How to prepare your finances for when you die
Adapted from a Guardian Money newspaper article 26th February 2022
Write a will
A will names your beneficiaries – the people you want to inherit your assets you die and appoints executors – the people who will manage the financial process. However, more than half of UK adults don’t have one.
One of the main reasons is that they believe everything will automatically pass to their spouse or civil partner. But this is not necessarily true because your estate is shared out in a standard way defined by the law of intestacy. This decides who gets what and how much, as well as the order of priority starting with immediate family members and then moving further down the line.
Unfortunately, if you are not married or in a civil partnership, your partner is not treated as a family member so will not inherit anything through intestacy rules no matter how long you have been together (which debunks the ‘common law’ theory).
If you own your home jointly, your partner will inherit that unless a will says otherwise. If your situation is at all complicated, it is wise to hire an expert rather than attempting to set things out on your own.
Include a letter of wishes
A letter of wishes is not legally binding but it can help provide important, more personal guidance to friends and family when you die. I can contain views, opinions and details that complement the will. For example, you can give details about the distribution of personal possessions, explain the background to any inheritance or even your wishes for the future of your loved ones.
It’s your chance to dispel any misunderstandings or assumptions that may occur after your death.
Inheritance tax
Inheritance tax (IHT) is 40% and can be applied to anything over the £325,000 limit. However you can save by leaving everything over this limit to your spouse or civil partner and anything you don’t use of your limit can be used by a surviving partner when they die.
Your home can be left to your spouse or partner tax-free and the IHT limit rises to £500,000 if you leave it to your children.
Early planning can reduce the IHT bill such as transferring money to benefits as gifts during your lifetime. Your can give away up to £3,000 work of gifts a year and there are separate rules that allow large sums to be given when people get married.
If you die within 7 years of making other financial gifts, your estate or the recipient of the money may be liable to pay IHT. Consulting a financial adviser or solicitor would be advised to discuss inheritance tax and other options around setting up trusts.
Insure yourself
A life insurance policy will provide some financial protection to dependents and loved ones who receive a lump sum or regular payments upon your death. How much they get depends on the level of cover you buy. The greater the cover, the more expensive the policy. The cost is typically paid on a monthly basis and is also determined by factors such as your age, lifestyle and family medical history.
Life insurance can be bought through your bank, an insurer, a specialist broker or even from big supermarkets. Before you buy, check whether you are already covered through work as many employers include death-in-service insurance as part of their benefits package which pays out a tax free lump sum if you are on the payroll when you die.
Whatever type of insurance you choose, it is vital you continually review the policy to ensure it still offers the right cover for your current circumstances and that the people named as beneficiaries are also up to date.
Plan your funeral
The cost of a typical funeral is currently about £4,000. The cheapest is cremation. For example, a direct cremation – which means the service is unattended and the remains retuned to the family so they can celebrate in their own way – costs from £999.
Burials can costs around £5,000 and there are additional fees for the plot and interment. You could invest in a prepaid funeral plan which enables you to decide on arrangements in advance and money is held in a trust or policy which fixes the price.
Alternatively, you can discuss your wishes with your family and complete a simple funeral wishes form (available on the resources tab) and keep with your will to guide your family upon your death.