Nobody enjoys thinking about their own death. So, it’s easy to put off the practical steps that will protect your family when you’re no longer around. Yet a small amount of planning now can spare your loved ones a great deal of stress, delay and unnecessary expense at an already difficult time.
Protecting your family financially involves several separate but connected pieces, including making sure your will reflects your wishes and having the right insurance and pension arrangements in place. Understanding your Inheritance Tax (IHT) position and talking to your family about your plans can also help.
None of this needs to be complicated, but each piece matters, and any gaps in one area can undo good planning in another. This article looks at the practical steps you can take to protect your family’s financial future, and where Glenrose can help along the way.
Start with a will
A will is the foundation of any protection plan, yet more than half of UK adults don’t have one. Writing a will lets you decide who receives what, name guardians for children under 18, and appoint executors you trust to carry out your wishes efficiently.
Without a valid will, the rules of intestacy will decide who inherits your estate, and the results can be surprising. Unmarried partners, for example, have no automatic right to inherit, however long you’ve been together, or however much you’ve built as a couple.
Intestacy follows a fixed order. Spouses and civil partners come first, followed by children, then wider family such as parents and siblings. Stepchildren, close friends and any charities you’d hoped to support could be left with nothing at all, regardless of your wishes.
It’s worth reviewing your will after any major life event, such as marriage, divorce, having children or grandchildren, or a significant change in your finances or property. Marriage automatically revokes an existing will unless it was written in contemplation of that marriage, so this is a common and costly oversight.
Once your will is in place, keep it somewhere safe and make sure your executors know where to find it. A will that can’t be located when needed can cause the sort of delays and expense you’re trying to avoid.
Life insurance and other protection
Life insurance provides a lump sum, or sometimes a regular income, if you die during the policy term. It’s often the simplest and most cost-effective way to make sure your family isn’t left struggling financially when you pass away, particularly if you have a mortgage or dependent children relying on your income.
Level term insurance pays a fixed sum regardless of when you die within the term. It suits those wanting to replace lost income or clear a debt in full. Decreasing term insurance, where the payout reduces over time, is commonly used alongside a repayment mortgage, since the amount owed falls in a similar pattern, keeping your premiums lower than a level term policy would allow. Whole of life policies run indefinitely rather than for a fixed term, and are often used for estate planning purposes, such as covering an eventual IHT bill so your family doesn’t need to sell any assets to pay it.
You can write a life insurance policy in trust. Doing so means the payout goes directly to your chosen beneficiaries, bypasses probate and sits outside your estate for IHT purposes. Without this step, the payout could be delayed for months while probate is granted. It might even increase the tax your family owes on the rest of your estate. Setting up a trust for a life policy is usually straightforward and often costs nothing extra, so it’s worth asking your provider about when you take out cover.
What happens to your pension when you die
Pensions are usually treated differently from the rest of your estate. They generally fall outside your estate for IHT purposes, provided your scheme allows discretionary distribution to beneficiaries.
What your beneficiaries receive, and how it’s taxed, will depend largely on your age at death. If you die before age 75, any pension benefits can usually be passed on free of Income Tax, whether taken as a lump sum or income. If you die at 75 or older, your beneficiaries will typically pay Income Tax on withdrawals at their own marginal rate, which is still often more favourable than other forms of inheritance.
None of this happens automatically. Pension providers rely on your expression of wish or nomination form to decide who receives the benefits, and these forms are easy to forget about once completed, particularly if your circumstances have changed since. It’s worth checking every pension you hold, including any old workplace schemes you may have lost track of, to make sure the nominated beneficiaries still reflect your current wishes.
IHT: what your family could owe
IHT is charged at 40% on the value of your estate above the nil-rate band of £325,000, a threshold that’s been frozen since 2009. Rising property values over that period mean growing numbers of ordinary families now find themselves with an IHT liability that they wouldn’t have expected a decade ago.
If you own a home and are leaving it to your children or grandchildren, you may also benefit from the residence nil-rate band, currently worth up to £175,000 per person. Combined, it means a married couple could potentially pass on up to £1m before IHT applies, though the residence nil-rate band tapers away for estates worth more than £2m.
There are several ways to reduce your family’s potential IHT bill. You can gift up to £3,000 each tax year free of IHT, and larger gifts fall outside your estate entirely if you survive seven years from the date you make them. Regular gifts from surplus income can also be exempt, provided they don’t affect your standard of living and follow a consistent pattern. Pensions, as we’ve covered, generally sit outside your estate, too. And certain trusts can be used to pass on wealth while retaining some control over how and when it’s used.
Given how easily these allowances interact, and how often the rules around them change, it’s sensible to review your position with your financial adviser rather than assume your estate falls below the threshold.
Using trusts to protect your wealth
A trust is a legal arrangement where you place assets under the control of trustees, who manage them for the benefit of people you choose. Trusts can serve several purposes within estate planning that go well beyond holding a life insurance policy.
They allow you to control how and when your beneficiaries receive money, which can be useful if you’re leaving assets to young children or grandchildren who aren’t yet ready to manage a large sum themselves. Trusts can also help protect your assets from being used to fund care costs in later life or provide for a family member with a disability or vulnerability without affecting their entitlement to means-tested benefits, which a direct inheritance might otherwise do.
Setting up a trust involves several legal and tax considerations. The right structure will depend on your circumstances, your family and what you’re hoping to achieve.
Again, we strongly recommend you seek professional advice before proceeding, as an unsuitable trust can be difficult and expensive to unwind.
Lasting powers of attorney
Protecting your family isn’t only about what happens after you die. Lasting powers of attorney (LPA) allow someone you trust to make decisions on your behalf if you lose the mental capacity to do so yourself, whether through illness, accident or dementia.
There are two types of LPA. One covers property and financial affairs. The other covers health and welfare. Without an LPA, your family would need to apply to the Court of Protection to gain the authority to manage your affairs, a process that’s often slow, costly and stressful at an already difficult time. Setting up an LPA while you’re still healthy and able to make your own decisions avoids this and gives your family a clear route to help you when it matters.
Talking to your family
Even the best-laid plans can cause confusion if your family doesn’t know they exist. So, take time to talk to your loved ones about where your will, LPAs and other important documents are kept, who your executors and attorneys are and what your general wishes involve, both financially and personally.
These conversations can feel uncomfortable, and many families put them off for years. But they prevent confusion, reduce the risk of disputes between family members further down the line, and give everyone clarity about what to expect and when.
Many families find it helpful to hold these discussions gradually, over time, rather than trying to cover everything in one sitting.
Bringing your financial adviser into these conversations can also help. Having a neutral, informed third party in the room often makes it easier to discuss sensitive topics openly, and ensures everyone understands the plan in the same way.
How can Glenrose Financial Planners help?
Protecting your family financially after you’re gone doesn’t need to be overwhelming.
Wills, life insurance, pensions, IHT planning and powers of attorney each play a part, and getting the right combination in place can give your family security and peace of mind, whatever happens.
At Glenrose, we help clients across Derby and the East Midlands build comprehensive protection and estate plans tailored to their family circumstances. Our experienced advisers can review your existing arrangements, identify any gaps in your cover or planning, and help you put a plan in place that reflects your wishes while making the most of the tax allowances available to you and your family.
We can also help you have the wider conversations that often get put off, from choosing executors and attorneys to deciding how and when your wealth should pass to the next generation. Every family’s circumstances are different, so we’ll take the time to understand yours before recommending a way forward.
Book a consultation with one of our advisers today to discuss how we can help protect your family’s financial future.