Could your Will and the way you own your home be your biggest potential financial liability?
Ok so you reach a point in your life where you start to think about what might happen when you are not around anymore. It’s an uncomfortable thing to think about, let alone discuss, but people you know have maybe passed away and left a bit of a mess behind and other people you know have made, what seems to be the sensible decision, to make a Will.
The first thing to think about is how are you going to make this Will. Where do you go? Are you going to respond to one of those adverts on social media and pay £19.99 for one and then have to fend off the salesperson who will inevitably try and ‘upgrade you’, did you really think it was only going to be £19.99? or do you go and see your local, high street solicitor for limited, if any, advice.
Whichever path you go down you are more than likely to end up with a Basic Mirror Will. This is the most common type of Will for couples. Maybe you have one of these already or maybe you are contemplating putting this type of planning in place?
So, the really important thing to remember here is that a Will can only ever deal with any assets you have left at the very end of your life. Unless you are making a deathbed Will, this is when you are literally about to die and think now is the time to make a Will, then you are not really dealing with the assets you have now. I will say this again as this is the extremely important bit. Your Will can only ever deal with the assets you have left at the end of your life !!!! Sorry for shouting but this is really important.
Looking around at what you have amassed so far in life you will be hoping that by making this Will you are making sure that these assets are going to go where you want them to when the time comes…….Well, not necessarily.
The way in which a Mirror Will works is that, on first death, it will pass the deceased’s assets to the surviving spouse and on second death it will pass everything down to the ultimate beneficiaries which is usually your children.
In most cases, when you make your will, everything is rosey in the garden. Everything remains rosey in the garden until it stops being rosey in the garden. The types of things that could prevent the continuation of this roseyness could be any number of things such as illness or passing away at an inconvenient time. Is there ever a convenient time? I guess not.
Let’s look at a case study.
Here we have Mr and Mrs Smith and their 2 children Mark and Susan. They have a house worth £200K along with £50K in the bank. They are in their mid 40’s and still have a mortgage but have a life assurance policy in place that will pay off their mortgage balance on first death.
They made a Basic Mirror Will when Susan, their 2nd child, was born. They own their home as Joint Tenants. This is the default position that conveyancing solicitors will appoint joint owners when they first purchase a house. They very rarely discuss the different options of how to own your home jointly, they just tick the box that says JOINT TENANTS.
A word on Joint Tenancy. What this means is that Mr and Mrs Smith both own 100% each of the property. It is in fact the same as having a joint bank account. Mr and Mrs Smith have £10K each in sole accounts and £30K in a joint account. They both own all of the money in the Joint Account and are both legally entitled to take it all out if they wish.
With Joint Tenancy ownership comes something called the ‘Rules of Survivorship’. What this means is that on first death, the survivor will own that particular asset outright in their sole name. Even if the deceased, in their Will, said that they wanted their share or interest in the property to go somewhere else, such as to a child for example, this wouldn’t happen. It all goes into the name of the surviving joint owner.
Mrs Smith suddenly becomes ill and after a short illness she passes away. Her name is taken off as joint owner of the house simply by sending her death certificate off to the land registry and the same is done with the joint bank account.The life assurance pays off the remainder of the mortgage balance and the home is owned outright by Mr Smith.
The basic mirror will and the death certificate come into play for the £10K that was in Mrs Smith’s sole name. The Smiths have been with the same bank for nearly 20 years and have a personal relationship with their local branch so they are happy to release the funds directly to Mr Smith’s bank account. If the amount had been higher the bank could have insisted on a grant of probate which would have been annoying to Mr Smith considering he inherited everything else without one. The general rule is that any estate worth more than £5K in england and Wales would need a grant of probate. There are a few exceptions as we’ve seen with this scenario.
So the Basic Mirror Will passed £10K to Mr Smith. Mr Smith is now in control of the whole of the estate.
Now, Mr Smith doesn’t particularly want to spend the rest of his life on his own. Infact, Mrs Smith, on her deathbed, insisted that he meet someone else and gave him her blessing.
After a few years he did, infact meet Mrs Jones. Mrs Jones had been divorced a few years earlier and has 2 children of her own.
Mrs Jones had come to an agreement with her ex husband as to how they would divide the assets up. Seeing that she was going to be the main carer for the two children, she kept the house.
Further down the line, and time is completely irrelevant here, they got married and two things happened on that lovely day that neither Mr Smith and the new Mrs Smith had any idea about.
The first thing that happened was that, as soon as they signed the marriage contract Mr Smiths Will was instantly revoked, cancelled. The new Mrs Smiths was revoked too.
The second thing that happened was that everything they both owned became a matrimonial asset. It now all belongs to the marriage and Mr and Mrs Smith have just potentially and inadvertently disinherited their children.
Let me explain. Let’s say in a few years, again time is irrelevant, Mr Smith passes away. Mr and Mrs Smith either didn’t get around to making a new Will or they assumed their Wills were still in place and because they had their individual names down as sole owners of property and accounts they just ‘assumed’ these things would go to their children.
Now what actually happened was that Mr Smith had actually died INTESTATE. This is the word we use when someone passes away without a valid Will. So, the dusty old ‘Rules of Intestacy’ are brought out and they dictate who inherits. The problem here is that these rules were written in 1925 when life was pretty simple. Average life expectancy was early 50’s and second marriages after death or divorce were scarce. 1 in 3 marriages now are second or more after death or divorce.
These rules do not take into consideration any emotion or family dynamics. They are black and white and ask a series of questions. As it happens the first question asked is
WAS THE DECEASED MARRIED?
The answer is yes so everything to Mr Smith’s wife. Nothing to Mr Smith’s Children. Mr Smiths children are now reliant on their stepmother making a Will to include them, if she gets around to it. Maybe she hasn’t got the capacity to do this or realise that this is something she must do or maybe she’s fallen out with them and doesn’t want them to get anything? When Mrs Smith eventually passes away the same rules are brought out and the answer to the first question is NO because Mr Smith has already passed away. The second question is:
DID THE DECEASED HAVE ANY CHILDREN?
The answer is yes so everything is divided 50/50 between her two children. Mr Smith’s children miss out completely.
This unfortunate situation has a name. It’s called SIDEWAYS DISINHERITANCE and happens more frequently than you can imagine. Maybe you’ve heard of it happening to someone before or maybe you have been a victim yourself.
Another scenario which doesn’t stand up very well to basic mirror wills is the following.
Lets use Mr and Mrs Smith as the example again but let’s assume that Mrs Smith is still alive, In Fact they have both managed to make it to their 70’s relatively unscathed. Their mortgage was paid off years ago and they now have an estate worth £450K. £300K in the value of their home, £110 in a joint savings account and £20K each in their own accounts. Mark and Susan are grown up now with families and homes of their own.
Mr Smith is showing signs of more than forgetfulness. He’s doing some very strange things which at first, is amusing to Mark and Susan but soon becomes alarming and life threatening. They find out that he has early onset dementia. Dementia is now the biggest killer in our country and overtook cancer a few years previously.
A few more years go by Mrs Smith makes the difficult decision to put her husband into a facility which can better meet his needs. It has all become extremely stressful and it’s the best place for him.
Now all eyes are on Mrs Smith and everyone expects a certain path to unfold which culminates in Mr Smith passing away first. The problem is Mrs Smith’s health has suffered as she has had the burden of looking after Mr Smith for many years. It has taken its toll and now she has the stress of having to visit him in a care home. He’s forgotten who she is.
Mrs Smith passes away first.
I’d like to press pause for a second here and explain some of the rules around paying for care. These rules have been in place since 1993 when Mrs Thatcher was in power. Many governments have tried and promised to tackle the care problem but the rules remain the same. There are 3 main rules which I want you to remember.
- The property disregard rule.
When Mr Smith went into care, Mrs Smith was still living in the property. This meant that the property was disregarded at this point and wasn’t included in his care assessment.
- The first threshold of £23,250
When you are assessed for care and have more than £23,250 in your own name then you have to pay for your care in full. Care fees can be anywhere between £600 and £1500 a week depending on where you live.
- The lower threshold of £14,250
This is the amount that they can take your total assets down to before they stop and you get your care for free.
Ok so Mrs Smith has passed away, there are a few things that are going to happen. One of those things is that the Will is going to come out. If you have a Will i’d like you to go and get it please as we are going to press pause again, apologies as I realise we have only just resumed but this is important. We are looking for a word. A very dangerous word and the reason for the title of this download. It is the word ABSOLUTELY. It is used when it mentions the passing of assets. On first death and on second death.
What it means in this scenario is that Mrs Smith’s £20K that she has in her account is going to go straight to Mr Smith regardless of the situation he is in and the situation he is in isn’t the best situation to be in to receive large sums of money.
As it happens in this case the £20K is pretty much inconsequential compared to the fact that Mrs Smith’s name is to be taken off as joint owner of the house and the joint bank account leaving Mr Smith as sole owner of both.
This leaves the Smiths children in the unfortunate position of watching as every month goes by that their father is in care, firstly the cash is reduced considerably and then the value of the house. Worse case scenario being he stays in care for that long that they get down to the lower threshold of £14,250 and Mark and Susan get just over £7K each when their father eventually passes away.
There is another, 3rd scenario that a basic Mirror will and the word Absolutely doesn’t work well with either. This is very quick and happens on second death. Let’s bring Mr and Mrs Smith back to life and assume for this little story that they both pass away in their sleep within hours of each other. I think this is how we all envisage and would like our end to come.
The problem here is that Mark is in the middle of a divorce and Susan has taken a business risk and is going through a bankruptcy. According to the Basic Mirror Will The Smiths children are to inherit absolutely. This means they get £225K each regardless of the situation they are in.
Mark’s wife, he’s not divorced YET, gets half and Susan has to use £150K of it to pay the receivers. If only there was another way The Smiths could have set things up?
There are many unfortunate consequences of making a Basic Mirror Will. We never advise anyone who owns their own home to make one of these wills. There are other types of Wills that we would recommend and also other types of planning which prevent these types of things happening and which make sure your assets go where you want them to, regardless of what life throws at you. Get in touch to find out for free about what would be the right plan for you.