The aim of most financial plans is to allow you to achieve your goals, whether long or short term. For many people, this could entail getting on the property ladder, or maybe planning for the ideal retirement. However, making plans for your money once you are gone can be a trickier area to think about.
There are numerous reasons why estate planning is an essential part of any financial plan. Leaving a legacy behind can be extremely fulfilling, especially if you have worked hard to build up your wealth. Efficient estate planning may also save on tax and ensure that more of your money goes to those you intended.
Creating the perfect estate plan can take time and should not be rushed. Here are some tips to help you get started.
Make a will
A will is the foundation of any estate plan, yet many people put this off indefinitely.
The rules of intestacy in England will allocate your assets to your spouse, children, and other family members in a specified order of priority. Should you not have any family, your estate will instead pass to the Crown.
Without a will, you cannot:
- Appoint someone you trust to deal with your affairs
- Decide who should inherit your assets, and in which proportions
- Decide who should not inherit your estate.
- Pass any of your estate to people who are not related to you, for example, partners, step-children, foster children, friends, or carers.
- Make specific gifts to certain people
- Set up trusts or make charitable gifts.
- Have any control over how your estate is treated for inheritance tax (IHT) purposes.
Making a will is simple and may be less expensive than you think. It will allow you to take control over all the above factors. Importantly, a will can also be easily changed. Therefore, it is better to make a basic will now, knowing that you can change it later, than to put it off.
Plan ahead
It is never too early to start thinking about your estate plan.
If you have a young family, you should certainly be thinking about making or a will or updating your existing one, setting up life assurance, and nominating beneficiaries for your pension.
When you become more financially secure, you can start making regular gifts to your family. Gifts of up to £3,000 per year, or any regular amount funded from surplus income, are immediately outside your estate. This both reduces your potential IHT bill, and also means that you can see your family enjoying the money.
If you are financially stable, you might even want to make larger gifts. Large gifts will remain in your estate for seven years and will incur IHT if you die within that time.
Business owners can receive up to 100% IHT relief on company shares or other assets used in their own business. This is subject to a number of conditions, including the requirement to own the assets for at least two years.
You do not need to own your business to benefit from this relief. You can instead purchase unlisted shares, or shares listed on the Alternative Investment Market. These can then form part of your estate plan, but remember, these investments are riskier than typical investments.
Finally, it’s also worth noting that pensions are not subject to IHT. You can pass your pension to beneficiaries free of tax if you die before age 75. However, if you die after age 75, your beneficiaries will pay tax at their marginal rate on any withdrawals they make. What this means is that when you retire, it could be more efficient to draw on other assets first, thus keeping your pension intact for others.
Make use of trusts
Trusts are a complex area of financial planning and there are many different variations. Essentially, a trust allows you to designate assets to particular people or a ‘class’ of beneficiaries, for example, your children. A trust may be ‘absolute,’ whereby beneficiaries have full entitlement to the assets, or ‘discretionary,’ where the trustees have the final say regarding distribution of the assets. Generally, it is the more flexible trusts which attract the greater tax implications.
Depending on the type of trust, you may be able to:
- Save on IHT. Discounted gift trusts offer an immediate reduction to your estate, while most other gifts into trust will fall out of your estate after seven years. Loan trusts, where you retain access to your original capital, only allow you to avoid IHT on the investment growth.
- Re-direct life insurance benefits so that they are paid out more quickly and do not form part of your estate.
- Place wealth outside your estate without passing it absolutely to any one individual.
- Protect assets from divorce, bankruptcy or financial mismanagement.
However, trusts may have high costs and large tax liabilities which could outweigh any savings made. For these reasons, it is crucial to seek advice.
Gift to charity
Charitable gifts immediately fall outside your estate for IHT purposes. Regularly making gifts to charities can reduce your estate while also helping those than need it. You may also be able to save on income tax and capital gains tax by gifting cash or assets to charity.
Additionally, if you leave at least 10% of your taxable estate to charity, your remaining estate will be taxed at a rate of 36% instead of 40%. This means that even a modest gift through your will can ensure that more of your wealth goes to your intended beneficiaries.
Don’t neglect your own needs
Whilst there are many ways in which you can save on IHT via estate planning, you shouldn’t seek to do too much too soon.
Gifting assets and placing them in trusts could be beneficial down the road but if you find yourself in a time of financial hardship, you may be unable to pay for your daily essentials. Worse still, if you deliberately deprived yourself of assets to avoid paying care fees, you may not qualify for means-tested support.
Like any part of a financial plan, an estate plan shouldn’t be viewed in isolation. It is most effective when you carefully consider your goals, review it regularly, and make changes in line with your evolving circumstances and wishes.
Please don’t hesitate to contact a member of the team to find out more about estate planning.