The digital probate service

Launched in 2017, the online probate service allows people to apply for a grant of probate, saving time on many of the legal processes.  However, you will still need to send actual copies of the relevant paperwork, including the death certificate and the deceased’s will. But the statement of truth can be done online – executors no longer have to visit the probate office to swear their oath – and payment of the probate fees can be done electronically.

Solicitors are also now allowed to apply for probate online.  The legal profession can also apply for intestacy or grant of letters of administration as part of a will annexed application.  It is also possible to stop a grant of probate being issued, known as a caveat, through the online probate service.

The online probate service allows executors, administrators and solicitors to view their probate applications and forms on a dashboard, as well as monitor their probate process.  According to HMCTS, the only documentation that needs to be sent to them is the original will, a copy of the death certificate and the Inheritance Tax forms.

To use the online probate service, you will need to open a Pay By Account (PBA) account which links you with HMCTS’s fee account system to pay for your online probate application.  Once registered as an executor, you will be able to start your online probate application.

What do I need and when do I apply for probate online?

Once the death has been officially registered (which is within five days), apply for probate online within six months of the death.  This is because there is a time limit on paying HMRC any Inheritance Tax that may be due.  In practice, reporting the value of an estate to HMRC and applying for probate online is usually done at the same time to avoid any delays.

Before you start your probate online application, report the value of the deceased’s estate to HMRC first.  Then get together the following documents as these will need to be sent to HMCTS:

  • The original will of the deceased together with any codicils (small additions to the will).  It is recommended you have at least two copies of the will and codicils.  Complete form PA1P if there is a will; if not, complete form PA1A.
  • The death certificate, or an interim certificate
  • HMRC’s Inheritance Tax form (IHT205) even if Inheritance Tax is not due. Ensure you complete the correct form for HMRC.

When there isn’t any Inheritance Tax due, form IHT205 should be completed if:

  • The estate’s value is £325,000 or less (known as an Excepted Estate)
  • The estate’s value is less than the Excepted Estate limit of £650,000.  However, there has to be a claim to transfer the entire nil band rate from a wife, husband or civil partner that died first, and their allowance wasn’t used.
  • The estate’s value is less than £1 million but no Inheritance Tax is due as the estate is being passed on to a surviving wife, husband or civil partner, or it is a charity exemption.

How much does it cost to apply for probate online?

Once you have had the deceased’s estate valued and reported this to HMRC, you can apply for a grant of probate online.  You will need to pay a fee of £215, which can be done online through HMCTS’s service when you submit your application.  If the value of the estate is lower than £5,000, HMCTS waive this fee.

It is advisable to order copies of your grant of probate as they will be needed during the process of administering the deceased’s estate.  There is a cost for this at around 50p per copy.

At Probates Online, we are able to offer a professional probate service online that is efficient and affordable.  If you are an executor of a will and need to apply for a Grant of Probate or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.

When Do I Need Probate?

probate

 

There is an overriding question when someone dies; do I need probate? Determining if probate is needed or not can be difficult to ascertain.  Sometimes it’s down to whether there is a will or not, sometimes it’s down to joint-named assets and bank accounts, and sometimes it’s the value of the entire estate that determines the outcome.  Let’s look into this in more detail. 

What is probate? 

Before we discuss whether probate is needed or not, let’s just clarify exactly what probate is and what it means.  Probate is the legal process by which a deceased’s estate is distributed among beneficiaries after someone has died.  The process includes all financial and physical assets, such as property, belongings and monies. 

There are various situations where probate is absolutely required, some where it is not  and some circumstances when letters or administration need to be applied for instead of probate. 

When is probate necessary? 

Generally, if the value of a deceased’s estate is in excess of £5,000, probate is required.   

When there is a will, the executor appointed to manage the estate will apply for probate.  The executor can be a family member, a friend of the deceased or a solicitor.  However, if there is no will or executor, a next of kin or a member of the family representing the deceased will have to apply for letters of administration, which is the authority needed to administer the deceased’s estate.  They will then be known as the administrator.   

There are other circumstances where letters of administration are required: 

  • You have been left the entire estate; 
  • There are no executors named in the will; 
  • The executors are not prepared to accept the role. 

Only an executor of the estate can apply for probate.  If there is no executor, the next of kin or a close relative has to apply for grant of letters of administration in order to manage the deceased’s estate. 

When is probate not necessary? 

Generally, if the majority of the deceased’s assets are jointly owned with the spouse or civil partner, such as joint bank accounts or a mortgage, probate may not be required.  However, there are cases where probate is not required: 

  • If the estate is worth less than £10,000 and there are no shares or land as part of the estate.  If the estate is particularly small and there is only a token amount in a bank account, the bank has the discretion as to whether they need Grant of Probate to release the funds. 
  • If any money, i.e. bank accounts, or property are owned jointly with a spouse or civil partner. 

The threshold for probate ranges from £5,000 to £50,000.  The banks or financial institutions have their own policies regarding a deceased person’s assets so, it’s important to contact them as soon as possible. 

When there is a will, an executor has been appointed to manage the estate and apply for probate.  The executor can be a family member, a friend of the deceased or a solicitor that has the will.  If there is no will or executor, someone representing the deceased will have to apply for the authority from the court to manage the deceased’s estate.  This is usually the next of kin; they will have to apply for letters of administration.   

Other circumstances when letters of administration are required: 

  • You have been left the entire estate; 
  • There are no executors named in the will; 
  • The executors are not prepared to accept the role. 

Applying for probate 

Once the death has been registered (which is within five days), you should apply for probate within six months of the death.  This is not because there is a time limit on applying for probate.  It is because there is a time limit on paying HMRC any Inheritance Tax that may be applicable.  In practice, reporting the estate’s value to HMRC and applying for probate is usually done at the same time as both are needed to finalise the estate. 

Whether there is a will or not, the probate process is similar.  The first step is to find out the value of the estate, such as money in the bank, the deceased’s belongings and any property held in the deceased’s name (even if it is joint names, the value still needs to be ascertained).  You will need to consider: 

  • Bank accounts, pension funds and any other financial assets, such as mortgage on a property, savings and life assurance policies 
  • Any property, whether in joint names or not, will need to be valued by a local estate agent.  It is always worth getting three to four valuations. 
  • Any outstanding debts, such as utilities, mortgage payments, credit cards, loans or any other monies owed by the deceased 
  • Any gifts the deceased made that are above the official allowance within the previous seven years (not including Christmas, birthday or anniversary gifts) – they may be subject to Inheritance Tax. 

In most cases, you will need a copy of the death certificate and/or will be sent to the relevant organisations.   

Applying for probate can either be done through a solicitor, often the solicitor that holds the deceased’s will or a family solicitor, or you can file for probate yourself online.  If there is a will, you will need the following to apply for probate: 

  • An official copy of the death certificate (if applying online, this will be a scanned image); 
  • The original will; 
  • The application fee. 

One thing to note is that you can only apply for probate online if: 

  • All the named executors are alive and able to make decisions; and 
  • The deceased spent most of their life in England and Wales. 

If there is no will, the next of kin or a close relative of the deceased will need to apply for letters of administration which you can do yourself via post using the form PA1A, which is a probate application form.  You can download the forms from an online probate service or from a probate registry near you.   

At Probates Online, we are able to offer a professional probate service online that is efficient and affordable.  If you are an Executor of a will and need to apply for a Grant of Probate or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.