Estate Planning
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Estate Planning
Ian Winterbotham returns to explain how estate planning works.What is estate planning? Why is it important?
There’s an old saying which says, ‘if you fail to plan, you’re planning to fail’. Your estate contains all your assets and everything you’ve worked so hard to build up over the years. It’s incredibly important.
Younger people will typically start off buying a house and get a mortgage. Then they’ll worry about what happens if they’re not around and their partner can’t pay the mortgage. To prevent them losing the house, they talk to an advisor about insurance policies. The next thing to worry about is pensions and the like.
Our clientele tend to be over 50 years old. They’re looking at retirement options and how to help their bloodline in years to come. None of us want to rely solely on the state for our future, so we need to consider what might happen when we stop working.
Some people will build up pension assets, and others will invest in property. Retirement savings are important. Some families will be able to leave an inheritance to their children in the way they would hope to – but others, tragically, will see their savings eaten up by the local authority to pay for their care fees.
Some people will see the family home be possessed by the local authority. The realisation then is that their children and grandchildren may get nothing from all their hard work. Estate planning is essential if you want to protect your assets for future generations.
What should be included in an estate plan?
You can start by listing your assets and liabilities – your property, your pension assets, your savings, your ISAs, etc., as well as any loans or credit cards or mortgages.
Start thinking about what your priorities are, whether it’s retirement, passing money on to your family or a combination of both.
Do I need a Will?
If you die without one, there are rules which will apply called Intestacy Rules. If you have children, you will have thoughts about helping them now and in the future. You may want to help them buy their first home, and ensure they can do the same for your grandchildren.
Married people or people in a civil partnership can set up a Trust Will to protect at least half the family home for your children. It could protect other assets too. A Trust can also save inheritance tax on a generational basis. So anyone who wants to plan for the future probably needs a Will.
Do I need a Power of Attorney?
Wills are for when we die. During our lifetime, there’s another document that’s just as important in many ways, called a Lasting Power of Attorney.
In fact, there are two documents – one for property and financial affairs and one for your health and welfare. These are incredibly important documents, as they allow our loved ones to make decisions for us if we are not able to do it for ourselves – if we lose mental or physical capacity.
We will all need these if we live long enough. Lasting Powers of Attorney are really valuable as part of your estate planning.
Do I need to consider care provisions in estate planning?
This is a thorny subject and one that many governments have struggled with. Some have tried to address it, but none have succeeded completely. The inevitable worry is that the state is not going to be able to pay for all of our care in the future.
At the moment, local authorities have the power to go to the courts and take away everything we’ve worked so hard to build up, in order to pay for long term care. In some cases, people lose the family home and have nothing to leave their children as a result.
Estate planning, as in Will planning, can make sure that your children and your bloodline inherit at least half the value of the family home, plus any ISAs you’ve managed to save up and some pension assets. Setting up a Trust Will can protect an awful lot of assets.
That really applies to married people or people in a civil partnership. Single people can protect assets with careful planning as well, but they need to account for the deprivation rules. Local authorities do have powers to undo some of that planning if they can successfully argue that it was done to deprive them of assets to pay for your care.
But assets that are protected on first death for a married couple cannot be claimed in the courts by the local authorities. So for married people or civil partners, Will planning is a relatively simple way of protecting at least half the family home, and possibly other assets from the local authority.
Single people have to consider other options to protect assets during their lifetime. A Trust Will can ensure the inheritance they leave is not lost in paying their children’s or grandchildren’s care fees – because the Trust can last for 125 years.
That applies for married couples as well. Good Will and Trust planning and attention from the trustees can protect what you’ve built up all your life for generations to come.
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What should I plan to do with my pension? And what is inheritance tax?
The inheritance tax rules are changing. As announced in the autumn budget 2024, most pension death benefits will be included in the member’s estate for inheritance tax purposes from 6 April 2027.
When we’re writing a Will, we’re not usually expecting to die before April 2027, so we need to plan as if our pensions are included in our estate. There’s not yet a general consensus as to how we should go forward with this, but it should become clearer when the legislation has been finalised.
Pensions are still very tax efficient. A pension can be inherited tax-free by a surviving spouse, and they in turn could then gift the proceeds received to the children tax-free.
As long as the surviving spouse lives a further seven years, it’s completely out of their estate and the pension will be passed on without any inheritance tax due.
Conversations can be held around this possible plan now, but we ought to wait for the legislation to be finalised. For couples lucky enough to have estates valued between £2 million and £3 million between them, our Triple Trust Wills can actually save inheritance tax during this generation.
Of course, the value of pensions can be quite significant for people in good jobs who’ve saved a lot during their careers. £1 million can be held in a pension and a lot of those people will find that Triple Trust Wills could save a lot of inheritance tax. We have discussed Triple Trust Wills of course in a separate podcast.
Can estate planning specialists ensure I don’t pay too much inheritance tax?
I always think of Roy Jenkins, for those who remember him, who said: ‘inheritance tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue’.
It’s strange that people complain so much about inheritance tax, when actually good planning can avoid most of it. It is difficult for people with properties in the south east, which can be worth £1 million or more, but generally good planning can save a lot of inheritance tax.
Will planning is an important part of it, and a good independent financial advisor (IFA) can also be another essential part of your planning.
How do I make a gift as part of estate planning?
Simply transfer the asset. It could be cash or property and you can pass it on as a gift. It’s best to keep a record of the amount you give and the date.
Make sure the executors of your Will have access to this information. You don’t have to tell them now, but it may be helpful to leave a letter to your executors or your beneficiaries, explaining that this is an outright gift. Then there’s no possible doubt that it could have been a loan.
If you plan to make regular gifts out of taxed income, you should also make this clear in your letter. Regular gifts out of taxed income are tax-free even if you die within seven years of making these gifts. Make sure that it’s clear that they are intended to be regular so that HMRC won’t challenge it.
You should also try and identify what your income and expenditure was in the years you made the gifts. So there’s a little bit of work on a spreadsheet to do, possibly, but there’s a significant amount of tax to save.
What do family estate planning services do?
Much of what we’ve been talking about. Family estate planning services really encapsulate Wills and Lasting Powers of Attorney.
How can a financial advisor help here? Is there anything else we need to know?
It’s a very important part of one’s planning and a financial advisor is helpful, because advice on investments and pensions is regulated by the Financial Conduct Authority (FCA). This is for people’s protection.
Providing competent advice requires a lot of training and qualifications these days. There have been problems in the past with poor advice and complications around pensions. Everybody’s decisions will depend on their priorities and their ‘attitude to risk’.
Some people will not want to invest in stocks and shares, while others want to take the chance and hope they get much better growth by doing so.
A financial advisor is really important if you can afford the time and costs for one. If you get to a stage where you have significant assets and you want to plan for the future, it really is a good idea to find an experienced IFA who won’t be too old when you retire so you can build up a long-term relationship.
Advisors used to be 10 a penny, but a lot have left – having not wanted to do the required training and get those qualifications. If anyone wants more guidance, I can help – just send us a message via our website.
The value of pensions & investments and any income from them can fall as well as rise. You may not get back the amount originally invested.
