In order to adequately provide for your loved ones after you are gone, it’s important to pay attention to estate planning.
Making a Will, or more correctly ‘estate planning’, is one of those tasks that if not dealt with appropriately earlier in your lifetime, it can lead to problems for loved ones in the future.
This article highlights some of the common problems and pitfalls we come across and how these might be avoided.
Do not undervalue or delay estate planning
A Will is probably the most important document that many of us will ever prepare. It is the only document which deals with the whole of your estate and how it will be transferred following your death. Therefore, the real value of a Will should not be underestimated and the time and cost devoted to its preparation should reflect its importance and value.
Your Will should be the end product of an “estate planning” exercise. This should take into account not only your desires and wishes but also the tax implications, potential claims against your estate and whether there are other things (as well as making a Will) that need to be done to give effect to your wishes in the best interests of your intended beneficiaries.
Therefore, do not undervalue this exercise or cut corners.
Once the Will and any other documents have been prepared, they should be reviewed regularly. Failure to do so can result in unintended consequences later and with beneficiaries being left without the value that you intended them to receive.
Inheritance Tax (IHT) and the Nil-Rate Bands (NRBs)
A well drafted Will, resulting from a thorough estate planning exercise, will help you make full use of the Nil-Rate Bands (NRBs) that are available to you and save Inheritance Tax (IHT).
Most people are aware that:
- they have an NRB of £325,000, which can be left to anyone tax-free; and
- that gifts to spouses are free of IHT.
Many are also aware that on the death of the survivor of two spouses that he or she can use any unused part of the NRB available to their late spouse’s estate that was not utilised on their death.
Whilst this gives the majority of couples a combined nil-rate band of £650,000 of value, some couples may have a further £325,000 or in fact a further £650,000 of value available to them if either or both have previously been widowed. They can only take advantage of those additional NRBs if their Wills are properly drafted to do so.
The Residence Nil-Rate Band for Inheritance Tax
This is an additional allowance available to most but not all people. There are, however, some strict conditions which apply before the additional £175,000 allowance can be claimed on death. The legislation requires, for example, that there must be a qualifying residence and its value must be left to a qualifying beneficiary (usually a child or grandchild). However, there are a number of other conditions which must also be met.
The relief can be lost or reduced if for example:
- Trusts are used (which is common in the case of second marriages); or
- Value of the deceased’s estate exceeds £2m.
These issues can be overcome with careful planning.
Estate planning for blended families
Second and third marriages are no longer uncommon, creating difficulties where there are children from the previous relationships which each party to the marriage wishes to ensure benefit from their share of the estate whilst also ensuring that the surviving spouse can continue to occupy the family home and receive the income they need.
Where Wills do not fully appreciate and understand the complexity of these arrangements, the result can be that the children of one party to the marriage miss out on what would otherwise be their share of the estate and this can lead to expensive claims and litigation over the administration and distribution of the estate later.
Once again, careful estate planning and a well-prepared Will should help to avoid those consequences.
The desire to keep things simple must be weighed against the need to provide the protection that beneficiaries require. Where a potential beneficiary of your estate is young or disabled or not able to manage their money, there are ways in which the estate can be protected for their use and benefit by using the appropriate forms of trust.
Trusts can also offer protection in the longer term against the possibility of a beneficiary divorcing at some point in the future and also lead to longer term IHT savings for the family.
All too often, the process of undervaluing a Will leads to a straightforward (dare I say cheap) document being prepared, leading to greater costs being incurred later because the Will does not incorporate the protections which a proper estate planning exercise might have revealed where necessary.
Inheritance Tax Reliefs
There are a number of reliefs which mean that some assets are effectively exempt from IHT. These can relate to business and farming assets but can apply to some investments.
Too often, we see that clients who own these assets have been advised to make “straightforward” Wills whereby they leave those assets to their surviving spouse on their death. The gift to the spouse would have been exempt from IHT in any event and therefore the relief that applied to the asset will have been “lost” particularly if during the lifetime of the surviving spouse he or she sells the asset that qualified for the relief.
This is often the case when a business owner dies and the spouse inherits his or her interest in that business which they then sell.
A thorough estate planning exercise will help to identify those assets which do qualify for relief, whether such assets should be acquired to help minimise the IHT liability and, where they do exist, how these can best be left for the benefit of the surviving spouse and then ultimately for the children whilst preserving the benefit of the relief that applies to them. Once again, failure to make full use of that relief is an expensive error when the IHT rate is 40%!
Estate planning takeaway
A well drafted Will resulting from a proper estate planning exercise, is likely to be far more cost effective and better value for money for your estate and its beneficiaries than trying to economise on the cost at the outset.
If you would like assistance with estate planning, our Private Client team can help.