That elephant in the room at times, what happens if we die?
There are plenty of adverts on the radio now talking about Wills and bequests (thatâ€™s leaving stuff to people in a will to you and me) but is it just as simple as getting a will sorted? Leaving your estate I meanâ€¦..
So I thought that I would talk this week about that most cheery of subjects, DEATH! But specifically Inheritance Tax and what you as advisers should always be saying and doing....
Joking apart, it is a sad truth that so many people donâ€™t organise what is to happen should they die and I donâ€™t mean their funeral, Iâ€™m referring to their estate, the financial and physical things they might leave for others.
Having experienced the cruel fighting after death within a family and the pain that intestacy can cause, I know a little bit about the bad side of inheritance, never mind losing someone that you love as thatâ€™s hard enough anyway but add in people fighting over money or possessions of a deceased loved one and having to deal with solicitors and the Probate Department and Land Registry and what you have there is a recipe for stress and misery for the livingâ€¦..can you ease any of this pain?
Iâ€™m not about to suggest that anything you or I could say would ease the devastation of losing a loved one but I think that I can make some sensible suggestions about what to do with the estate and how as a financial adviser, you can help in a small way to reduce or remove some of the stress and worry and frankly potential cost!
PLANNING. Pure and simple.
There are lots of things that can be done to ease this situation, start with a decent will and review it every 4-5 years in case things change.
Talk to your family to let them know what youâ€™re thinking of doing.
Use your allowances where you can
If you have pensions and investments, understand what happens to them on death, how do they get paid out and to whom?
Understand what the Nil Rate Band is and how to use it.
In a 2018 survey, 42% of UK adults did not have a will (I have one I hasten to add!) the huge risk here is INTESTACY. If you die without a will your beneficiaries/family cannot apply for Grant of Probate and without this grant they cannot get at your estate/stuff/money. Imagine that you die and your survivor and children need to sell the house but instead have to move out of it as it forms part of your estate and until they gain probate they canâ€™t touch it!
So what should we, as responsible adviser be doing? We should be advising to get a will where they donâ€™t have one. For the most part IFAC members do this I am pleased to say and unless they have a will writing service to refer to, that is enough.
Now we come to Inheritance Tax (IHT) and an area that sadly is lacking is sensible advice from many. This failing I believe is a result of a small lack of understanding of your responsibility in this area.
Most IFAs and protection advisers wonâ€™t want to or be authorised to do IHT planning, after all it can be highly complex and time consuming and the more assets a client has the trickier it can be, that is not to say that IHT planning is impossible, it just requires a different skill set and additional knowledge to the usual lines of advice.
But what all advisers should be doing is making their clients aware of their potential IHT situation, in every Suitability Report I would expect to see a paragraph that sets out the clientâ€™s current asset/liability position and whether there is potential for IHT, this would include numbers here people and an explanation of the Nil Rate Band and Additional Nil Rate Band (if applicable) plus a statement as to whether the client may have a potential IHT issue or not. Perhaps on just a mortgage sale I would not expect you to be discussing this, so mortgage adviser you are free to leave this discussion. Hang on though! If you sell/advise on protection then sit back down, you need to know this.
If your client might have an IHT issue, I would expect you to be advising that they do something about it (they donâ€™t have to of course but you should be recommending they do as you all do with wills)
Letâ€™s think about this a bit moreâ€¦â€¦
You arrange an investment of some kind or a pension switch or transfer or you put in place some Life Assurance. You want the recommended investment to grow of course and so this could potentially add to a possible IHT problem. Plus a life policy proceeds will come into the estate even if it's used to repay a mortgage (the value being equal of course)
If your client has plenty of assets (remember their home may be rather valuable and take up lots of the Nil Rate Band or bands) and you donâ€™t identify that they could have a problem then you have just left yourself exposed to challenge.
â€œWhy didnâ€™t my adviser tell me I had an issue?â€
â€œI now have to pay IHT and I donâ€™t have the assets to pay itâ€
â€œI canâ€™t gain Grant of Probate until I pay the IHT and so canâ€™t even live in my deceased parentsâ€™ houseâ€
Ok so I am painting a bad picture there but this is the risk that you will carry if you fail to make every client awareâ€¦â€¦itâ€™s great if they are likely to be way under the Nil Rate Bands but if they could be close then why wouldnâ€™t you just explain the position and warn them? You are not giving IHT advice, you are just stating their current financial position and how it might or might not present later an IHT riskâ€¦â€¦
You donâ€™t even need to be explaining that there are various annual and one-off IHT allowances to be had or talk about possible solutions to reduce or cover a possible IHT bill, you just have to be setting the scene and warning the clients if there could be a risk, you know, good old â€œadviceâ€ (and not selling them something)
Advice that doesnâ€™t end in a sale of a product but that could potentially reduce or eliminate a risk, especially to clients that have young children, can only surely add to your credibility as an adviserâ€¦..
Donâ€™t you agree? (say â€œyes Niel!â€)
So here it is in simple form:
1.Add up their assets
2.Deduct their liabilities
3.Take off applicable Nil Rate Bands
4.Youâ€™re left with the potential estate chargeable to IHT (this could be Â£0)
5.Show them what the IHT bill could be in Â£
6.Advise them to look at the area if there appears an issue
7.Briefly explain the Nil Rate Bands
Boom ! Done! IHT position explained and advised.
And you never know, you might just gain some more business as a resultâ€¦â€¦.