Dealing with Finances after a Bereavement – Part 1

If you are reading this blog because you are recently bereaved, our condolences. We hope that this guide will offer some practical steps, given the emotional fog that you are likely to be going through. If you have never been bereaved, this blog is not irrelevant, read it now whilst you are ok, as at some point, bereavement may happen to you and it is invaluable to have some knowledge of how to negotiate all of the tasks necessary to sort out your loved one’s estate in the most difficult of times.

Bereavement

Bereavement is the experience of loss, especially the loss of a loved one through death. It encompasses the emotions, thoughts and behaviours that people go through as they grieve and adapt to the reality of the loss. It is a deeply personal process and can affect individuals in various ways, influencing their emotional, physical and social well-being.

The grieving process varies from person to person and is not linear. But over time, most people find ways to adjust to life without the person they have lost. Support from others is key and part of the journey to recovery and part of that support is to obtain good advice around the financial aspects of the deceased’s life. At the time this may not seem the most important thing given the huge hole that has been blown in your life when you are aching with the loss of your companion and previous rituals. There will be highly emotional responses to cope with as well as questions about the meaning and purpose of life to grapple with. You may suffer unwelcome behavioural and physiological changes such as sleep disturbances, changes in appetite, social withdrawal, and chronic grief all of which can contribute to the development or exacerbation of physical health conditions. It is a serious thing.

Bereavement is something you could face at any age, but it is worth noting that in the UK women on average live four years longer than men. Bereavement, therefore, is more often dealt with by women whilst traditionally it may have been the man who dealt with most of the family’s finances. This is certainly the case for the current aged population over 80 – women who were young wives in the 50s and 60s, but thankfully the following generations are more independent financially and are empowered and knowledgeable.

The importance of the Will

Incredibly over 50% of adults in the UK have not written a will, even though having a Will is crucial to ensure your wishes are respected and important for financial reasons. No one likes dwelling on death, but as we are talking about it, Please read the second part of this blog that focusses on the importance of the Will.

Dividing a person’s estate after bereavement

A person’s estate is everything owned by that person: money, money owed to them, shares, property, and personal possessions.
Anything left over after tax and debts are paid is usually left to surviving relatives, details of this are outlined in the person’s Will.
If they do not have a Will- the estate is distributed according to the legal rules called the rules of intestacy.
The person dealing with the estate is called the executor or administrator.
Executor vs administrator:

Executor- has responsibility for the estate and is named in the Will, they may have to apply for probate before they can start dealing with the instructions and legalities.
Administrator- is only responsible under certain circumstances, i.e. if there is no will or the executors named in the will refuse to uphold their responsibility. They must apply for letters of administration before the actual dealings. There is a list of priority about who wants to take on the role of the administrator.

The role of the Executor or Administrator

Find all financial documents that belonged to the person who died.
Send copies of the death certificate to organisations holding money for the person who died and find out confirmation of the value left, what income was received in the last tax year, and freeze bank accounts so that no money is taken out without the correct legal documents.
Open a bank account on behalf of the estate.
Find out if the person who died has any outstanding debt.
Find out if the person who died was owed any money.
Create a list of all money, possessions, debt and property.
Work out the amount of inheritance tax to be paid and pay it.
Send documents to the probate registry or letters of administration.
Collect money belonging to the estate from all funds.
Pay the deceased’s debts out of the estate – if you don’t let the creditors know that they can make a claim before the estate is sold off, then the rest of the debt may need to be settled personally by the executor. If there is not enough money left in the deceased’s estate then creditors cannot make claims to anyone else (unless the debt is joint, e.g. an overdraft on a joint account).
Share out the estate according to the Will.
An executor or administrator should try to act quickly while the next of kin can still apply for any death benefits.

Exceptions to needing probate or letters of administration:

These are not required if:

The estate only consists of cash and personal possessions such as a car, furniture, and jewellery.
All property in the estate is owned as beneficial joint tenants – the property automatically becomes owned by the other party.
There is only a joint bank account.
The amount of the estate is only a small amount of money (usually an estate of around £15,000 or less).
The estate is insolvent.
There are certain life insurance policies and pension benefits in the estate.

What happens to joint property?

There are two scenarios depending on how the property is owned:

Beneficial Joint Tenancies

The surviving partner inherits the other partner’s share in the property. (no probate or letters of administration are needed unless there are other assets which are not jointly owned.)
If there is a mortgage it either has to be paid off immediately or the partner who inherited the property has to take it over.

Tenancies in Common

Probate or letters of administration are necessary. The property will be inherited as laid out in the Will, or by the Rules of Intestacy.
If there is a mortgage on the property, before paying it off from the estate, check if there are mortgage protection policies in place that will settle the debt.
If the property is sold the mortgage can be paid from the sale proceeds.

What happens to joint bank accounts?

Joint bank accounts are also automatically inherited by the surviving partner.
Accounts that do not have joint ownership will need probate or letters of administration and then the executor or administrator will act as outlined in the Will.
Only if the amount of money in the account is deemed ‘small’ enough, is it possible that probate and letters of administration will not be necessary. The threshold for probate varies widely between financial organisations as each has its own rules and limits and this can be anywhere between £5000 and £50,000, so will need checking.

What happens to the pension of the deceased?

The State pension will stop being paid, but you may be able to claim some benefits.
Private or workplace pensions may provide death benefits to the member’s beneficiaries
The pension holder will normally have nominated beneficiaries for their pension. It is important that this is done correctly to avoid the pension being considered part of the estate for inheritance tax purposes. It is important that the pension scheme administrator keeps the right to decide who to pay the benefits to, otherwise the pension would form part of the taxable estate.
Pension pots are not subject to inheritance tax when you die. If you die before the age of 75 the person who inherits the pension pot can draw on the money as they wish, without paying any income tax.

Inheritance Tax

This is a specialist area and potentially complicated. It is important to get proper advice to ensure that wealth is passed on tax efficiently and in the most beneficial way.

Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and money.
The standard rate of IHT is currently 40% and currently it is only charged on the part of your estate that is above the tax-free threshold (currently £325,000).
There is no IHT to pay if you leave everything above the threshold to a spouse/civil partner or an exempt beneficiary, e.g. a charity.
If you give away your home to your children or grandchildren the threshold can increase to £500,000.

NB IHT is a tax that may well change in future budgets as it is politically sensitive.

What to do when someone dies – a checklist:

Obtain a medical certificate.
Register the death.
Arrange a funeral.
Notify the landlord or mortgage provider, pension company and other organisations.
Notify government departments.
Return the deceased’s passport and driving licence.
Notify any insurers and creditors.
Value the estate and check if you need to pay inheritance tax.
Apply for probate if necessary.
Deal with the estate.
Check if you are entitled to bereavement benefits.
Access bereavement support services.

Click here to read – Dealing with Finances after a Bereavement – Part 2

Read our helpful booklet – Do You Need a Will?