Estate Planning: What to Consider
Estate planning helps you to arrange how to leave your money, property and possessions to your loved ones when you die. From writing a will to minimising inheritance tax, here are the building blocks of an efficient estate plan.
No one likes to think about dying, and we are not that fond of discussing it either. Throw the awkwardness of being open about money into the mix, and planning what happens to our finances when we pass away is a topic most of us are keen to avoid.
But overcoming this unease is more essential than ever.
More of us are living together or having children without being married, while blended families and remarriage are becoming increasingly common. This means it is vital to think about your financial priorities and consider who inherits what.
We are also owning more complicated assets. It is no longer the case that we have one pension from a job for life and a house that we’ve lived in for several decades. Now we have countless online bank accounts and savings plans to think about. Then there are digital assets that we store on our smartphones and laptops to consider.
It is clear that estate planning is important, but how do you do it and where do you start?
What is your estate?
Your estate is the totality of what you leave behind when you die. We tend to think of our estate as property and, for many people, their house is their most valuable asset, but there are other assets to consider.
These assets can include a pension, savings and investments, physical possessions such as a record collection, works of art or a favourite vase. There are precious, often priceless digital assets too: Facebook posts, love letters stored on email, photos of your children, or videos of your wedding.
How do you start estate planning?
When deciding where you’d like your assets to go when you die and how you want your estate to be managed, you’ll want to consider:
- Who do you want to inherit your money or possessions?
- Are there specific photos, heirlooms or savings you’d like to divide between different friends or relatives, children, grandchildren, and past or present partners?
- Who would you like to distribute your estate?
- Do you want to leave any money or possessions to charity?
- Do you want to consider ways to minimise inheritance tax (IHT) due on your estate?
- If you have young children, who would take care of them if you were to die while they are still minors?
- Do you want to plan your funeral, and how should it be paid for as part of the distribution of your assets?
- Do you want to consider setting up a lasting power of attorney (LPA) to make decisions on your behalf, if you are unable to?
Thinking about these things in advance will help save heartache or deliberation for those who are tasked with dividing up your estate. It will make their work easier, potentially minimise the tax charged on your estate, and make sure that your wishes are met.
Here are nine estate planning basics to consider.
List your assets
Identifying and listing your assets and any debts such as a mortgage will help the person dealing with your estate know what your estate consists of and what it is potentially worth.
You could divide your assets into tangible assets and intangible assets. Tangible assets might include a house, a car, jewellery and books. Your intangible assets could be a pension, money in bank accounts, and life insurance or other policies that pay out on death or ill health. Include digital assets, which includes social media accounts, music, emails and photographs.
Ideally, you would also detail the value of your assets, such as balances in savings accounts, and the value of your property. You should update this list regularly.
Some assets may not be worth much financially but could have considerable sentimental value to your friends or relatives.
Make a will
Every adult should have a will, which is a legally binding document detailing who inherits what when you die. You can also include how to access and manage your digital assets and whether you would like social media accounts memorialised or shut down.
You can put together a DIY will without legal help. At its most basic it can be written on a piece of notepaper, but there are more structured templates available online and in stationery stores. The will is legally binding if you sign it in front of two witnesses who are not beneficiaries named in the will. You must also have the mental capacity to make the will and be making it voluntarily, without pressure from someone else, for it to be valid.
The DIY approach to making a will can be risky, though, as any mistakes could invalidate it. For most people, and especially for more complex estates, it makes sense to use a will writer or a solicitor to oversee the process.
» MORE: Learn how to write a will
Consider a lasting power of attorney
A lasting power of attorney (LPA) gives legal permission to someone that you trust to make decisions for you and handle your money and property if you no longer can. This could be for a number of reasons, such as an accident, a stroke, being in a coma or developing dementia. You can also give your attorney permission to make medical decisions on your behalf, which might include the kind of care you would like to receive.
Under normal circumstances, you alone can access or manage your bank accounts, investments, property and assets, unless they are in joint names. This could create problems if, in the future, you lose the ability to make decisions about your finances or your care and need your partner or children to act on your behalf. Even if a bank account is in joint names, when one person loses mental capacity the bank can freeze the account for both people until they see the LPA.
You can give someone power of attorney to deal with all your property and financial affairs, or only certain things, such as paying bills. A property and financial affairs LPA comes into effect as soon as it’s registered. However, if you don't want your attorney to be able to make decisions about your affairs until you are no longer able to, you can make that clear in your LPA.
You don't need legal help to register an LPA. You can fill in online forms via the government website or by completing a paper form, and registering the LPA with the Office of the Public Guardian. But you can use a solicitor or financial adviser if you prefer.
» MORE: How power of attorney works
Understand inheritance tax and gifts
Most people in the UK don’t have estates worth enough to be liable for inheritance tax (IHT). But it’s worth being aware of the rules and considering if your estate plan needs to factor this in.
In the UK, if the value of your estate is below £325,000, there is no IHT to pay. This is called the nil-rate band. If the estate is worth more than £325,000, there will be a 40% IHT charge to pay on the amount over this threshold.
There is no IHT tax to pay if you leave your full estate to:
- your spouse or civil partner
- a charity
- a community amateur sports club
If you leave your home to your children or grandchildren, the threshold for your estate increases to £500,000. And if you are married or in a civil partnership, you can pass any unused allowance to your spouse or civil partner when you die, which means that their estate could total as much as £1 million and not be liable for IHT.
If you have an estate that is likely to be taxed, you may want to consider the implications. Giving gifts, such as money, jewellery or furniture, is one way to pass on wealth in your lifetime to minimise IHT. You can give possessions and assets away tax-free, with no tax due, provided you live for seven years after giving them.
There are also IHT-free gifts, known as an annual exemption, that you can give away each year. For example, you can give away up to £3,000 worth of money or possessions each tax year, which you can gift to one person or split between several people. You can also give wedding or civil partnership gifts of up to £1,000 per person, or up to £5,000 if it’s your child or £2,500 if it’s your grandchild or great-grandchild, without them being included in the value of your estate.
You can give as many £250 gifts as you like, known as a small gift allowance, as long as you haven’t used other allowances from your £3,000 exemption for the same person in that tax year. You don’t have to pay IHT on birthday and Christmas gifts that are paid for from your regular income.
It can be quite a complex area, though, and getting it right is important. So if you have a large estate to pass on, it’s a good idea to take financial advice from a tax accountant or estate planning solicitor. They can look at your circumstances and help you prepare your inheritance plans in a tax-efficient way.
Make use of trusts
You may want to consider putting some of your assets ‘in trust’. A trust will allow someone else to manage these assets on your death, on behalf of your beneficiaries. For example, you may choose to put money or property in trust for your children or grandchildren to be managed until they are old enough to look after the money themselves.
Trusts can be used as a way of minimising IHT and protecting assets for people who are vulnerable, such as relatives who have a disability.
You may also decide to put a life insurance policy into a trust to help protect it from inheritance tax. If the insurance company pays out, the money can then go directly to your beneficiaries and won’t form part of your estate for IHT purposes.
Although trusts can be useful for IHT planning, it’s a very complicated area with lots of different types of trusts and rules associated with each. So you know exactly what using a trust would mean for your specific situation, seek advice from a qualified estate planning professional.
Plan your funeral
There are two aspects to this: setting out the type of funeral you want and how it will be paid for.
It might be helpful for loved ones to know the kind of send-off you’d like, and you can detail this in your will. You can state whether you would prefer a cremation, burial or a non-religious service, for example, but you could also include the songs to be played or whether you would prefer charitable donations over flowers. While this won’t be legally binding, it is a useful way to express your wishes.
You could also consider adding funeral details to a letter of wishes attached to your will. In addition, you could explain how you’d like specific assets to be dealt with, to help direct your executor. You can sign and update a letter of wishes whenever you need to, without any need for it to be formally produced or witnessed. It should support what is in your will and not contradict it.
Money from your estate can be used to pay for the funeral, if you have left enough behind to cover it. The funeral bill, or at least a deposit, may need to be paid sooner than the estate is distributed, but this can be claimed back from the estate once grant of probate has been issued. Banks sometimes release money early from the bank account of the person who has died to use for the funeral, if presented with the right documents.
However, you can make specific provision for your funeral. With a prepaid funeral plan, you take care of the cost of certain funeral services ahead of time, and set out the type of funeral you want. Just make sure you’re clear on exactly what is and isn’t covered by the plan before going ahead.
Over-50s life insurance is a way of leaving a guaranteed lump sum behind that your family could use towards your funeral. But keep in mind that what you pay in premiums may end up being more than what is eventually paid out.
However you document your funeral wishes, let your loved ones know what you’ve decided – not least because a funeral is sometimes arranged ahead of finding the will.
Tell your loved ones
The topic of death may not be top of the list of conversations you would like to have with those closest to you, but it makes sense to broach it. Being open can help remove the guesswork and reduce stress at an already difficult time if your close family is aware of your plan and where important papers are stored. For example, perhaps you have created a document detailing your finances that will help your executor when they are dealing with your estate.
You could explain who your executors are, whether you want to leave anything to charity, and whether you have taken out life insurance or a funeral plan. You don’t have to mention details about beneficiaries if you would prefer not to. And it is important to explain that it isn’t set in stone and is subject to review if life changes.
You may want to discuss your estate plans with your family before you draw up the legal documents. This could involve answering any questions they have and understanding what their needs and expectations are, as well as explaining yours.
Along with potentially reducing stress and tension in the future, being open and clear about your wishes can bring reassurance to you and your family that your affairs are in order.
Get the right help with estate planning
There are plenty of will writing and estate planning services that will offer to put together a low cost will or advise you about arranging your affairs.
The industry is not regulated, so beware of firms that try to persuade you to pay more than necessary or to appoint executors for a large percentage fee.
Look for an estate planning solicitor or will writer who is a member of a recognised trade body, such as the Institute of Professional Willwriters or the Society of Trust and Estate Practitioners.
You can also get specialist financial advice about IHT from a tax accountant or an estate planning solicitor with expertise in this area.
Revisit and review your estate plan
You should review your will regularly and update your estate plan to reflect any major life changes. Marriage, separation and divorce, the births of children and grandchildren, moving home and people close to you passing away are just a few life events that may be a reason to update your estate plan.
Minor amendments may just mean making a codicil to your will. This legal document detailing any amendments to your will usually costs less than writing a new will. You should keep the codicil together with your will and make sure it is signed and witnessed.
However, if you are making major changes to a few sections of your will, you should consider writing a new will. This should clearly state that it revokes your previous will and any codicils. Make sure you destroy any old wills and codicils, so there is no confusion over which is the latest version.
Image source: Getty Images
Laura is a journalist and author, writing about money since 2008. Including writing for The Times for 9 years. She believes finance doesn't need to be complicated. Author of Money: a user's guide. Read more
Holly champions clear, jargon-free writing. She’s been creating finance content for leading organisations for over 10 years. Read more