All you need to know about estate planning

The three main sections are:

• Wills
• Inheritance planning and tax
• What information should I leave my loved ones?

There are also lots more helpful articles here.

What is a will?

Your will is how you divide up your estate (which is everything you own that has economic value, from your money to your house to your car) in the way that you want, rather than the way the court decides. For example, if your arch-enemy also happens to be your twin sister then it is likely that you might want to leave her nothing. However, the courts may award her everything you owned if you didn’t leave a will telling them not to, simply because she was a close relative.

This is, obviously, among the most important pieces of information to leave your loved ones. As well as saying which beneficiaries get what, you also need to make clear a few things.

What exactly is going to each person?

Maybe, instead of easily countable sums of money, you want to bequeath a diamond-encrusted tortoise to your aunt. She throws her arms up in confusion – WHICH diamond-encrusted tortoise? (This would be a rather satisfying problem to have.) An easy way to avoid confusion is to add in photos of the individual gifts to your will.

Who is the executor?

Nope, this isn’t the guy who administers your lethal injection. You need to nominate between one to four executors of your will, who are in charge of making sure all the stuff you wanted to happen happens. These might be friends, family members, or solicitors who will charge for their services.

What plans do you have for your children?

If your children are under 18 years of age and your partner is unable to care for them, then there are several options open which you will need to think through carefully. We recommend you seek advice on this from a solicitor, who will be able to guide you on what you need to do.

How can your executor contact all your beneficiaries?

It’s easy enough to ring up a charity and make a donation. On the other hand, leaving a mansion to a distant niece is all well and good, but if nobody has her contact details then it is unlikely she will ever be able to collect. Including phone numbers and addresses of your loved ones is a sensible idea, as is letting them know that they’ll inherit.

The risks of not making a will

Dying without a will is known as dying ‘intestate’. The risks of dying intestate include: 

• Your estate being divided in a way that you wouldn’t have wanted (if you’re not married to your partner, for example, they may inherit nothing)
• Disagreements between those who are expecting to inherit
• The inability to make it clear how any dependents (or pets) will be cared for 
• Losing the chance to leave assets to grandchildren (this isn’t possible without a will)
• Your family having to appoint an administrator, which adds delay and potential cost to the process

March is FREE WILLS MONTH – click here to find out more.

Reading a will

Reading a will for the first time can be confusing and sometimes overwhelming. Executors can act without a solicitor, however it may be wise to get some legal advice if you are unsure on how to proceed.

For example, if the estate is particularly complicated, legal advice is the best way to avoid any confusion and ensure compliance with the will. In particular circumstances, legal advice must be followed.

Such circumstances may be, for example, if the terms of a will are unclear, money or property was left in a trust fund, part of the deceased’s estate is to go to children under 18 years of age, or the person who died has part of their estate abroad. In these situations, contacting a solicitor should be the first step.

Similarly, if you think anyone is likely to dispute the terms of the will, or you yourself would like to contest it, proceeding with a legal team will help you get the best out of this situation. Any legal fees which are incurred as the result of the occurrences noted above may be paid for out of the estate.

Contesting a will 

So, you have received the will of your loved one, read through the terms and have decided to contest part of the document. What now?

Contesting your loved one’s will may be the last thing you want to do. However, there are reasons recognised by law which means it is necessary to do so.

There are two key reasons as to why you may contest a will:

The will is invalid

If you believe the deceased did not have the mental capacity to make a will, the will may be invalid on this basis. Your loved one may have been suffering from a serious illness like Alzheimer’s or dementia when they created their will.

Currently, there are 944,000 people in England alone living with dementia. For their will to be valid, they must still be able to make key decisions for themselves and their illness must not affect this. If you believe this wasn’t the case in regard to your loved one, you may have grounds to contest.

Perhaps you want to challenge the terms of the will on the basis that you believe it doesn’t reflect the deceased’s true wishes or intentions. In other cases, you may choose to challenge the will if you were unfairly cut out of it.

The will does not provide reasonable financial provision

You may have been financially dependent on the deceased. Even if you believe the will itself to be valid, you may have the view that you should have been more greatly provided for under the will’s terms.

If this is the case, you can make a claim under The Inheritance (Provision for Family and Dependents) Act 1975.

It is important to remember that a basic principle of the English Law surrounding wills, is that you may leave your estate to whoever you choose. If you don’t like the way your loved one chose to distribute their assets following their death, it is not a legal reason to challenge the will.

Funeral arrangements and costs

Not only are funerals tough for families but arranging them can be a stressful time. A particular stress that comes with arranging a funeral is the cost. According to MoneyHelper a funeral with burial will cost an average of £4,383, whilst a funeral with cremation averages at £3,290.However, this excludes extras such as a headstone or flowers.

This is an added stress during an already difficult time. Therefore, it is important to be aware of how the funeral can be paid for. First and foremost, it is important to understand who is paying for the funeral, as the person who signs the papers at the funeral director enters into a formal contract to pay for the funeral.

Your loved one may have had a pre-paid funeral plan, so some or all of the cost may already be taken care of. If this is not the case, the cost of the funeral may be taken directly from the estate of the deceased. It is important to bear in mind, however, that it may be hard to get the funds needed in time for the funeral. Therefore, if funds cannot be released on time, the family may need to pay and be re-imbursed at a later date.

‘Death duties’ and what they mean

‘Death duties’ were renamed as the Capital Transfer Tax in 1975, and again to Inheritance Tax in 1986. Inheritance Tax is a tax on the estate of the deceased. This includes their property, monetary savings and possessions.

Whatever the value of an estate, whether it is above the threshold or not, it must be reported to HMRC.

• What is inheritance tax ?
• How much inheritance tax do I have to pay?
• When do I have to pay inheritance tax ?
• How can I reduce my inheritance tax?

What is inheritance tax?

Inheritance tax is paid on the total value of someone’s estate when they die. It’s also sometimes payable on trusts and gifts made during that person’s lifetime. However, you only pay a certain amount if the total estate value is over the inheritance tax threshold (see below). You only pay tax on that amount over the set limit (not the whole estate).

The tax isn’t paid by you: it’s paid by the person inheriting your estate (or part of it) after you die. It’s not about how much each individual inherits – so you can’t avoid it by leaving your estate to multiple people. They’ll all still have to pay inheritance tax on their portion.

How much inheritance tax do I have to pay?

Firstly don’t panic – not everyone has to pay inheritance tax.  It’s only applicable if assets and any combined wealth are over the current inheritance tax threshold (£325,000). Any wealth you own above this allowed amount is taxed at 40% on death, with the main exception being gifts made to your spouse or civil partner.

Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to as much as £650,000.

As of April 2017, there’s also an extra £175,000 allowance on the value of your primary residence if you pass it to direct descendants. So, if your entire estate is valued at £450,000, but that includes your home at a value of £200,000 that your child will inherit, there’s no inheritance tax to pay.

When do I have to pay inheritance tax ?

In most cases, you must pay inheritance tax within six months of the end of the month in which the deceased died. Be careful as interest is charged on any tax not paid by the due date, no matter what caused the delay in payment.

Don’t worry if the majority of the tax would be paid through the value of the estate such as a house, because HMRC have kindly developed a system where you can pay yearly installments over 10 years. Fortunately, there are ways of reducing your potential liability (i.e. the enormous amount of tax your children may have to pay).

How can I reduce my inheritance tax?

The only way to reduce the RATE of tax is by giving at least 10% of your estate to charity in your will. This reduces the rate of inheritance tax on the whole estate from 40% to 36% – so, on large estates, it’s worth considering.

You can minimise the amount your beneficiaries pay by reducing your estate before you die. The first way to do this is with financial gifts. You can gift up to £3,000 per year to family members (£6,000 if you didn’t give them anything in the previous tax year), and as many gifts of £250 to friends each year as you want. You’re also allowed to provide one-off gifts of £5,000 to children (or £2,500 to grandchildren) for ‘life events’, like getting married, going to university, or buying a house. You can do the same for friends at a lower limit of £1,000.

If you’re married, you can each give up to £3,000 a year to family members, totalling £6,000 (or £12,000 if you roll last year’s allowance over). However, these payments can’t come from a joint account – it MUST be paid from your individual accounts as two separate payments of £3,000 EACH. Otherwise, HMRC may say the primary taxpayer in the couple is the sole gift provider – and the second £3,000 will come under inheritance tax rules.

Remember, you can also pay into a Junior ISA or pension for your grandchildren – and you can contribute to your child’s pension, too.

Gifting money is a good way to reduce your estate – but it’s also ideal if you want to see your loved ones enjoy their inheritance while you’re still here!

Potentially exempt transfers

You CAN give more than the limits provided above. However, these are known as Potentially Exempt Transfers (PET). What this means is, if you die within seven years of giving the money away, the recipient will have to pay inheritance tax on it. After seven years, it’s not liable for inheritance tax and they won’t need to pay tax.

The amount paid is tapered depending on how soon after providing the gift you die. So, for the first three years after, inheritance tax is 40%. It reduces yearly after that in 8% steps (so 32%, 24%, 16% etc) until the seven years is met.

If you’re not sure whether you want to gift the large amount of money in case your loved one will end up having to pay inheritance tax on it anyway, look at it the other way. When they have to wait to inherit the gift when you die, they’ll definitely have to pay inheritance tax (if your estate is over the threshold). If you give it to them now, and you live more than seven years, they won’t have to pay any inheritance tax – so they’ll get to keep the full amount (instead of losing up to 40% to the taxman).

*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.