Thousands of grieving families are facing enormous delays in dealing with the affairs of a deceased loved one as a result of a collapse at the probate office.
Five years ago, obtaining a probate grant took about ten days from the time you submitted your application. Now it takes about three months. Combine that with the time needed to prepare an estate for application and lawyers warn that it will take up to a year to grant probate.
The wait time is so terrible that families now risk receiving hefty penalties with interest for not paying taxes due on time.
The added stress is a heavy burden for already grieving family members, but with careful planning, you can save your family the administrative nightmare and ensure they have no trouble beating the tax clock.
The Government expects inheritance tax bills to be paid within six months of a person’s death. Then interest of 7.75 percent begins to be charged on the bill.
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If the grant of probate is not issued on time, executors may struggle to find the money to pay the inheritance tax bill. This is particularly difficult if the majority of the estate is an illiquid asset, such as a property that needs to be sold.
Greg Fletcher, solicitor at Cripps law firm, says: “Inheritance tax must be paid before the end of the sixth month after death.” This deadline raises significant problems if the principal value of an inheritance is tied up in the family home. HM Revenue & Customs recognizes this and allows property tax due to be paid in ten annual installments, but interest will continue to run from the end of the sixth month after death.
The average inheritance tax bill is £214,000, according to government figures. The interest on that would be £319 per week. If it had taken the executors 12 months to sort out that estate, apply for probate and issue the grant of probate (as many lawyers now warn will happen), the tax bill would have increased by £8,294.
One solution is to take out a whole life insurance policy today, so that your family has immediate access to cash when you die, with which they can pay the inheritance tax before interest needs to be added. It must be taken into account that only four percent of inheritances end up paying inheritance tax.
Taking out a policy would mean you pay premiums for the rest of your life, but when you die, the policy will pay enough to cover your tax bill. It could be a great stress reliever to know that your family won’t have to struggle to pay the tax man. However, for this plan to work, it is necessary to place the insurance policy in a trust, as Greg Fletcher explains: ‘With inheritance tax, if the policy pays out to your estate, it will increase the value of your estate and the associated inheritance. tax.
“If, on the other hand, the policy is written into trust and paid to the appointed trustees, it will remain outside your estate and no inheritance tax will be payable on the value of the policy at the time of your death.”
The other advantage of placing your insurance policy in a trust is that, since the trust deed gives your trustees the power to manage the policy, it can be paid out immediately upon your death without the need to grant probate. This means that trustees can settle your inheritance tax bill without having to wait.
While this trick can alleviate a huge burden for many families, it won’t work for everyone. Premiums on this type of policy tend to be high, so it’s best suited for people facing a substantial inheritance tax bill, perhaps like wealthy crime novelist Harlan Thrombey in 2019’s Knives Out, whose death triggers a tangled web of intrigue about his fortune.
For example, a £1 million whole life policy taken out by someone aged 50 will likely cost around £300,000 in premiums if they live to be 80. A joint whole life policy paying £214,000 – the average inheritance tax bill would cost £175 a month for a couple in their 50s.
Petronella West, chief executive of wealth manager Investment Quorum, says: “Although you will never benefit from the policy, the premiums you pay will almost certainly be substantially less than the final payment your family would receive from the insurance company.” The younger you hire it, the cheaper the premiums will be and the better your assets will be, but don’t commit to a cost that you can’t afford throughout your life.’
If you start paying premiums and at some point can no longer pay them, the policy will be canceled and you will lose all the money you have already paid.
West gives the example of a family he has advised: John Wilson, 48, and his wife Jane*, 38, with two young children. They have substantial wealth from the sale of their company. Having sought financial advice, Mr and Mrs Wilson expect to face an inheritance tax bill of around £10m when they both die.
West recommended that they take out a joint life, second death and whole life insurance policy written in a trust. The policy will pay out £5 million upon their death and will cost them £38,000 a year, which they can afford to pay out of their income.
West says: “We do not recommend covering the entire £10 million inheritance tax liability with the insurance payment, as John and Jane plan to make charitable donations in the future, which will reduce the value of their taxable estates.” . It would also have substantially increased your premiums.’
The Wilsons’ insurance policy will be placed in a discretionary trust for the benefit of their executors to be used to pay their inheritance tax bill. Most insurance companies have a standard trust deed template that you can fill out to place your policy in trust, but it is advisable to get advice from an attorney.
You must be very careful when setting up your life insurance policy, because once you have placed it in a trust you cannot change your mind. It cannot be reversed. A letter of wishes is a document that you write yourself to accompany your will. While not legally binding, it may contain additional information useful to your executors and family members.
West says: ‘Having witnessed many horrible family feuds and disagreements, I always recommend that families discuss things together before someone dies. But if that’s too difficult, it always helps to use a letter of wishes to guide the executors. When there’s a lot of money and young adult children involved, it can be a good idea to make a note of who they can talk to and who they can confide in now that mom and dad aren’t there to offer advice.’
* Names have been changed.
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