As we approach the year-end, reflecting on the multitude of clients we’ve met, wills have been a focal point for many. Notably, a significant number of these clients were cohabiting couples, some with the added complexity of small children.
The Common Theme: Leaving a Legacy
A prevalent theme among these couples was the desire to leave their estate initially to each other and subsequently to their children, often including minors in the equation.
The Challenge: Tax Implications for Cohabitees
However, a challenge emerged—cohabitees do not benefit from the tax-free inheritance status granted to married couples. This realization brought forth potential substantial tax implications that needed careful consideration.
The Solution: Strategic Tax Planning
The key to overcoming this hurdle lay in proactive tax planning before establishing the wills. This involved a crucial step: a referral to a financial advisor for the implementation of appropriate life policies.
The Process:
1. Life Policies on Each Other:
Engaging in what is commonly known as a policy ‘on the life of another,’ each party took out a life policy on their partner.
2. Monthly Premiums:
Both parties committed to paying the monthly premiums on the life policy of the other.
3. Tax-Free Lump Sum:
Upon the passing of either party, a tax-free lump sum would be disbursed to the policy holder, ensuring financial security for the survivor.
The Outcome: Fulfilling Wishes with Financial Prudence
The result was gratifying—we were able to help our clients craft their wills in alignment with their wishes while strategically ensuring sufficient cash reserves. This financial cushion was designed specifically to address any potential Capital Acquisitions Tax implications arising from inheriting each other’s estates.
The Moral of the Story: Estate Planning Requires Forethought
In the absence of a will or a comprehensive estate plan, the potential ramifications are significant. For cohabiting couples, it not only jeopardizes the survivor’s entitlement to inherit the estate but also introduces the prospect of costly court applications for provision and potentially catastrophic tax consequences.
Understanding our clients’ wishes and implementing suitable solutions demand forward thinking and a proactive approach to estate and tax planning.
In conclusion, the lesson is clear: Estate planning needs planning! It’s not just a legal formality; it’s a strategic move to secure your legacy and protect your loved ones. If you’re in a similar situation, consider consulting with a legal and financial advisor to ensure your estate plan is comprehensive and aligned with your unique circumstances. Your future selves—and your beneficiaries—will thank you.
*In contentious business a Solicitor may not calculate fees or other charges as a percentage or proportion of any award or settlement
**This information is for guidance purposes only. It does not constitute legal or professional advice. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. No liability is accepted by McElhinney & Associates for any action taken in reliance on the information contained herein. Any and all information is subject to change.
