What is estate planning and why is it so important?
Estate planning is the process of working out how best to leave your money and assets to your family. It allows you to protect your wealth for future generations and in some cases minimise inheritance tax. It can also involve making plans in case you lose capacity to make decisions in the future.
Getting good estate planning advice and preparing the right documents will make things easier for your loved ones, if you were to lose capacity or when you pass away.
What’s the difference between making a will and estate planning?
The two do link together. Writing a will is an important part of estate planning. But estate planning is a broader process, where you document your wishes in more detail and provide your family with extra protection.
What are the main steps in estate planning?
As a minimum, every adult should firstly have a will and Lasting Powers of Attorney. A will is a legally binding document that outlines what should happen if you die. It sets out how you wish to distribute property, money and personal possessions to your family, your friends or charities. It also makes provisions for your children or pets and documents your funeral wishes.
Lasting Powers of Attorney are legal documents where you appoint people to act on your behalf if you ever lose mental capacity. Your attorneys make choices about your health and welfare and financial affairs if you’re unable to make your own decisions, due to an accident or illness.
The third step is to consider setting up trusts. These can either be set up in your lifetime or written into your will. The type of trust you create will very much depend on the type and value of your assets and the main purpose of the trust.
Why might I set up a trust?
There are various different reasons why a trust might be beneficial, but it generally falls into one of three categories:
- For inheritance tax planning. Some trusts allow for inheritance tax planning to reduce potential tax liability. Trusts are subject to their own tax regime, so they’re not likely to be exempt from inheritance tax, but they can help in minimising tax liability.
- To protect or control all or part of your estate. If there are any concerns about a beneficiary going bankrupt, remarrying,divorcing or needing long term care, then a trust can ring-fence your assets. That way they can’t be lost to creditors, to a new spouse or to the local authority.
- To protect vulnerable beneficiaries. If a beneficiary has an addiction, mental health problems or a disability, then having trustees manage their inheritance can limit their access to it. In some cases, the trust can also preserve any means-tested benefits.
What is the main purpose of estate planning?
The primary purpose of estate planning is to plan for possible incapacity and death, making all the arrangements so that everything is legally binding. That way, your family has all the tools to honour your wishes once you’re gone.
Estate planning allows you to protect your assets, protect your beneficiaries and do long term tax planning. Generally, and most importantly, it makes everything much easier for your loved ones.
Without a detailed estate plan, there could be a whole range of problems for your family and friends to sort out after you’re gone. Estate planning is one of these things we leave until later and don’t talk about. That may be because we’re not really aware of what’s involved or how to approach the subject. But it is a very important thing to explore.
When do you need to start thinking about estate planning?
Generally, the earlier you think about these things, the better. We can’t predict the future, so the best thing to do is to make the right preparations so that if anything does happen, there are no question marks. Your family will have clarity about what happens next.
Anyone who’s lost a loved one appreciates the level of emotional strain. Having everything prepared and in place relieves some of the pressure and avoids disputes further down the line.
Who is eligible for estate planning?
As a minimum, anyone over 18 should at least have a will. In terms of setting up trusts, this will very much depend on your assets, what they are worth and how concerned you are about protecting them or minimising inheritance tax.
People with more complex family situations, those who have quite a large estate value, or anyone who’s a key player in a business are more likely to need estate planning over and above simple wills and LPAs.
Many people have concerns about protecting their assets from things like remarriage, bankruptcy, long term care fees and any other third party claims. Estate planning can help in these circumstances.
It’s also important to seek advice as part of the wider estate planning process around life insurance, protection policies and pension funds, just making sure everything’s airtight. That way you’re preserving your wealth for your family and your loved ones.
What happens to my estate if I don’t have a will?
If you don’t have a valid will, then your estate is shared out according to rules determined by law, which are known as the rules of intestacy. The rules of intestacy are governed by legislation written a very long time ago – and people often find it doesn’t reflect modern society. Partners and family members often fall outside of the automatic entitlements under the rules of intestacy.
From that perspective, it’s really important to make a will so that the right people inherit the right assets. Aside from the financial aspect, it allows you to think about care arrangements for children and pets, and documenting your funeral wishes. It just generally makes the whole process after you die much smoother.
What are the costs involved with estate planning and will writing?
The costs will depend on your specific situation, so it’s difficult to put a ballpark figure on it. Estate planning costs are higher than simple will writing, as this is an area of professional expertise. It involves knowledge of succession law, inheritance tax etc. As with most legal fees, the costs will correlate with the level of detail required and the seniority of your consultant.
But the overall cost to your family without the right advice and planning in place will be much higher, both financially and emotionally. The first step is to arrange an initial consultation and the advisor can talk you through their recommendations and give you an indication of costs.
Can you use estate planning to avoid paying inheritance tax?
There is a common misconception that trusts and estate planning allow you to escape inheritance tax. Unfortunately, it’s not quite that simple. If you do have a genuine inheritance tax liability, it’s very difficult to avoid it completely because there are various anti-avoidance rules and regulations.
Estate planning can, however, help you ensure that your estate can take advantage of all available exemptions and reliefs so that your loved ones don’t pay more inheritance tax than is absolutely necessary. This can just be as simple as preparing a will in some cases, or including additional trusts or some lifetime planning.
Inheritance tax exemptions and reliefs and their qualifying criteria are very complex. Estate planning can help you structure your estate to qualify for as many of these as possible.
There are cases where people end up with no inheritance tax. It’s not that they’re avoiding it, they’re just using exemptions and reliefs to potentially reduce that bill to zero.
How do I go about estate planning?
If you were to come to Expression Wills, we would arrange a consultation with you where we would talk through your financial assets and family situation. We would discuss any potential tax liability as part of our general process, and then recommend any solutions in relation to your estate, your family and your wishes.
We also work closely with other professionals outside of our own area of expertise. An example is life insurance and protection, to make sure there is adequate cover to pay any debts and provide additional streams of income for your family.
There is no obligation with any of our services – we explain how everything works and what the impact would be if you didn’t proceed with our recommendations. That way you have all the information you need to make an informed decision about what’s right for you and your family.
Why Expression Wills
Claire has been really helpful throughout the process. She was particularly supportive in helping us decide who to appoint as guardians and trustees and gave us lots of insightful information to help us make the right decision for our family. We have been really happy with the service and would highly recommend Expression Wills.
I used Expression wills to take out my first will, Claire was very knowledgeable and the process was effortless. I would highly recommend Claire and Expression wills to anyone who needed a will.
Had wills completed for myself and my partner, we were already stressed as this was in the middle of our house purchase/sale but Claire made the whole process a breeze. Very informative and helpful every step of the way. Would definitely recommend to anybody thinking of getting a will done