What happens to your money when you die? Experts explain how to manage your affairs in good time

If your death is something that you don’t like to think about, you’re far from alone.

Half of all UK adults do not have a will, according to the insurer Canada Life, and one in three of those aged 55 and over have not made plans for their death.

While it can feel a little morbid, preparing for your death and having the proper documents in place can save your loved ones time, stress and money after you’ve died.

“People should recognise that death is inevitable and they should plan for it like any other major event in their lives,” said Andy Gillett from BRI Wealth Management. “Preparing for it might seem strange, but it will certainly make your loved ones’ lives easier, and save them money.”

Here’s how to get your affairs in order.

Do I need to write a will?

Even if your wishes are very simple and your estate (a catch-all phrase for your belongings, property and savings) is small, you should write a will explaining what you want to happen once you’re gone.

Without a will, you will die “intestate”. It means that strict rules of inheritance will apply and your estate could be split in a way that you would not want. Not having a will can also slow down the already long-winded process of sorting out your assets.

To write a will, figure out what your estate is worth. Draw up a list of your assets — such as property, savings, premium bonds, insurance, investments and pensions — and your debts, like a mortgage or credit card balances.

Decide how you want it to be divided up: who will benefit, whether you want to give any specific gifts to particular people and what would happen if someone died before you.

You will also need to choose an executor, who will deal with distributing your estate after you’ve died. Choose wisely — they will need to have the time to manage the workload and be able to deal with the matter responsibly.

How much does it cost to write a will?

You could write your own will or use a DIY kit, but it’s only advisable to do this if your will is very simple.

It is easy to make mistakes — such as failing to take account of all the money and property available or not updating it after a marriage or birth — which can be costly and time-consuming to fix after your death.

Instead, use a solicitor. It costs between £150 to £2,500, depending on how complex your circumstances are and where you are based.

Do I need life insurance?

Life insurance will pay out a tax-free lump sum when you die, and how much you buy is up to you. The larger the payout, the higher the monthly cost.

You should focus on your debts and your dependents. Cover your debts first, so your loved ones do not get lumped with a bill once you’re gone. Then think about how much you want to leave to your spouse and any children; if they rely on you now, consider how much they might need in the future.

The money will form part of your estate when it is paid out, so it will be subject to inheritance tax. If you want to avoid this, you could put the policy into a “trust” — a legal arrangement that allows you the insurance to sit outside of your estate.

How does inheritance tax work?

Your estate will pay inheritance tax if it is worth more than £325,000 (unless your main home is passed to your children or grandchildren, in which case this limit rises to £500,000). Effectively, 40 per cent of anything above this limit will be paid to the taxman.

There are ways to limit your inheritance tax bill. The “seven-year rule” means that gifts made at least seven years before your death are free from inheritance tax, so if you are happy to give now then it could lower your estate’s tax bill in the long run.

You can also give away £3,000 worth of gifts each tax year, and extra gifts at special occasions, like a marriage. These won’t be added to your estate so won’t have an inheritance tax liability.

If you can afford to do so, you could think about funnelling any excess money into your pension. Most defined contribution pensions (pot of money pensions, which most private sector workers have) are not part of your estate, so can be a tax-efficient way to pass on money.

What happens to your money after you die?

When you die, your loved ones will need to register your death with the government, get a death certificate and inform your bank and the other financial organisations you use that you have died.

It’s likely that at this point, your assets will be frozen until probate (which gives your executor the legal right to manage your estate) is granted.

Tim Snaith, from the law firm Winckworth Sherwood, said: “Some banks will release cash from your accounts, but it could take as long as nine months for loved ones to have access to your funds.

“It’s important to consider how those who are financially dependent on you have access to the funds they need.”

This could be as simple as setting up a joint bank account.

What documents do I need when I die?

Your will and your life insurance policy are the most important documents to have in place when you die, but you could go further to make your loved ones’ life easier once you’re gone.

When sorting out your estate, your family will need to pull together a list of all of your assets and debts, and their estimated value. This can be tricky if they need to go to each provider and track down usernames and passwords, so you could make a list yourself and try to keep it up to date.

It is also worth writing a letter to sit alongside your will. It won’t be binding, but you could explain how you would like your assets to be dealt with, put forward your wishes for your funeral and outline how the beneficiaries should use the money you have left them.

As your pension sits outside your estate, it is not necessarily included in your will. Make sure you have let your pension provider know who you want your pension to go to, as well as their contact details.

Finally, make sure your family knows where to look for all this information on the event of your death. Create a “in the case of death” folder, update it regularly and, importantly, tell your loved ones where it is.