Many people put off decisions around estate planning. It can be a complex area, as well as being a difficult subject to think about. But having an estate plan in place can help to reduce stress for your loved ones as well as saving on tax.
Below, we outline five common mistakes when it comes to estate planning.
Not Making a Will
Making a will is the most important thing you can do when it comes to estate planning. This is a legally binding document which outlines your wishes for your estate. It includes details of how you would like your assets to be distributed and who should be responsible for the administration of your estate.
If you die without a will, the rules of intestacy will apply. This means the court will nominate someone to deal with your estate – this may not be someone you would choose. Assets are then distributed in a strict priority order, starting with spouses and children – this depends on the value of your estate and where you are in the UK. If you aren’t married and don’t have children, your assets will pass to other family members. If you don’t have any living relatives, the Crown will receive your estate.
The rules do not account for unmarried partners, step-children, friends, or carers. They do not take into account your relationship with your family, for example, wishing to prioritise a niece or nephew over an estranged sibling.
Unless you put plans in place, there is also a risk that your children could be disinherited. If you die and your spouse remarries, their estate could theoretically pass to their new partner, and subsequently the new partner’s children. This can be avoided with proper estate planning.
Making a will is simple, inexpensive, and can easily be changed. It’s far better to have a basic will as soon as possible than to put it off.
Putting off Powers of Attorney
A Power of Attorney allows you to appoint someone you trust to make key decisions for you if you are no longer able to. This can include matters around property and finance as well as medical decisions, such as treatment and end of life care. You can appoint the same person to deal with both areas, but you don’t have to.
To be legally valid, your Power of Attorney must be registered with the Office of the Public Guardian. This is an important step, and must be done while you still have full capacity.
Without a Power of Attorney, the Court will appoint someone to deal with your affairs for you, who again, may not be someone you would choose. The whole process takes longer, which can cause delays in making financial or medical decisions.
A Power of Attorney can be made alongside your will and is simple to change at a later date.
Not Making Gifts in Your Lifetime
When you die, the value of your estate may be subject to Inheritance Tax (IHT). This is currently 40% of your estate value over the nil rate band (currently £325,000 for an individual or £650,000 for a married couple).
You can reduce this by giving away some of your estate during your lifetime. There are, of course, rules in place to deal with tax avoidance, for example making deathbed gifts to avoid IHT.
You can give away up to £3,000 per tax year, which is immediately outside your estate. You can also make gifts for special occasions as well as unlimited donations to charity. Larger gifts usually drop out of your estate after seven years (depending on the timing of other such gifts).
Given the limitations on gifts, the earlier you start planning, the more you can reduce your IHT liability. It also allows you to make gifts at the point your loved ones need it most.
Giving Away Too Much
Of course, you need to be careful to balance your own needs with the desire to reduce your estate. If you give away too much, too soon, you risk leaving yourself short of money later in life. This can cause problems, particularly if you need long-term care.
There are also situations where giving away assets can reduce the relief your estate can claim. If your estate includes a main residence, and you are passing this on to a direct descendant, you can use the residence nil rate band (RNRB) to reduce the value of your estate further. The amount is £175,000 (£350,000 for a couple), capped at the value of your property. If you gift the property, you could miss out on this relief.
If you give away assets, you need to be sure that you don’t require them for your own purposes. If you still use the asset or retain any benefit (for example, rental income), there could be tax consequences. It’s a good idea to seek advice if you are considering making large gifts.
Not Using Trusts Correctly
A trust allows you to set aside money or assets for your beneficiaries without giving up complete control. They are extremely useful in the right situation, but getting the balance right between tax-efficiency and flexibility can be tricky.
If you have a life insurance policy, it’s usually a good idea to place this in trust. This can help avoid delays, and as the money bypasses your estate, should not increase your IHT liability.
Pensions are also a type of trust, and should not be forgotten about when it comes to estate planning. A pension is highly tax-efficient, and it may be effective to use other assets first and preserve your pension for your beneficiaries.
Estate planning can be complicated, and it’s a good idea to seek advice, particularly if you have a large estate or complex family situation.
Please don’t hesitate to contact us on 01869 331 469 to find out more about estate planning in context to your wider financial planning.