A Guide to Estate Planning

A strong estate plan can help to reduce tax, protect your legacy, and ensure that more of your money passes to your loved ones. The decisions can be difficult, but once in place, your estate plan will make things easier for you and your family later in life.

Here, we look at the main features of an estate plan and how they can benefit you.

Wills

Writing a will should be a high priority within your estate plan. This will allow you to direct your representatives (or executors) as to how you would like your assets distributed on your death.

Your will could be very simple, for example, you may want your spouse to inherit everything, followed by your children.

Alternatively, you might wish to make multiple gifts, arrange charitable donations, and set up trusts.

Perhaps your family situation is complex and you have a second marriage or blended family to consider. Maybe you have relatives that you are not in contact with and wish to ensure that they do not inherit anything.

If you die intestate (without a will), you will not have any control over these decisions. Your assets will be distributed according to a strict order of priority. This will depend on the value of your assets and where you live in the UK.

The intestacy rules are particularly severe when it comes to unmarried partners. Common law marriage is not recognised in the UK and only a legal spouse or civil partner has an automatic right to inherit. Similarly, carers, stepchildren (unless legally adopted), or close friends would also be excluded, while estranged relatives could take priority.

Writing a will is a relatively simple and inexpensive process. It’s easy to put this off, but remember your will can be easily changed. An imperfect will that is regularly reviewed is better than no will at all.

Powers of Attorney

A Power of Attorney (POA) is used to appoint a trusted relative, friend or carer to make important decisions for you if you lose capacity.

The two types of POA are:

•         Property and Financial (covering bills, investments, and property maintenance)
•         Health and Welfare (care, medical treatment, and end of life decisions)

Your POA must be created while you still have full mental capacity. It also needs to be registered with the Office of the Public Guardian.

If you lose capacity and don’t have a POA in place, the court will need to appoint someone to make these decisions for you. This can result in delays, distress, and choices being taken out of your hands.

A POA is simple to set up and register, and can normally be created at the same time as your will.

Trusts

A trust allows you to gift assets without giving up full control. You can set up a trust during your lifetime, or to take effect on your death. You will need to appoint trustees to be responsible for managing and distributing the money. You can be a trustee yourself, although it is sensible to appoint at least one other person.

The main types of trust are:

•         Discretionary, where the trustees have discretion over how, when, and why to distribute the trust’s assets, within the terms of the trust.
•         Bare/Absolute, which is similar to an outright gift, although without giving the beneficiaries full control at outset. This type of trust might be used for a minor child.

You may want to set up a trust to:

•         Reduce the value of your estate for Inheritance Tax (IHT) purposes.

•         Set aside funds for a particular person or category of beneficiary, separate from your own assets.

•         To ring-fence the money from the beneficiary’s own assets. This can be useful if the beneficiary gets divorced, is declared bankrupt, loses capacity, or makes poor financial decisions.

•         Direct who should receive income from, or be allowed to use the trust assets, while holding the capital for someone else at a later date.

•         To receive life policy benefits outside your estate.

It is worth seeking advice on the most suitable type of trust. There will be considerations around tax, risks, and charges that you will need to take into account.

Lifetime Gifts

The simplest way to create a legacy is to make gifts during your lifetime. Not only does this give you the satisfaction of seeing your loved ones benefit from the money, but it can also be tax efficient.

Lifetime gifts are treated as follows:

•          You can give away up to £3,000 per year, which is immediately outside your estate. This can be carried forward by up to one tax year as long as the current year’s allowance is fully used.

•          There are also exemptions for Christmas, birthday, and wedding gifts.

•          Other gifts may also be immediately exempt, providing they are made from surplus income and form a regular pattern.

•         Larger gifts remain within your estate for seven years. If the value is over £325,000, the Inheritance Tax payable by the recipient of the gift on your death will reduce by 20% per year from the end of year three onwards.

•         Any gifts into trust may be immediately chargeable. The rate of tax is 20% of the value over £325,000 (or less if you have made previous chargeable gifts in the last 7 years). If you die within seven years, a further 20% is payable, although this reduces between years three and seven.

It's worth considering gifts on an annual basis, as this can reduce your estate, pass more money onto your beneficiaries and ensure that you dont leave yourself short in later life

The Financial Conduct Authority does not regulate Wills, Trusts, Tax and Estate Planning

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