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A guide on estate planning

by | Dec 13, 2022

Estate planning is an important process that can help ensure that your assets are managed and distributed to the beneficiaries you want after you pass away. In this article, we will provide a guide to estate planning that covers the basics of what it is, why it’s important, how this relates to inheritance tax and how to get started. 

There are a few different documents and information involved with estate planning that may make the process seem confusing such as a will, deed of variation and inheritance tax laws and rates. Also, it is vital you understand the power an executor has too. 

So, Whether you are just starting to think about estate planning or you have already started the process, this guide aims to make things clear so you can make the right decision concerning your estate.

Someone planning their estate

What is meant by estate planning?

Estate planning is mainly in place for the financial benefit of individuals and their families despite it potentially being a headache to deal with. At its core, estate planning is the process of organising and arranging one’s assets and property, also known as their “estate”. This can involve the creation of a will, making funeral plans and panning out how an estate will be dealt with following a loved one’s death.

Besides the legal aspect, it is also valuable that estate planning is done so the person who owns the estate can feel satisfied that what they left behind will be dealt with in the right way in the event of their death. By dictating what happens to your estate, you can severely impact the financial future of your family, especially for high net worth individuals.

The creation of a will is important and the creation of a trust may also be thought about. In particular, if you have a cause that is dear to your heart that you want to make sure this cause continues to be taken care of. Also, you may want to choose a power of attorney which is someone who will be able to manage your estate if you are still alive but aren’t able to make changes to your estate due to poor health.

Should everyone consider estate planning?

In general, most people should consider estate planning. Even if they aren’t planning to keep much value in their estate by planning to spend it all or give a lot away to charity, it is important to at least write a will explaining this as this is a vital part of the estate planning process.

However, if you think that the total value of all the assets you own will be over £325,000, estate planning can be very important to the extent that you may want to consider seeking legal help with reducing the amount of inheritance tax you’re subject to pay by transferring assets to where you want in the most tax efficient way possible.

This is because £325,000 is the threshold in which you will start paying inheritance tax and this can help save money in your estate or save your close friends and family members time if they have to deal with your estate after you are gone.

At what age should you consider estate planning?

According to this article, the perfect time to start planning your estate is in a person’s 50s. Considering this is the time when most people have reached their financial peak, this makes a lot of sense.

If they wait until retirement age or later into retirement, they may not have enough time to transfer assets and take advantage of tax exemptions. For example, if you don’t give away gifts seven years before you die, they are subject to inheritance tax. Also, there is also the Business Relief for Inheritance Tax exemption that is available for assets that have been in a business for at least two years.

These transfers take years so to be on the safe side it is recommended to do it earlier. On top of this, if you speak to a solicitor, they may recommend that you take out life insurance which gets increasingly cheaper the earlier you take it out.

An older couple that decided it is the right time to plan their estate

How to plan your estate if you live in the UK?

Because of the various things involved, it can be difficult to know where to start if you want to go about planning your estate. Below are some tips to help you along in the process.

1: Start the process early and in your 50s latest

In order to get the best chance at making an informed decision, it is important to start the process as early as you can and at least start thinking about estate planning as soon as possible too. 

Unfortunately, many people get caught out with their estate planning as they put it off and wait for too long. As they age they may fall into ill health and not plan their estate in the best way they could, resulting in higher taxes and potentially an incomplete will.

2: Consolidate the value of your estate

Before beginning the estate planning process, it is important to gather all the assets you own and evaluate how much they are worth. While some assets will still go up over time as you age and some assets will be hard to determine the true value of unless you sell it, you should still aim for an idea of its worth.

This is so you can take this information to a financial planner to start to plan your estate or if you understand this side of the all very well you could start to make plans on how you can reduce tax and offset assets to family, friends, trusts, charities or other means of distributing money in your estate.

3: Speak to a financial planner

Estate planning can be complex and it is often beneficial to consult with a financial planner or solicitor for guidance. You could ask them to advise you on a plan for your estate or you could check over a plan that you have made yourself with them to see if it is compliant with the law.

It is important to go to a professional for this rather than rely on advice on the internet for example as there is different advice given based on the size of an estate and the type of assets it includes. In order to find an estate planner or financial adviser, you can search in a directory where there are qualified professionals like this one.

Alternatively, finding trusted reviews for professionals online or going by word of mouth could be great ways to find the right estate planner you need.

4: Create a plan to minimise tax

With or without the help of the estate planner you can then create a plan for reducing tax paid such as reducing inheritance tax on a property. If you want to go through this process yourself, a good place to start would be our guide on the topic showing you how to avoid inheritance tax on property.

5: Create a will

With the consideration of how you’re planning your estate, you can begin writing a will. This will include the beneficiaries the person writing the will wants and who will receive the assets you have and in what amounts. It may be the case that the person already has a will. They should update their will after they plan their estate to make sure they both work well will each other.

A person writing their will as aprt of estate planning

6: Consider setting up a trust

Trusts are not mandatory but are great ways to avoid the inheritance tax needed on a property and put equity aside for children when they become of age to inherit the money. Also, if you have business you want to support after you die, trusts can be a great way to do this. 

7: Choose a power of attorney

A power of attorney is a legal document that gives someone else the authority to make decisions on your behalf. This person can make decisions about your estate plan if you are unable to do so yourself, such as if you become unable to make sensible decisions due to health reasons.

8: Choose an executor

An executor is a person who is responsible for managing and distributing the assets of an individual’s estate after their death. They are different to a power of attorney because a power of attorney is there while the person is alive.

Having said this, it is possible for a power of attorney to be the same person as an executor such as a friend or family member but you can request that they change and you can also request that an executor is someone outside of your family and is hired by a company to manage your estate instead. 

9: Review your will regularly

Estate plans should be reviewed and updated regularly to ensure that they continue to align with an individual’s wishes and changing circumstances. This is particularly important after significant life events, such as the birth of a child or the acquisition of new assets.

What are the pros and cons of estate planning?

Overall, the pros of estate planning include the ability to control the distribution of assets to your liking, potential tax savings, and the peace of mind that comes with knowing that an estate plan is in order. However, the cons of estate planning include the potential cost and complexity of the process.

Pros

Estate planning allows a person to control the distribution of their assets after they die. This means that a person can ensure that their assets go to the people or organisations that they want to receive them. It is clear that this is an advantage of estate planning, especially if the person who is planning their estate is planning on leaving a legacy behind through a trust or something more long term.

Estate planning can help a person to reduce their tax, in particular, inheritance tax. By carefully planning an estate, a person can minimise the amount of taxes that their heirs will have to pay on their assets after they die. This is great to give loved ones a financial head start and preserve wealth through family generations.

Estate planning can also help you avoid probate. This is where a legal process is started in order for someone to manage the deceased person’s estate and become either executor. If the executor was chosen beforehand, they will be able to avoid the costs associated with probates.

Cons

On the other hand, one of the potential cons of estate planning is that it can be a complex and time consuming process. Especially if you are someone who is trying to get their estate plan done earlier on in life when things tend to be busier, you could find that it is an inconvenience.

A man stressed about estate planning

In addition, the creation of an estate plan and effective estate planning may require someone to hire legal advice which may require a certain amount of money. Legal, financial and estate professionals can get expensive. However, you can justify this cost if you’re able to save money on tax in the long term.

Finally, estate planning may be complicated if you involve your family in the process as it may instigate conflict among a person’s heirs. If a person’s estate plan does not distribute their assets in a way that is perceived as fair, it can lead to disputes and potential family problems that may not be there at all if you didn’t do estate planning in the first place.

How to create a will while estate planning

Creating a will can be difficult if you’re not sure how to do it. There are various will templates that you can follow but for the most up to date information that is specific to where you are in the UK (the rules differ in Scotland and Northern Ireland), take a look at the government website here.

In general, wills should include the following points:

  • The name of the person on the will
  • The name or details of the executor
  • A statement revoking prior wills
  • A statement declaring the will to be final
  • The names of guardians for children on the will
  • The distribution of property and assets to beneficiaries
  • Specific gifts to named individuals
  • Specific instructions for the distribution of the estate
  • Provisions for trusts
  • Provisions for charitable donations
  • The signature of the person writing the will
  • The date of the will

Once you have obtained the right areas of your will, you can then give it to someone to take care of for you can give someone the keys to a safety deposit containing your will to retrieve after your passing. 

What happens if you don’t make a will?

If you don’t make a will, the value of an estate and the management of an estate will be given to an executor and distributed according to laws of intestacy. These are rules written in the Administration of Estates Act 1925 and the estate will be automatically given to whoever is available for them.

To see what will happen to an estate for a particular scenario, you will have to apply the law to your case as there are a lot of scenarios involving wider family members, children, unrelated family members and if you are married or in a civil partnership that determine how inheritance will be split. For the exact legislation to work this out for yourself click here.

An image showing the cash flow of a house that determines the estate plan

What are the benefits of cash flow planning for estate planning?

A cash flow plan is an observation of the projection of the assets of an estate into the feature based on the evaluation of income and expenditure in the past. This helps you visualise how the rest of your life will pan out financially. For example, in a cash flow plan, it could be that after a certain while it is recommended to enjoy more time away from work, travel more, downsize your house or potentially retire.

These can all impact how you plan your estate and the cash flow plan should impact the estate plan by providing a suitable time for assets to be sold. This can be done by an investment or financial adviser and gets more complicated the more assets a person has and how diversified they are.

Not only can this be good for estate planning but also to meet the general short-term and long-term financial goals you may have by making sure you factor in all of the taxes and expenditures that may be due after your death. 

Can you use estate planning to avoid paying inheritance tax?

Absolutely, estate planning is most often used because people want to attempt to pay as little inheritance tax as possible. It is important to read our article on how to avoid inheritance tax on a property if this is something you are interested in.

What is inheritance tax?

Inheritance tax is a tax that is charged on the value of a person’s estate when they die. In the UK, inheritance tax is charged at a rate of 40% on the value of the estate above a certain threshold, which is currently £325,000.

This means that if the value of a person’s estate is below this threshold, no inheritance tax will be charged. If the value of the estate is above the threshold, the tax will be charged on the amount that exceeds the threshold.

How to do estate planning with a lot of assets

Estate planning has to be done slightly differently if you have a large portfolio. It could be that there is a mix of different assets that are all in different countries and multiple laws that have to be looked at. In such cases, it may be essential to find a financial planner that is able to give advice in every country before you start to write a will or conduct estate planning.

How can you manage an estate over multiple countries?

Whenever someone dies with assets such as property in multiple countries, it is usually necessary for a probate to have to be acquired for every country so someone can manage the assets on behalf of the deceased. They will then be able to manage the asset in regard to how they wanted as part of the will.

Or, if there is no will, the assets would be managed by how the laws of the country are laid out. 

How to do estate planning if you are a high net worth individual

Interestingly, just 4% of the estates left behind after someone has died is valued at £325,000 or more which is the threshold in which inheritance tax is paid. This means in order to be classed as a High Net Worth Individual (HNWI), your estate would have to be valued over this amount.

For these individuals, taking advantage of as many laws as you can in the UK that allows you to stop paying inheritance tax is essential to reduce your tax bill. This may include gifting and using business exemption tax.

A man who is a high net worth individual with an estate plan

In conclusion

In conclusion, estate planning is a crucial aspect of ensuring everything runs smoothly as assets are dealt with. It may require expert guidance and it may also mean you have to consider how you plan the estate over many years.

By taking the time to properly plan an estate, individuals can ensure that their loved ones are taken care of and their plans for the future after they die come true. While the process may seem daunting at first, the peace of mind and security it provides is well worth the effort.

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Andreas Gerazis

Experienced landlord

Andreas is a certified landlord with extensive knowledge about the UK property market as he has been actively investing for half a decade. Founder of the first three-in-one property management software, Lofti Proptech, Andreas has a brilliant understanding of the details surrounding what it takes to grow and run a thriving property portfolio.

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