Let’s debunk a myth: ‘estate planning’ doesn’t necessitate a stately pile on the coast! Nearly all of us have an estate - your estate being comprised of everything you own such as your home, car, bank accounts, life insurance, personal possessions etc. Estate planning isn’t just for the wealthy; in fact good estate planning often means more to people with modest assets, because it aims to preserve them for the people that matter most. It’s not only for retired people either; unfortunately accident and illness can happen to people of all ages.
So, now that you know you have an ‘estate’, what plans should you be making?
It’s common knowledge that having a Will in place ensures your assets will pass in accordance with your wishes upon your death. Without a Will, your assets will pass according to the statutory rules of intestacy laid down by the government, which means you have no say as to who gets what. However, making a Will is really the tip of the iceberg when it comes to estate planning; it can be the prompt required to get other important affairs in order…
For instance, if you have a life insurance policy that would pay out to your estate on death, this increases the value of your estate for Inheritance Tax (IHT) purposes and could push you into taxable territory when IHT may not otherwise be due. Instead, life insurance can be nominated to pay out directly to a particular beneficiary (such as a spouse or civil partner) or into a trust to be distributed on your death. This avoids the monies being subject to IHT on your death and means your loved ones usually receive the money soonest, without having to wait for the rest of your estate to be finalised.
If a lump sum were due to be paid out from a pension, it would usually be paid out to your estate. The same problem occurs here - the monies will be included in your estate for IHT purposes. Whilst the benefits payable will depend on your particular pension arrangement, if appropriate nominations are put in place the funds can bypass your estate and be paid to your beneficiaries, tax free.
With an ageing population, many couples are becoming increasingly concerned about the prospect of care fees eating into their hard earned savings, leaving less to pass on to their families. When making Wills, you could consider inserting a Life Interest Trust over the deceased’s share of the home, allowing the survivor to continue living in a property until their death, whilst ring-fencing the deceased’s share of the property (and other assets if desired) for the chosen beneficiaries. These trusts can be drafted flexibly, to allow the survivor to move home or ‘downsize’ if they want to, whilst maintaining the protection over the assets.
This is also a good time to consider whether certain Inheritance Tax reliefs may be used to reduce the value of your estate and minimise the IHT payable on your death. Everyone has an annual exemption of £3,000 each tax year that can be given away tax-free. Additionally, small gifts can be given tax-free on occasions such as weddings or civil partnerships, birthdays and Christmas. Regular gifts out of excess income may reduce your estate further, provided that they are out of your income and not capital resources, and your usual standard of living isn’t compromised.
It should be noted that any other type of lifetime gifts are added back into your estate for Inheritance Tax purposes if you die within seven years of making them.
And finally, everyone should consider making Lasting Powers of Attorney to cover both their Financial Affairs and Health. These important documents allow your chosen attorney(s) to make decisions on your behalf, should you lack the mental capacity to do so. You can also give your financial attorney the opportunity to assist you whilst you still have mental capacity, if you wish. This can be useful, for example, if you are finding tasks such as getting to the bank physically difficult, even though your mental capacity isn’t compromised. If you were to lose mental capacity and no such documents were in place, your loved ones would need to apply to the Court of Protection for a Deputyship order in order to assist you; this can cause real practical issues as it takes a long time to obtain the authority to access bank accounts and can be very costly.
If you would like advice on any of the areas I've touched on in this article, I can be contacted by phone on: 01603 724637 and by email at: email@example.com.