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Here are some common questions a client may ask you regarding estate planning, these can help you and your client identify any estate planning needs. Here are some answers you can provide:
What is estate planning and why it is important?
Estate planning is an important step to take to make it easier for family members and loved ones to deal with an estate after your death. Trust and estate planning can also protect an estate for any beneficiaries and reduce the amount of inheritance tax required.
What are the benefits of estate planning?
There are numerous reasons to have an estate plan in place. These include:
- To protect finances for loved ones after your death
- Potentially reduce the amount of inheritance tax that may need to be paid
- The secure knowledge that wishes and plans will be upheld via a will so giving it legal protection from a challenge
- Setting out clear wishes for charitable donations
- How to split up an estate for key beneficiaries
- To control who does not get access to any assets
What does wills and estate planning involve?
The key stages include:
- Making a will, telling the executor their role, and making sure family knows that a will exists.
- Consider setting up a lasting power of attorney for if you are incapacitated in the future.
- Write an ‘estate plan’ which lists all the assets and debts in the estate, including property, savings, physical possessions, and any life insurance policy or trusts.
- Plan what cash gifts you want to make, and record any gifts made in the last seven years.
- Consider if there may be a need for any (new) trusts to be implemented
- If you have a business then future planning for this will be crucial also
What is an estate?
An estate is a legal term for everything a person owns. This comprises your entire net worth, including all assets, the value of any shares you own, any business in your name, your pension, your personal possessions, cash, debts, and insurance policies.
What is an estate plan?
This is effectively a list of all your wishes that you give to your loved ones about what you want to happen to your money and property after you die, and how you want your affairs to be managed.
When should I make an estate plan?
It is never too early in life to start putting plans in place for what you want to happen to your estate after your death.
This should be done ideally before retirement. This allows you to think about your wishes while you have the capacity, and you can make gifts over seven years before you die, which may protect the funds from IHT.
What does a will do?
A will is a legal document that says what you want to happen after your death, including setting out who is an executor or beneficiary of the estate, and your wishes around your funeral.
If you don't make a will during your lifetime, you do not get to decide who will inherit from your estate. This may mean that you pay more tax than is necessary or people you care about do not benefit from your estate.
How do I make a will?
It is recommended to get a will written with a professional. This will ensure all your wishes are fully covered and you have a legally binding document that would be difficult to challenge later down the line.
The cost of a will depends on the complexity of the estate, the nature of the assets, and whether you need help setting up a trust, etc.
What is inheritance tax?
This is a tax charge you have to pay on any part of your net worth that is over your personal allowance, also called the nil rate band. When the inheritance tax bill is payable depends on the form of your estate, and whether you set up trusts, hence why tax planning is so important.
How much is inheritance tax?
The current rate of inheritance tax is 40% of the value of your estate over the nil rate band. However, the inheritance tax charge is reduced to 36% if you are donating over 10% of your estate to charity in your will.
How can I make sure I am not paying too much inheritance tax?
You will have to pay inheritance tax on any amount over the threshold, which is currently £325,000. Therefore you can use estate planning, such as trusts, to make sure you don’t pay more than you have to.
Can estate planning specialists help me avoid inheritance tax?
There are multiple ways people can reduce the amount of tax they are required to pay by inheritance tax planning. It’s recommend to get advice on this.
Methods of reducing IHT include:
- Setting up a trust fund
- Giving an asset to family or friends during your life
- Certain life insurance policies will cover the estate’s tax bill after your death
- Donating to charity can mean the IHT percentage is reduced
What should I plan to do with my pension?
Pensions are not included in the inheritance tax calculation. Therefore, if you have enough money and resources to not use your pension for your retirement, you can pass your pension on tax-free, which means you will avoid inheritance tax.
Do I need to consider care provisions in estate planning?
You need to take into account whether you may need care in the future in order to make financial projections about future living expenses.
This can be an issue where you give away your assets or put them in a trust fund, then do not have any left to pay for your care. This is especially relevant if you already have a degenerative health condition.
What is a lasting power of attorney?
A lasting power of attorney is where you appoint an individual to make important decisions about your finances if you are not able to anymore, including if you have a life-changing accident or are left incapacitated. An LPA should be set-up with an adviser.
How do I make a gift as part of estate planning?
Making a gift is an easy method of estate planning. Outright gifts can be either tax-free of ‘potentially exempt transfers’. You can also make gifts as trust, though this should be discussed with an adviser.
What is a potentially exempt transfer?
These are gifts that are not tax-free straight away. If you die less than seven years from the date of making the gift, then the value of the gift counts as part of your estate, so you will have to pay inheritance tax on it.
What are the rules and allowances when making gifts?
Rules on gift-giving during your lifetime include:
- You can give away up to £3000 a year total divided between as many people as you want. If you don’t use it, you can pass it on to the next year, but you can only do this once.
- Gifts from excess income are tax-free as long as this doesn’t affect your lifestyle.
- You do not have to pay tax on gifts to your spouse as long as they live in the UK.
- You do not have to pay taxes on gifts to charity or some political parties.
The law on gifts can be confusing, so an experienced estate planning adviser should be used (an opportunity fo you the adviser to step in)
Why would I use a trust fund as part of my estate planning?
A trust is a financial arrangement where the trustees hold assets on behalf of beneficiaries. There may be conditions on accessing the trust fund, or a trust can be used to reduce inheritance tax.
What happens to my inheritance if I live abroad or have assets abroad?
The best type of estate planning in the UK may be different from in other countries, which might have different rules on inheritance which can affect who your estate goes to, how much tax is due on trusts, and when and where your legacy goes.
You may still be liable to pay inheritance tax in the UK. If this applies to you, you should call for legal advice.
What is a deed of variation?
If you inherit assets, if you do not need the inheritance funds, you can set up a legal deed of variation so the inheritance value passes to someone else. This can prevent you from facing a large inheritance tax bill.
