Estate planning means working out how you’d like your assets to be managed and passed on after your death. It’s as important as making a will because it can:
- Make your executors and loved ones' lives easier
- Protect your estate for your beneficiaries
- Help you understand how much Inheritance Tax (IHT) might be due
That final point is particularly important. When you're estate planning, it's very important to understand IHT, which may be due if your estate is:
- Worth more than the IHT threshold (AKA the nil rate band - it's currently £325,000)
- Not going to a spouse, civil partner or other exempt beneficiary, like a charity
IHT regulations can change at any time, and the rules around tax, gifts and trust funds are complex. So, we're not going to talk about it in too much detail in this article. It's a good idea to consult a professional financial adviser and a solicitor (ideally an estate planning law specialist) to get some expert estate planning advice before you make any decisions.
To plan your estate, there are some basic steps you’ll probably need to work through:
- Assess your net worth by adding up all your assets and taking away any liabilities
- Work out where you want everything to go after your death – for example:
- Making the right arrangements (like a will) to make sure your wishes are legally binding
That’s a simple list but in practice estate planning can be a complex task. And because individual estates vary so much, it’ll be different for everyone.
As we’ve noted above, many financial and legal professionals offer estate planning services and can offer very useful advice and support. If you’re not already getting that sort of advice, you can visit Unbiased.co.uk to find a financial adviser or for legal advice go to Solicitors Regulation Authority.
What should your estate plan include?
Gifting property
If you want to give the property away but still live in it, you can:
- Pay the proper commercial rent to the new owner, which could keep any IHT benefits of giving it away.
- Stay in it rent-free (known as a 'Gift with Reservation of Benefit'), which removes any IHT benefits of giving it away. When you die, the property will fall back into your estate for tax purposes, even if you live for more than seven years after giving it away.
As ever, you need to make sure you understand the IHT implications of gifting property. Make sure you consult an expert before making any final decisions. And bear in mind that if you give away your property while you're still alive, you could run into problems. The new owner could:
- Increase the rent with due notice
- End your tenancy agreement
- Sell the property without having to ask your permission
Making other financial plans for friends and family
Careful financial planning is an important way of protecting your estate. It can make sure that your financial wishes are followed if you become incapacitated before you pass on. It can also help you understand how much IHT might be due on your estate, which could affect how you share it out.
Gifting money before you pass on
You can give up to £3,000 in any one tax year IHT free. And if you don't give some or all of that amount, you can carry the balance forward to the next tax year.
- For example, if Mary gifts £1,500 in tax year 1, she can carry forward £1,500 and have a £4,500 IHT exemption in tax year 2. But if she doesn't use it in year 2 she can't carry it forward to year 3.
Some types of gift might be completely exempt from IHT. They include gifts between spouses or civil partners and those given over seven years before your death. And if you're thinking about helping your grandchildren, read our guide to gifting as a grandparent.
Your executors will need to declare any cash gifts you make in the seven years before your death. So, it's important to keep records of them and make sure the relevant people know where to find them.
Setting up a power of attorney
A power of attorney is a very important wealth planning tool. It's a legal document that lets you appoint one or more people to either:
- Help you make decisions
- Make decisions on your behalf
It's usually set up as a peace of mind measure, so (for example) you know everything's taken care of if you run into mental incapacity problems. It can be a good opportunity to chat through your wishes with your loved ones and deal with any questions or worries they may have.
To find out more take a look at our power of attorney article.
Find out how Over 50 Life Insurance and Lifetime Mortgages can help with your estate planning
Related articles
Discussing your death with loved ones
The importance of writing a will
What are the duties of the executor of a will?
What happens to debt when you die?
