The Chain of Inheritance

When you purchase life insurance you can choose to assign a specific person to receive your sum assured, the money paid to your survivors in the event of your death or diagnosis with a terminal illness; the beneficiary can be any other person, but you may wish to assign the pay-out to someone who is financially dependant on you and would benefit most from the financial assistance. For example, you could choose to assign your civil partner to receive your sum assured in order to enable them to continue making mortgage payments on your home when your income is no longer available.

You should consider writing a Last Will and Testament, even if you do not think it likely that you will die in the near future. A Will can protect your survivors from a complicated legal battle for financial security in the event of your death by ensuring that your 'estate', that is, everything you own, your assets and even your debts, are all divided amongst the people you nominate. The process of writing a Will is not as time-consuming nor as complicated as you might believe. It is a useful tool to ensure that your loved ones will receive your money and any personal items that you wish them to have when you are dead, and it provides a good opportunity for you to assess potential financial complications caused by your death, such as ongoing mortgage repayments or inheritance tax bills.

As of April 2008, the threshold rate for inheritance tax is £312,000 and any assets that you have which exceed this limit, including your home, will be subject to inheritance tax. When making a Will you will be able to determine the current value of your estate and take measures to avoid unnecessary tax deductions for your survivors when you die. If you have children and wish to leave them money for the future, a Will allows you to appoint guardians who take responsibility for your estate until your children are old enough to care for it themselves.

If you choose to do so, you can write your life insurance 'in trust' by assigning a specific beneficiary who should receive the sum assured in the event of your death or diagnosis with a terminal illness. This beneficiary will receive the pay-out quickly and easily, without the need for anyone to refer to your Will or the need to wait for the probate process to be resolved. If you do not write your life insurance 'in trust' or assign a specific beneficiary by other means, then any pay-out will become part of your estate. If you have not made a Will, your life insurance will, along with the rest of your assets and debts, be shared according to the 'Intestacy Rules'. These rules define the chain of inheritance.

In England and Wales, the following chain of inheritance applies:

• If you have a lawful spouse (legally married partner) or civil partner and no other relatives, he or she will inherit everything that you leave: both assets and debts.

• If you have a lawful spouse or civil partner and children and your estate is less than £125,000 then your spouse or civil partner will inherit everything. If your estate is more than £125,000, your spouse or civil partner would get £125,000 as well as lifelong interest from half of the remaining sum. Half of the sum over £125,000 would be inherited immediately by your children. They are entitled to the other half on the death of your partner or spouse. Your grandchildren would be entitled to their parents' share if your children had died before you.

• If you have a lawful spouse or civil partner and no children but you have other relatives (for example parents, siblings, grandparents, aunties and uncles) your spouse or civil partner would be guaranteed £200,000, plus half of anything exceeding this amount. The remainder would be shared between (in order of priority) parents, siblings, half-siblings, grandparents, aunties and uncles, their spouses or civil partners, half-aunties and -uncles.

• If you have no lawful spouse or civil partner but you do have children, your estate would be shared equally between them all. If one or more of them has died before you, their children would be entitled to their parent's share.

• If you have no lawful spouse or civil partner and no children but do have other relatives, either living or dead, then the estate is shared equally between them or their surviving children, in the order stated above.

• If you have none of the above, that is, no spouse nor civil partner and no children nor relatives, your estate will pass to the Crown: for further information contact Bona Vacantia: Tel: (+44) 020 7210 3116.

It is worth noting that your estate will pass to your spouse or civil partner without inheritance tax liability. When your spouse or civil partner subsequently dies, your estate is passed on tax-free, up to a limit of £600,000 rising to £700,000 by 2010, as long as you did not use any of your tax-free allowance upon your death, for example, by passing money directly to your children via a life insurance policy written 'in trust'.