Estate Planning

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Estate Planning

Kwasi Yeboah joins the Pension and Investments Podcast to discuss all you need to know about estate planning.

What exactly is estate planning and why is it so important?

Estate planning is the process by which we, as financial advisers, assist with the management and the disposal of a person’s estate. It can also involve making plans for the circumstances where the person might become incapacitated through the loss of physical or mental capacity.

There is an old adage about the only two certainties in life being death and taxes, and estate planning sets out to address both. It is about helping people decide who their belongings to go to throughout their lives and what happens in the case of loss of capacity or death.

What should be included in an estate plan?

The starting point for any estate planning is to work out what actually comprises the estate, and having a think about your desires and objectives. Who will you leave assets to when you are gone? Is there any scope for gifting assets while you are still around?

This is especially relevant if your estate is liable for inheritance tax. We will work out what tools are available to help you achieve your objectives and put the appropriate solution into action.

As with all planning, it is important to regularly review your plan to make sure that it remains appropriate and it is achieving what we want it to.

When should I start estate planning?

It can vary – people might start planning early if they have a large estate – perhaps they have recently inherited themselves. Other typical times are when you have bought a house and when you have a family. There’s little benefit to estate planning unless you have an estate to leave!

Another common time is as you reach retirement and start to think about what will happen when you are gone.

Do I need a will?

If you want to have a say in how your estate is distributed after you die, then it is a good idea to have a will. Otherwise relevant legislation will decide who your assets will go to.

Putting a will in place means you are in control of what happens. I always advise people to write a will and review it every few years or when there are any significant changes in your life; perhaps you gain a new family member for example. It is worth noting that divorce does not automatically invalidate a will, but a marriage will automatically revoke it.

Wills are fairly inexpensive to put in place, so it is certainly worth doing.

Will writing and Powers of Attorney are not part of the Quilter Financial Planning offering and we would refer requests for Will Writing, Powers of Attorney and estate planning to an external third party. Neither First Thought Financial Services nor Quilter Financial Planning accept any responsibility for the actions of a third party.

Do I need a power of attorney?

By setting up Lasting Power of Attorney you legally appoint someone to act as your agent if you are unable to make decisions for some reason.There are two types of powers of attorney, one for health and welfare decisions, and one for financial decisions.

These are as important, if not more important, to set up than a will. People are living a lot longer but they can lose mental and physical capacity as they grow older.

Do I need to consider care provisions in estate planning?

Care in later life in the UK mandates that people who have assets are expected to meet the vast majority of their own care costs. The UK government recently announced that it is looking to cap these care costs, but it is still an important consideration.

Any inheritance tax planning should be in the aftermath of ensuring you have made adequate care provision. Once this has been done, you can look to ensure that you can still pass your assets to the next generation.

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What should I plan to do with my pension?

Any savings within a pension ‘wrapper’ are outside your estate for inheritance tax purposes, which makes them a really effective estate planning tool. You can leave pension assets that you do not spend in retirement to whomever you like.

Depending on your age at death, the recipients of those pension benefits might not have to pay any tax whatsoever.

What is inheritance tax?

It is a tax that may be payable on certain transfers of value when someone dies, or indeed throughout their lifetimes. There are a number of different tax rates for inheritance tax – you can be taxed at zero percent if the gift falls under what’s known as the nil rate band. It is 20% if the transfer is above that nil rate band of £325,000 or it can reach 40% on death.

Paying 40% of your estate to the tax man is not great – but with a little bit of planning, this can be mitigated. The first £325,000 of an individual’s estate is taxed at 0%. There is also a nil rate band for your primary residence. So in effect, the first £1 million of a married couple’s estate is actually protected from inheritance tax. The situation becomes a little bit more complicated where the estate value is more than £1m or a variety of lifetime gifts have been made.

Can estate planning specialists ensure I do not pay too much inheritance tax?

Estate planning specialists have a range of tools at their disposal to mitigate inheritance tax; if necessary, the use of trusts, the use of exemptions and charitable giving. As with all forms of financial planning, it is best to seek professional help.

How do I make a gift as part of estate planning?

There are a number of different ways to make a gift and different vehicles to make a gift into. For example, you can transfer a sum of money to another individual and declare it on your tax return. You can also make gifts into trusts, for example, to be safeguarded for someone until a certain age or until a specific point in the future.

You can also make gifts to charity throughout your lifetime or by direction in a will. Again, it is important to clarify your objectives because there are so many different ways to go about it.

Putting assets into a Trust is a very common part of estate planning, and it isimportant to seek advice as there are many different trust structures. A discretionary trust is often the most appropriate for inheritance tax planning, but this really does depend on individual circumstances.

What do family estate planning services do?

This is a similar service that is focused on the wider family rather than an individual. It begins with reviewing the family’s finances and estate alongside their needs and objectives now and in the future. An important focus is to protect the estate from unnecessary taxation.

We make use of all the tools that we’ve touched upon already. But the idea here is to put in place a plan that incorporates family needs in the future.

How can First Thought Financial Services help?

First Thought Financial Services is part of the Quilter Financial Planning network, which itself is a part of Quilter Plc, a FTSE250 company. Quilter has a huge range of estate planning tools to support our clients in achieving their objectives in this area.

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