Nobody likes to think about their own mortality, which can often lead to many people neglecting to take the time to make a plan for their estate when they pass away.
While it may be difficult, it’s important to plan for a future when you’re no longer around, particularly for the sake of your family. In many ways, as the biggest beneficiaries of your wealth, your planning matters more to them than it does to you.
By planning in advance, you can remove the stress for loved ones at what will already be a difficult time as they come to terms with losing you. That’s why it’s key to get your estate in order before you pass away.
It’s important to have a will in place to ensure your wishes are carried out
The first step in creating an estate plan is to make a clear and comprehensive will. This is a legally binding document in which you can leave detailed instructions for what you want to happen to your wealth.
As part of your instructions for your estate, you’ll also appoint the people who will be responsible for administering it. These individuals are known as “executors”.
If you die without making a will, you’ll be what’s called “intestate”, and this can be an issue for two reasons.
The first is that, without leaving clear instructions for who you want to receive your wealth on your death, it will be decided by common law instead.
This may see your estate divided up in ways that do not align with your wishes. For example, you might have stepchildren that you have a close relationship with but, under common law, they may not be entitled to any of your wealth as they technically aren’t your direct descendants.
Having a will that contains this information ensures your wealth goes to the people who you want it to. It can also help to prevent disputes between family members.
Planning your estate beforehand can make your passing easier for your loved ones
The second issue of intestacy is that, without a will, your family won’t have any idea of how to administer the rest of your estate.
This means they may have to navigate difficult processes, such as probate, without any knowledge of what you would have wanted to happen. These processes can be complex, expensive, and time-consuming.
You can remove these stresses for your family by selecting your executors, leaving clear instructions for exactly what you want to happen, and making provisions for costs of expensive processes in your will.
Estate planning can be important for securing your family’s wealth
Once you’ve made a will, you may want to consider further securing your wealth for your family with protection measures. A popular strategy for doing this is by putting your money and assets into trust.
Creating a trust means putting your money in a secure account for someone of your choice, legally known as a “beneficiary”.
You then name a “trustee” to oversee the trust, who will be responsible for giving access to the money contained within the trust to your beneficiary at a time of your choosing. Trusts can be particularly useful for protecting your money from any third-party claims to your wealth, such as an ex-partner if you’ve been married before.
It also helps to protect your beneficiaries from themselves. For example, you may be concerned that your children would squander your wealth if they had access to it while they were still young.
Having money in trust means you can control when they’ll receive it, ensuring they’ll only get access when they reach adulthood. This helps to protect your wealth, ensuring it only goes to those who you want to have it when you want them to have it.
Planning ahead can help to mitigate some of your Inheritance Tax liability
One of the biggest threats to your wealth when you pass away is Inheritance Tax (IHT). The standard rate for IHT is 40%, meaning nearly half of your wealth could end up going to the government, rather than to the people you love.
There is a nil-rate band (NRB) before IHT is charged, which for the 2021/22 tax year is £325,000.
There’s also an additional residence nil-rate band of £175,000 if you pass your main residence to your direct descendants, such as your children and grandchildren. This means you may be able to potentially pass on up to £500,000 without having to pay IHT.
Additionally, if you’re married or in a civil partnership and your partner has died, you may be able to use any of their unused nil-rate band. This also works the other way for your partner if you die first.
This means you may be able to pass on up to £1 million without incurring a tax bill, depending on your circumstances. However, any amount over these thresholds will be subject to that 40% charge.
That’s why it’s important to find strategies that mitigate your IHT position. Trust planning can reduce how much you owe, but you may also want to consider gifting to family or charity to reduce the size of your estate.
IHT can be complicated, which is why it’s often best to work with a professional who can find the right strategies that are most appropriate for you.
Get in touch
If you’d like help managing your estate so that as much of your wealth as possible will go to those you love, please get in touch. Please email email@example.com or call 0115 933 8433.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing. Levels, bases of and reliefs from taxation may be subject to change and their value depends on upon your individual circumstances.