What to Consider When Leaving Gifts in Your Will
Throughout the Coronavirus pandemic, the will-writing industry has seen a significant spike in the number of enquiries being made.
This is largely due to the fact that the unknowns of the virus and crisis has forced us to stay at home, giving us plenty of time to consider our own lives and mortality, as well as what may happen to our loved ones if anything unexpected were to happen to us.
This has led millions of people in the UK to start putting plans in place to prepare for the future and the unknown, such as making a will online from the comfort of their own home or taking out a life insurance policy.
For many people today, they can easily write their own will online without the hassle of arranging meetings with solicitors, and while this is a convenient and more affordable way of planning your loved ones’ inheritance, there are many things to consider first - particularly if you’re considering passing down your wealth by leaving gifts in your will to family members or other loved ones.
Gifts in wills
When making a will, you will be asked whether or not you intend on leaving certain gifts to particular people or organisations; these will be known as your beneficiaries - the person/people benefiting from your will.
This is useful if you want to pass on some money, your home or valuable personal possessions to certain people when you pass away.
There are 3 different types of gifts you can leave in your will:
- Pecuniary gifts (also known as outright gifts): This type of gift is a fixed amount of money that’s left to a loved one (or loved ones) or a charity in your will.
- Specific gifts: These are often valuable possessions or family heirlooms, like jewellery.
- Residuary gifts: Whatever remains of the deceased’s estate after everything has been distributed as per the will and all debts have been settled, it is known as a residuary gift.
Most commonly, individual’s usually plan on leaving their loved ones money, perhaps to be used as a deposit on their first home or to be put towards a wedding, for example.
Whatever type of gift(s) you plan on leaving in your will, you will need to consider the following important factors first.
What to know before leaving gifts in your will
1. Your needs vs the needs of your beneficiaries
Thinking about your potential needs later on in life can be difficult, and it’s not something that many people want to do.
However, if you want to leave a gift in your will, you will need to consider any potential future expenses that you might need to make later on. This could be anything from the cost of long-term care or emergencies, for example.
So while you are considering helping your loved ones with financial gifts, you must also ensure you leave enough money for your own life and anything you may need along the way. After all, you’ve spent your life working hard to earn the money and assets you have, so you should enjoy them and try to get the balance right between what you need and what your beneficiaries need right.
To help get the balance right, it is a good idea to speak to a professional advisor about cash flow planning. They can provide expert advice on the amount of money you could afford to gift to your loved ones, based on a variety of different potential life situations. This can help you make informed decisions regarding the right amount of money to gift now, over a period of time or at some point in the future.
2. The right time to gift
After you’ve made the decisions as to who is receiving what gift in the event of your death, you then need to think about when you want to give those gifts to your loved ones.
There is, however, no definitive answer to this question as it is entirely dependent on your family.
To consider the right timing, you will need to look at your own financial plan to identify the best times in your life that you’d feel most comfortable parting with your money or other type of gift.
In many cases, people tend to plan for their gifts to be released at certain milestones in their life, or the lives of their beneficiaries, where the money would be needed the most. This can be life events such as buying a first home or a wedding, for example.
You don’t have to arrange gifts to be given during these life events, but sometimes they can help give you and the beneficiaries a better idea of when the money or gift will be released, while it also helps with financial planning throughout their lives.
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3. Tax implications of gifting money
In the event of an individual’s death, inheritance tax is placed on an estate if it exceeds the value of the Nil Rate Band, which is £325,000. Anything over this amount will be subject to 40% tax, so it is important to consider any tax implications when putting financial plans in place for the future.
Inheritance tax (IHT) will be placed on any gifts you give that are over the Nil Rate Band and if the donor (the person giving the gifts) passes away during the 7 years after making the gift in their will.
To prevent your beneficiaries’ gifts from being subject to the high IHT, it is important that you do not leave it too late to leave gifts in your will.
Having said this, gifting too early may have an affect on your own financial situation in the future, and doing so makes it more difficult to determine how much you should keep for your own needs during your lifetime.
It is highly recommended that you speak to an adviser about this, as you’ll need to plan your cash flow carefully and you may even want to consider regular gifting as a way of avoiding IHT. A financial advisor will be able to help you make the right decision based on your personal situation and needs.
4. Communicate with your loved ones
As well as deciding what gifts to give or the amount of money you want to leave behind, you will need to think carefully about who you want to give gifts to and how it may affect them.
If you are gifting to children, try to consider the following:
- Will your children all receive money at the same time or at a particular time in each child’s life?
- Will each child receive the same amount or do they have different needs? Many people tend to gift to their children at a later date in their lives when they are more mature and able to manage their finances better, while others feel it will benefit them if they receive it much earlier.
- Are you going to give slightly more than you originally intended to account for inflation?
There is no doubt that your children will be very appreciative and grateful for receiving a financial gift from you, but bear in mind that the timing is crucial.
It’s important to consider whether or not receiving a financial gift would benefit them more earlier on in their life, and whether increasing the value of their wealth at a later stage might cause them to incur an inheritance tax bill. There may be ways to avoid the IHT bill, but you will need to speak to an adviser about this first.
Finally, you will need to consider how your decisions will affect your children emotionally. While it isn’t an easy topic to bring up, communication is always crucial, especially if you want everyone to be aware of where they stand and you want to avoid family disputes in the future.
If you are planning on gifting money to your children for major life events, speak to them about it. In many cases, beneficiaries have postponed major life events because they’re waiting to receive inheritance, so it’s a good idea to clarify your needs as well as theirs before putting it all in your will.
Read more: A Guide to Making a Simple and Basic Will
Your next steps
As there are many things to consider when gifting and passing wealth on to your loved ones, your next best step would be to speak to a financial adviser who can point you in the right direction.
You can also ask them about the best ways to approach the subject with your family and loved ones when talking about the plans you intend to include in your will, which you can start writing today, at an affordable cost and at your own pace.
For more information about financial planning and writing a will, read our useful guides below.