Four steps to plan your estate

Introduction

Although it’s not nice to think about, preparing for when you eventually pass away will help you leave behind more than just happy memories for your loved ones.

If you’re thinking about estate planning but aren’t sure where to start, we’ve put together a few steps to help you get your finances in order:

1. Make a will

Perhaps one of the most important aspects of estate planning is writing a will. Sometimes called a last will and testament, this is a legally binding document expressing your final wishes regarding your estate and its assets.

In a will, you name the person or persons, organisations, or charities you want to leave the various parts of your estate to. You also name an executor, who is responsible for handling the estate and seeing that the instructions within the will are followed.

Without a valid will, distribution of your assets becomes subject to the rules of intestacy.

These rules dictate who receives what. First in line are legal spouses and civil partners (even if you’re separated at the time of death). This is followed by children, grandchildren, siblings and so on. It can sometimes mean that all or part of your estate doesn't pass to those you intended.

To make sure this doesn't happen, you should make a valid will as part of your estate planning process.

2. Consider a lasting power of attorney (LPA)

Although no longer relevant once you've died, a lasting power of attorney is a vital consideration when planning your estate.

If you become physically or mentally incapable of handling your own affairs, your ‘attorney’ or ‘attorneys’ will either help you make decisions or make them on your behalf. Typically you would choose one or more family members.

There are two types of LPA. For the purposes of estate planning, the property and financial affairs lasting power of attorney is the more relevant. This gives the named attorney the power to make any financial and property-related decisions on your behalf.

Once registered, and with your permission, this LPA can be used immediately. Otherwise, it only becomes active if you can no longer make your own decisions.

3. Minimise your Inheritance Tax (IHT) liability

Following your death, your estate becomes liable for Inheritance Tax. The current IHT charge is 40% and is payable on everything over a £325,000 threshold, with an additional £175,000 available if you own a property. The exception is where the beneficiary is a spouse or civil partner, who are exempt from the tax.

If your estate exceeds the basic £325,000 threshold and you intend to leave all or some of it to anybody other than a spouse or civil partner, there are ways in which you can mitigate the amount of IHT your loved ones have to pay.

From gifts to trusts, find out more about reducing the Inheritance Tax liability for your loved ones.

Please bear in mind that advice in relation to inheritance tax planning is not regulated by the Financial Conduct Authority. Tax treatment depends on your individual circumstances and may be subject to change in future.

The seven-year rule in Inheritance Tax

Put simply, as long as you live for more than seven years after making a gift, your beneficiaries won’t have to pay Inheritance Tax on the gift when you die.

If you die within seven years of making the gift, the amount then becomes part of the value of your estate, and will be taxable if the threshold is exceeded (excluding any exemptions).

If this happens, the beneficiaries of the gift will be responsible for paying any Inheritance Tax that is owed.

The rate of Inheritance Tax that is charged will depend on how soon you die after making the gift. This is known as taper relief, with current rates as follows: 

4. Set up a trust

You might consider a trust if you’re looking to reduce the Inheritance Tax bill for your loved ones or you need a place to hold assets until a child or grandchild comes of age.

A trust is a legal contract, which names a 'trustee' (person, persons or a company) to look after assets on behalf of a beneficiary named in a will or trust deed. 

Depending on the type of trust you choose, the assets may be either:

• Inherited upon your death
• Managed indefinitely by the trustee (for instance, if the beneficiary is a vulnerable person)
• Transferred when a certain condition is met (i.e. a child reaches adulthood).

Whichever type of trust you choose, the assets will be kept solely for the beneficiary and can't be divested, sold or spent by anybody else.

As you give up ownership of the assets when setting up a trust, they are no longer part of your estate. This is the basic principle of how trusts can be used to lower an Inheritance Tax bill.

Setting up a trust can be a complex process though, especially with regards to Inheritance Tax.

If you'd like a helping hand understanding your options, you should  speak to a Specialist Financial Adviser from Wesleyan Financial Services.