How to Start Thinking About Estate Planning
Estate planning is arranging where you’d like your assets to go when you die. From making an inventory of your assets to writing a will and gifting, there are many steps that you need to consider as part of your plan.
No one likes to think about dying, and we aren’t 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 unease to talk about our wishes with loved ones is more essential than ever.
More of us are living together or having children without being married, while blended families, getting remarried in later life or gaining new stepchildren are all becoming increasingly common. This means it’s 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, 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 to consider that we store on our smartphones and laptops.
It’s 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 you most likely have many other assets to consider, too. These can include a pension, savings, and investments, physical possessions like 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.
What is estate planning?
When planning your estate you want to think about where you’d like your assets to go when you die. Questions that you will want to consider include:
- 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?
- If you have young children, who would take care of them if you 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?
Thinking about these things in advance will save heartache or deliberation among those who are tasked with dividing up your estate. It will make their work easier, potentially minimise the tax they may have to pay, as well as making sure that your wishes are properly met, both while you are alive and after your death.
How to make an inventory of your assets
List all your assets and as well as your liabilities to guide whoever is overseeing your estate on what is in it and how much your overall estate is worth. Liabilities are your debts, including things like outstanding mortgages.
You could divide your assets into those that are tangible: like a house, a car, jewellery, books; and those that are intangible: for example, your pension, money in your bank accounts, any life insurance or other policies that payout on death or ill health. Digital assets could include social media accounts, online music, emails and photographs.
Ideally, you’d detail the value of your assets too, such as balances in savings accounts, and the value of your property. You should keep this updated regularly.
Some assets may not have great monetary worth but could be of considerable sentimental value to your friends or relatives.
Wills and estate planning
A will is a fundamental part, but not the full scope, of estate planning.
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, things like your social media and whether you’d like them memorialised or shut down.
You can put together a will without legal help. At its most basic it can be written on a piece of notepaper and is legally binding provided it is signed by you in the presence of two witnesses who are not beneficiaries of the will.
However, this approach is high risk as any mistakes or errors risk invalidating it. For most people, it makes sense to use a will writer solicitor to oversee the process.
» MORE: How to write a will
Lasting power of attorney
While you are alive only you will be able to access or manage your bank accounts, investments, property and assets, even your spouse is unable to do so on your behalf unless your accounts are in joint names. This can create a problem if you become too ill or disabled to look after your finances.
A lasting power of attorney gives legal permission for a nominated person to take over decision making and handling of your money and property. You can also give them permission to make medical decisions on your behalf, for example, the kind of care you would like to receive.
» MORE: Power of Attorney
Inheritance tax and gifts
In the UK there is a 40% inheritance tax charged on estates over £325,000. There is no tax to pay, however, if you leave your full estate to your spouse or civil partner, a charity or a community amateur sports club.
If your full estate goes to your children or grandchildren the threshold may increase to £500,000, and there are some rules around passing property between spouses that mean children may inherit more without tax.
If you are wealthy and have an estate that is likely to be taxed you may want to consider the implications. You can give possessions and assets away tax-free, provided you do so seven years before you die.
There are also inheritance-tax free gifts, known as exempted gifts, that can be used. For example, you can give away £3,000 worth of gifts each tax year, as well as wedding gifts of up to £1,000 per person, or £5,000 for your child.
Putting assets into trust
You may want to consider putting some of your assets into trust. Trusts enable someone else to manage these assets on your death, on behalf of your beneficiaries. For example, you may choose to put money or property into 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 inheritance tax, and of protecting assets for people that are vulnerable such as relatives who have a disability.
You may also decide to put a life insurance policy into trust to protect it from inheritance tax.
Getting help with estate planning
There are many will-writing and estate planning services that will offer to put together a low cost will or advise you on 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.
If you use an unregulated company, try to find one that is part of a trade body, such as the Institute of Professional Willwriters, which will give you a way of seeking redress if the need arises.
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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