Intestacy trap - facts exposed

Under current intestacy laws if one spouse dies leaving a surviving spouse and children, the surviving spouse will get the personal chattels and the first £125k from the Estate. He/she will then get a life interest in the half of the balance. The other half goes outright to the children.

What we mean by a life interest is that the survivor is entitled to the income from half of the remainder of the estate, but cannot touch the capital.

Given the current average house price is £165k this means that the surviving spouse or civil partner is unlikely to be able to own the roof over their own head.

Depending upon the value of the estate the house might even have to be sold, to pay out the children.

When the surviving spouse/partner dies the children get the funds that were left in the life interest trust for the surviving spouse.

Example:
A husband dies, owning the family home worth £300k plus he has £25k in the building society
The children would be entitled to £100k and the house would have to be sold to pay this sum

Fortunately, the Ministry of Justice has realised the total inequity of this situation and from February 2009, the £125k statutory legacy will increase to £250k.

In the above example that would mean that the widow would get £250k and the income from £37,500. Only £37,500 has to be found for the children.

Even with the increased limits this is still more than the available cash in the estate.

Action points

The first solution is of course, to make a Will.

At an absolute minimum put the family home in joint names so that it automatically goes to the survivor on the first death. In these circumstances the intestacy laws will apply to everything other than the house and the survivor will still get the first £250k. This should cover the vast majority of estates.

The intestacy rules if there are no children are different. In this case the surviving spouse gets £250k (from February 2009 £450k) and half of the balance. They other half goes to the parents of the deceased (if they are alive) and if not to brothers and sisters and their descendants. This is much less of a problem on small estates, but currently an estate of £400k including the family home, could still result in £100k going to parents or brothers/sisters. Under the new regime the whole of the £400k would go to the surviving spouse.

The statutory legacies were last increased in 1993 - and have not exactly kept pace with house-prices or inflation.

Let's hope the Ministry of Justice does not wait another 15 years before reviewing the limits again!