Estate planning might sound like something only the wealthy need to worry about, but that’s far from the truth. If you own any assets at all – a house, a car, savings or personal belongings with sentimental value – you have an estate. And you probably want a say in what happens to it after you’re gone.
Estate planning is the process of arranging how your assets will be managed and distributed after your death. It’s about ensuring your wishes are carried out, and your loved ones are taken care of. But it’s not just about what happens after you die. A good estate plan also covers what happens if you become incapacitated and can’t make decisions for yourself.
You might think you’re too young to worry about estate planning, but the truth is, it’s never too early to start. Life is unpredictable. Having a plan in place gives you and your loved ones peace of mind.
This blog shares six essential tips that will help you get your estate in order.
Tip 1: Create a will
A will is the cornerstone of any estate plan. It’s a legal document that sets out your wishes for how your estate should be distributed after your death. Without a will, you die ‘intestate’, which means the law decides who gets what – and it might not align with your wishes.
Your will should cover all your assets, from your home and savings to your grandmother’s antique jewellery. But it’s not just about distributing assets. In your will, you can also:
- Name guardians for your children
- Specify funeral arrangements
- Leave instructions for the care of pets
- Make gifts to charity
When creating your will, be as clear and specific as possible. Ambiguity can lead to disputes among your beneficiaries. Also, remember that your will needs to be witnessed to be legally valid. If you die without a will, your estate will be distributed according to intestacy rules. These rules prioritise close family members, which might sound fine, but they don’t account for modern family structures or personal preferences. For instance, unmarried partners or step-children may not inherit anything under intestacy rules.
Tip 2: Appoint a lasting power of attorney
A Lasting Power of Attorney (LPA) is a legal document that allows you to appoint someone you trust to make decisions on your behalf if you become unable to do so yourself. There are two types of LPA:
- Health and Welfare LPA: This covers decisions about your healthcare and personal welfare.
- Property and Financial Affairs LPA: This covers decisions about your money and property.
Having an LPA in place can be crucial. If you lose mental capacity without an LPA, your family might need to go through a lengthy and expensive court process to get permission to act on your behalf.
To set up an LPA, you’ll need to choose your attorney(s), fill out the relevant forms and register the LPA with the Office of the Public Guardian. You can have different attorneys for each type of LPA, or the same person for both. Remember, you can only set up an LPA while you have mental capacity. Once you’ve lost capacity, it’s too late. So it’s wise to set one up well in advance, even if you don’t think you’ll need it anytime soon.
Tip 3: Consider setting up trusts
Trusts can be a valuable tool in estate planning. A trust is a legal arrangement where you give cash, property or investments to someone else (the trustee) to look after for the benefit of a third person (the beneficiary). Trusts can offer several advantages in estate planning, including:
- Control over assets: You can set conditions on how and when your assets are distributed.
- Protection: Assets in trust may be protected from creditors or divorce settlements.
- Tax planning: Certain trusts can help reduce Inheritance Tax (IHT) liability.
However, trusts can be complex, and there are often tax implications to consider. It’s usually best to seek professional advice before setting up a trust.
Tip 4: Understand and plan for Inheritance Tax
Inheritance Tax is a tax on the estate of someone who’s died. In the UK, there’s usually no IHT to pay if:
- The value of your estate is below £325,000 (the current ‘nil-rate band’)
- You leave everything above the £325,000 threshold to your spouse or civil partner, a charity or a community amateur sports club
If the value of your estate is above £325,000, the part of your estate above the threshold might be liable for IHT at 40%. There are additional allowances and exemptions to be aware of:
- The residence nil-rate band: An additional allowance when you leave your home to your children or grandchildren.
- Annual exemption: You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate.
- Small gifts exemption: You can make small gifts of up to £250 to as many individuals as you like tax-free.
IHT planning can be complex, and the rules often change. It’s an area where professional advice is essential.
Tip 5: Review your pension and life insurance arrangements
Pensions and life insurance policies can play a significant role in your estate planning. Many people don’t realise that pensions usually fall outside of your estate for IHT purposes, making them a tax-efficient way to pass on wealth. For most pensions, you can nominate who you want to receive your pension after you die. This is done through an ‘expression of wish’ form. It’s essential to keep this up to date, as pension trustees will take it into account when deciding how to distribute your pension.
Similarly, life insurance policies can be written into trust, which means the pay-out doesn’t form part of your estate for IHT purposes. This can be a simple way to provide for your loved ones while reducing your IHT bill. The tax treatment of inherited pensions depends on several factors, including the type of pension, your age when you die and whether you’ve started taking money from the pension. In many cases, beneficiaries can inherit pensions tax-free if you die before age 75. If you’re unsure of your current pension situation, speak to a professional adviser.
Tip 6: Regularly review and update your estate plan
Your estate plan isn’t a ‘set it and forget it’ document. It needs regular reviews to ensure it still reflects your wishes and circumstances. Life events that often need updates include marriage or divorce, having or adopting children, death of a beneficiary, significant changes in your financial situation (such as inheriting or losing a job) and changes in tax laws.
As a general rule, it’s a good idea to review your estate plan every three to five years, or whenever a significant life event occurs. During these reviews, focus on:
- Ensuring your will is up to date
- Checking your LPA is still appropriate
- Reviewing trust arrangements
- Reassessing your IHT position
- Updating pension and life insurance beneficiaries
Your estate plan should evolve as your life does. Keeping it current ensures your wishes will be carried out accurately when the time comes.
Getting professional advice when estate planning
While it’s possible to do some estate planning yourself, there are many areas where professional financial advice can be invaluable. Solicitors can help ensure your will and LPA are legally valid and reflect your wishes accurately. Financial advisers can assist with IHT planning, trusts and ensuring your overall financial strategy aligns with your estate planning goals.
You should consider seeking professional help if your estate is likely to be subject to IHT, you have a complex family situation (such as remarrying or gaining step-children), you own a business or have assets overseas, or you want to set up trusts. While the cost of professional advice may seem high, it can often save you much more in the long run.
How can Glenrose Financial Planners help?
Estate planning might seem daunting, but it’s an essential part of managing your finances and securing your family’s future. The peace of mind that comes from knowing your affairs are in order is invaluable. While the process might seem complex, you don’t have to navigate it alone. Working with an experienced financial planner like Glenrose can help you understand the tax implications of your estate plan, protect your assets and ensure your wishes are properly documented.
So, if you haven’t already started the estate planning process, now’s the time to act. We can help you take the necessary steps to create a plan that reflects your needs and wishes to ensure your legacy is preserved and your loved ones are protected for years to come. To make a start, book a consultation now.