5 Ideas for Crafting a Great Estate Plan

The aim of a financial plan is to allow you to achieve your goals and to create financial independence. Most people think of getting on the property ladder or planning their perfect retirement. Planning what should happen to your money when you are gone can be a more difficult subject to tackle.

14th July 2022

But there are several reasons why estate planning is a key part of any financial plan. When you have worked hard to build up wealth, it can be extremely fulfilling to know that you will leave a legacy behind. Efficient estate planning can also save on tax and ensure that more of your money goes to those you intended.

Crafting a great estate plan can take time and should not be rushed. Below are some tips to help you get started.

Make a Will
A will is the basic foundation of any estate plan, and yet many people put this off indefinitely.

The rules of intestacy are different throughout the UK, but will allocate your assets to your spouse, children, or other family members in a specified order of priority. If you don’t have any family, your estate will pass to the Crown.

Before considering why you should write a will, we should first look at what will happen if you don’t have one. Without a will, you cannot:

Making a will is straightforward and may not be as expensive as you think. It will allow you to take control over all of the above factors. Even more importantly, a will can be easily changed. It’s better to make a basic will now, knowing that you can change it later, than to keep putting 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 a will, setting up life insurance, and nominating beneficiaries for your pension fund.

Later, when you become more financially established, you may want to make 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. Not only does this reduce your potential IHT bill, but it also means that you can see your family benefitting from the money.

If you are financially secure, you might even want to make larger lump sum gifts. These will remain in your estate for seven years and may potentially 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 business. There are a number of conditions to this, including the requirement to own the assets for at least two years.

You do not need to own your own business to benefit from this relief. You can buy unlisted shares or shares listed on the Alternative Investment Market. These can form part of your estate plan, but remember, they are riskier than mainstream investments.

Finally, it’s also worth noting than pensions are not subject to IHT. You can pass your pension to beneficiaries free of tax if you die before age 75. If you die after age 75, your beneficiaries will simply pay tax at their personal rate on any withdrawals they make. This means that when you retire, it can be more efficient to draw on other assets first and keep your pension intact.

Make Use of Trusts
Trusts are a complex area and there are many different variations. Broadly, a trust allows you to designate assets to particular people or a ‘class’ of beneficiaries, for example, your children and grandchildren. 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 income or capital. Generally, the more flexibility a trust offers, the greater the potential tax implications.

Depending on the type of trust, you may be able to:

Trusts may have costs and tax implications which outweigh the savings, which means it is important to seek advice.

Give to Charity
Charitable gifts are immediately outside your estate for IHT purposes. Regularly making gifts to charity can reduce your estate while doing some good. 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 residual 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
While there are multiple options to create an estate plan and save on IHT, it would be a mistake to do too much too soon. If you give away assets, or place them out of your reach, you might face financial hardship later on if you need to pay for care. Even worse, if you are found to have 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 is not a one-and-done type of arrangement. 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.

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