When was the last time you discussed the family’s finances?
The unexpected death of a spouse can lead to considerable financial problems if the surviving partner is not fully aware of the state of the family’s finances. All too often, couples do not fully discuss the implications of the death of a spouse or partner, and this can create additional stress that could easily have been avoided. So, it’s worth taking some time out to consider the following areas of your family’s finances.
Inheritance Tax (IHT)
If you own your home on a joint tenancy basis and are married, there will be no tax liability on the first death, because anything left to a spouse or registered civil partner, a charity or a community amateur sports club is not subject to IHT. The same applies when you each own half the home as tenants in common and each of you leaves your share in your Will to the surviving spouse. However, a surviving spouse must be UK domiciled for an unlimited amount to be IHT-free, otherwise a reduced amount is IHT-free.
But IHT could be a problem once the second spouse or registered civil partner dies, in terms for your children. Under the IHT rules for the 2019/20 tax year, once a chargeable estate is worth more than £325,000, the excess becomes subject to IHT at a flat rate of 40%. For example, if your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
If an IHT bill looks likely, it is more sensible to make some provision to meet it, otherwise your heirs may be forced to sell the family home or other assets simply to raise enough money to pay the tax bill. A popular solution is the purchase of a whole-of-life insurance policy written in an appropriate trust and designed to pay out when the surviving spouse dies.
You also need to consider what death benefits will apply if you die before drawing your pension benefits under your current and any earlier pension arrangements. Will a lump sum death benefit be payable? Will provision be made for a pension to be payable to a surviving spouse, registered civil partner or dependents?
If a lump sum is payable to any one or more of a range of potential beneficiaries at the discretion of the trustees of your scheme, establish that your desired beneficiaries fall within the eligible group of beneficiaries and notify the trustees of who you would like them to consider when making any lump sum payment. Schemes typically have a benefit nomination form for this purpose.
Provided you say so in your Will, investments (such as unit trusts), investment trusts and shares can revert to your spouse or registered civil partner when you die, although in some instances the tax advantages of certain investments may be lost. If you have a substantial investment portfolio, it may be advisable to bequeath some of the investments in your Will directly to your children or grandchildren to make use of the IHT nil rate threshold, provided you leave enough for your surviving spouse or registered civil partner to live on. If a discretionary trust is used with your surviving spouse or registered civil partner named as a beneficiary, the trustees can pay capital or income or make interest-free loans to that spouse.
Don’t assume everything will automatically go to your spouse or registered civil partner when you die. Ensure that you have a properly drawn-up Will. Ask someone else as well as your spouse or registered civil partner to be an executor, and, finally, don’t forget to tell them and other family members where they can find a copy.
There is no crystal ball to tell you what your financial future will look like however with a bit a plan there is a way to give you a clearer picture of what retirement can look like for you.
How much money do you need?
You may know your current income and expenditure and have a clear understanding regarding your immediate financial situation but what about next year, the following year, 10 years’ time or retirement?
What you do know regarding your financial behavior that will affect the rest of your life?
These are the questions that will affect your financial stance.
At Virtue Money, we believe that Cash Flow Modelling is an excellent way to start planning your retirement and help with your lifetime cash flow.
We input detailed information supplied by you into our software system and can build in various “what if” scenario’s like what if the children go to university, what if we pay off the mortgage early, what if we want to go on that once in a lifetime holiday to identify a course of action needed to ensure that your financial future isn’t just pie in the sky.
The initial information gathering can seem a fairly lengthy process but what you have to remember is the more detail we can input then the more accurate your Cash Flow forecast will be. Once we have input the data for the first time, it is then a relatively simple process to keep those details up to date. Remember, this isn’t a one-off exercise, it’s a living document that should be regularly reviewed to ensure that it continually reflects your ever-changing situation.
We factor in things that perhaps you wouldn’t necessarily think about – the effects of inflation and the growth rate of your investments as well as lifestyle changes like increasing or decreasing your working hours, getting a better-paid job or a large bonus.
There is a lot of truth in the Benjamin Franklin quote “by failing to prepare, you are preparing to fail” – have a clear idea of your financial journey and the changes you might make today to ensure a brighter future tomorrow.
Here is a step-by-step guide to how parents can teach children about money.
Ages 3-10 years
Step 1: Introduce an allowance but teach them they must earn the money through doing household chores.
Step 2: Allow the child to spend their allowance on whatever they wish, therefore they will understand the concept of not wasting their money. Also, try and refrain from purchasing goods for them when they “want them” to allow them to understand the concept of earning.
Step 3: Create a chart that allows the child to see how much they need to save to purchase something they want. Once the child has earned their money, they can tick it off the chart and save.
Ages 11-16 years
Step 1: Start encouraging the child to research and compare the prices of items. This can be done easily even with weekly food shopping.
Step 2: Start to explain what interest is and how the money will grow over time with the more they save.
Step 3: Give your child 3 piggy banks (one for spending money, one for short-term savings and one for long-term saving).
Ages 17-21 years
Step 1: Explain the need to save for a mortgage and potentially look at investment into something such as an ISA to help. A good tip for training them to understand all of this would be helping them book a holiday with their friends (putting down a deposit, then installments).
Step 2: To help your child avoid debt, explain what credit means and how they can use it smartly. An example of doing this could be purchasing a car. In this case, parents may be able to lend them money for the car, however, the child must pay back the debt and interest.
Step 3: Teaching them about credit could be done through them getting a credit card to pay for their phone bill, for example, paying back the credit card each month. This will help them understand budgeting. You must also make them aware before getting a credit card of not paying the card back – a bad credit score.
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