Estate planning

This page was last updated on 1 November 2020

Estate planning

Estate planning involves considering what to do with a person’s money and assets after they are deceased.

While talking about death is not a pleasant conversation, estate planning can give you peace of mind over what will happen to your assets and property after you pass away.

Planning an estate is likely to be a time-consuming process and therefore it is worth making sure you have done all the research on what you need to do.

Topics that you will find covered on this page

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What is estate planning and why it is important?

Estate planning is an important step to take during your life to make it easier for your family members and loved ones to deal with your estate after your death.

Trust and estate planning can also protect your estate for your beneficiaries and reduce the amount of inheritance tax required.

What are the benefits of estate planning?

There are numerous reasons you should have an estate plan in place. These include:

  • To protect your finances for your loved ones after your death
  • Possibly reducing the amount of inheritance tax that you or your beneficiaries will pay
  • Additional relief in making sure your will is upheld and protection it from legal challenge
  • Setting out your wishes as to what will happen to your estate
  • Properly considering what is in your estate

 

Here is a short video from the UK Care Guide explaining what estate planning is all about.

What does wills and estate planning involve?

The main stages of personal estate planning are:

  • Making a will, telling your executor their role, and making sure your 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 your estate, including property, savings, physical possessions, and any life insurance policy or trusts in your name.
  • Plan what cash gifts you want to make, and record any gifts you have made in the last seven years.
  • Consider what you want to happen with your funeral and how the funeral expenses will be paid.

What is an estate?

An estate is a legal term for everything you own. This comprises your entire net worth, including all your assets, the value of any shares you own, any business in your name, your pension, your personal possessions, cash, debts, and your 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.

What should be included in an estate plan?

There are several components to an estate plan. These are:

  • A list of all your assets and debts
  • Your wishes as to what you want to happen with your funeral and how you expect it to be paid for
  • Any possible income, such as insurance policies that may payout after you die
  • Cash gifts you have made in the last seven years to get around inheritance tax

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 your 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.

You can get support in making an estate plan from a professional service.

Why is a will an important part of personal estate planning?

Writing a will is the best way to set out what you want to happen to your assets after you pass away, and who will benefit from your estate.

A will means you can determine who is responsible for distributing your estate (the executor) and therefore you prevent unnecessary stress and work for your loved ones after your death.

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."

Why is a will important?

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. For safety, you should put a will in place early.

How do I make a will?

You can set up a will yourself, but most people choose to get help and advice from an experienced professional, who can advise you through the process step by step.

How much setting up a will costs depends on the complexity of the estate, the nature of your assets, and whether you need help setting up a trust, etc.

What should I do with my will once I have made it?

You should keep a copy of your will and provide information about where your will is with at least one other person during your lifetime. You can change your will by using a codicil or getting updated if you get married or have a change in circumstances.

estate planning services

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 much is the nil rate band?

The law may change,  but this is currently £325,000. However, if one spouse does not use their allowance, this can be transferred to their partner after their death.

How much is the residence nil rate band?

There is a different allowance for passing on your family home, which is currently £175,000 and can be transferred between spouses and civil partners.

This only applies when passing on your primary residence to direct descendants. There is taper relief, so for estates worth over £2 million, your inheritance tax is reduced by £1 for every additional £2.

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. If you are considering this, you should get help and advice on estate planning from professional estate planning specialists.

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 means your iht percentage is reduced

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 your 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 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.

estate planning in the uk

How do I make a gift as part of estate planning?

Making a gift is a cheap and easy method of estate planning. Outright gifts can be either tax-free of ‘potentially exempt transfers’. You can also make gifts as trust, though you should seek legal advice to do this.

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 you should consider using an experienced estate planner.

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.

How does setting up a trust impact inheritance tax?

If you put money or property into a trust, according to the law, it no longer belongs to you, so you may not have to pay inheritance tax on it. You can use trusts, for example, to provide income for your children or to preserve the family home for your spouse.

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. You should find legal advice to help set up this power.

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.

How do I plan my funeral arrangements?

A funeral plan can ensure your funeral is how you want it to be and avoid stress for your children and spouse after you die. While it is difficult, it is important to talk to your family about your funeral while you are alive.

Can I hire someone to organise my funeral?

You can use a funeral plan service where clients make monthly payments to a company that plans your actual funeral without creating a financial family burden for your family after you die. Your life insurance policy also might take into account funeral costs.

Should I get estate planning advice?

Whether estates planning advice is important depends on how complex your estate is.

However, a professional estate planner can help their clients explore the options open to them and review their financial situations, to decide what best for their estate.

What do family estate planning services do?

Estate planners will review your net financial situation, alongside your future needs to help advise you to determine the most effective way to protect your assets.

An estate planning specialist can put together a personalised family estate planning strategy for their clients, including investments and trusts.

How do I find an estate planner?

You can call or find an accredited later life financial adviser through an online search or through a directory. 

You may want to use the same service for will planning, probate, setting up trusts, and general estate advice. Often you can call for free initial advice.

How do I choose an estate planner?

There are lots of services that provide step by step help with the law and advise you when setting up trusts. 

You need to find an estate planner who offers the right level of support and is experienced with estates of similar sizes.

Article author

Katy Davies

I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch.   I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.

Outside of work, I love the snow and am a keen snowboarder.  Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.

Email – katy@helpandadvice.co.uk

LinkedIn – Connect with me

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