THE
ESTATE PLANNER
INSIDE THIS ISSUE
Issue 37 – January 2018
Happy New Year, and welcome to the January 2018 issue of The Estate Planner. Writing a Will may seem daunting – and with everything else we should be thinking about, it becomes just another chore on the New Year to-do list. But writing a Will is fundamental to the financial planning process. It answers one of our most basic desires – to make financial provision for all that we hold dear. Turn to page 02 to find out more. Having an estate plan is good for our finances and for our heirs, but many of us fail to put a plan in place. However, those who do have a plan often make mistakes that can lead to familial and financial problems further down the line. When it comes to estate planning, the most common mistake people make is the most simple: they fail to do it. Some people feel intimidated or afraid when thinking about death, others don’t want to initiate a difficult conversation with a spouse, while others simply doesn’t know where to start. Read the full article opposite.
It’s good to talk To arrange an appointment or to discuss any concerns that you may have in relation to making appropriate protection for you, your loved ones and your estate, please contact us. We look forward to hearing from you.
COMMON ESTATE PLANNING MISTAKES Many of us are failing to put a plan in place
H
aving an estate plan is good for our finances and for our heirs, but many of us fail to put a plan in place. However, those who do have a plan often make mistakes that can lead to familial and financial problems further down the line. When it comes to estate planning, the most common mistake people make is the most simple: they fail to do it. Some people feel intimidated or afraid when thinking about death, others don’t want to initiate a difficult conversation with a spouse, while others simply don't know where to start. So what are some of the basic estate planning needs that everyone should address? WRITING A WILL This is especially important if you have children, as it ensures that you, rather than the courts, are responsible for naming their guardians. Pay particular attention to who you name as executor. DURABLE POWER OF ATTORNEY FOR POTENTIAL HEALTHCARE NEEDS You don’t want the state making 'do or do not resuscitate' decisions on your behalf. DURABLE POWER OF ATTORNEY FOR FINANCIAL MATTERS Be clear about whether you want this to be immediately effective
or 'springing', which means it isn’t effective unless you are incapacitated. Make sure this is allowable in your state of residence. Your goal with these base documents is to avoid probate and the painful situation of having outside legal entities making decisions about one of the most intimate moments of your life. Estate planning can get much more complicated than this, especially for those who have the nice problem of having net assets that exceed estate tax exemptions. But for the vast majority of people, establishing these basic documents will go a long way toward making wealth transfer as easy as possible for loved ones.
Helping you address the issues It’s easy to think about personal finance as investing. That certainly is one element of it, but so too is budgeting, retirement income planning, tax optimisation, risk management and estate planning. We can help you tackle estate planning in a coordinated manner to keep vital details from falling through the cracks. For more information, please contact us.
01
WILL YOU MAKE PROVISION FOR ALL THAT YOU HOLD DEAR?
Getting your affairs in order and planning what you want to pass on to loved ones
W
riting a Will may seem daunting – and with everything else we should be thinking about, it becomes just another chore on the to-do list. However, getting your affairs in order and planning what you want to pass on to loved ones – whether it’s while you’re alive or after you’ve passed away – is really important. Not only does it mean that your wishes can be carried out, but it can also help reduce the emotional and financial burden on loved ones at an already difficult time.
02
We all lead such busy lives that it can be easy to put off estate planning, but it’s best to take care of this sooner rather than later. It’s especially important for cohabitating couples to have a Will, as the surviving partner does not automatically inherit any estate or possessions left behind. NO WILL IN PLACE Three in five adults (60%) don’t have a Will in place, with a third (33%) not having thought about writing a Will, according to research from
Royal London[1]. Surprisingly, the research also found that a quarter (26%) of those aged 55 and over have not written a Will. Of these, one in six (16%) over-55s with no Will have never even thought about writing one. Cohabiting couples are less likely to have a Will, with three quarters (77%) not having written one compared to those who are married or in a registered civil partnership (46%). Single adults (45%) and cohabiting couples (32%) are
the least likely to have thought about writing a Will compared to those who are married or in a civil partnership (22%) and those who have separated/ divorced (21%). FEELING MORE PRESSURE Adults with children feel more pressure to write a Will, with half (48%) saying they have not written a Will but want to write one in the near future. Three in five parents with children under 18 (58%) also haven’t chosen guardians for their children in the event of their death.
Making or updating a Will provides the perfect time to talk to your family about inheritance matters. For instance, you can talk about the items you might like to pass on to them, as well as what they might spend an inheritance on. When people have these conversations, they often discover that they can help their loved ones financially now, rather waiting until they’ve passed away. As well as being able to see loved ones benefit from some money, this can also help from an Inheritance Tax perspective. PASSING ON YOUR BELONGINGS It’s not just about wealth. Some people may not think they need a Will because they don’t have very much money in the bank or because they don’t feel old, but this isn’t necessarily the case. You need to decide to whom you want to pass on your home and belongings, such as your car, jewellery and even your pets. It’s important to put this information down in writing so your family and friends can honour your wishes once you’ve passed away.
separating from or divorcing your partner, because if you die before your divorce is complete, your spouse or registered civil partner can still inherit your estate. MAKING PROVISION FOR ALL THAT WE HOLD DEAR Writing a Will is fundamental to the financial planning process. It may not be the most exciting of subjects, but it answers one of our most basic desires – to make financial provision for all that we hold dear. There are many things to consider when looking to protect your family and create an effective protection planning strategy. If you would like to find out more, please contact us. Source data: [1] YouGov on behalf of Royal London surveyed 2,089 adults between 10 and 11 October 2017. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).
DON’T ASSUME WHO WILL BENEFIT. IF SOMEONE DIES IN THE UK WITHOUT A VALID WILL, THEIR PROPERTY IS SHARED OUT ACCORDING TO RULES OF INTESTACY, WHICH MEANS YOUR ESTATE CAN ONLY BE INHERITED BY CLOSE FAMILY (SPOUSE/ REGISTERED CIVIL PARTNER, SIBLINGS, CHILDREN, PARENTS AND AUNTS/UNCLES).
Don’t assume who will benefit. If someone dies in the UK without a valid Will, their property is shared out according to rules of intestacy, which means your estate can only be inherited by close family (spouse/registered civil partner, siblings, children, parents and aunts/uncles). So, unless you have a Will, intestacy rules could force an outcome that is completely contrary to your wishes. WRITING A WILL OR REDRAFT Beware of the revoking rule. Wills are revoked when you marry, so even if you have written a Will to include your spouse or civil partner-to-be before your marriage, you’ll need to renew it afterwards. This is also important if you have children from a previous marriage. Although your new spouse would benefit from your estate through the intestacy rules, your children might not. You may also want to write a Will or redraft your existing one if you are in the process of
03
COMMON TRUST ARRANGEMENTS
How you can reduce your Inheritance Tax bill
R
ising property prices and high home ownership rates among middle to older generations means that many estates are prime for high levels of Inheritance Tax (IHT). Despite this, awareness of the tax and the options on offer to those facing high IHT bills remains noticeably low. The main reason people don’t give away large lump sums to save IHT (even if they can afford it) is because they are concerned as to what the recipient would do with their gift. Therefore, trusts are used as reassurance that when making substantial gifts to save IHT, the gift will not be frittered away or wasted. CONTROL OVER ASSETS Put simply, trusts are all about control over where assets are invested and who gets what and when. The change of ownership of an asset from an individual to a gift trust is a transfer for IHT purposes. The trusts usually used for IHT planning are called 'discretionary trusts' or 'bare trusts', the choice depending on how much the settlor can rely on the beneficiaries. The most straightforward arrangement is that of a gift trust, whereby the donor gives up all interest in the assets gifted and does not expect to have any entitlement to capital and income in future. Here is a brief summary of the most common trust arrangements
and packaged products that could make noticeable savings to your IHT bill: 1. You want regular income and not to part with your capital On the surface, it seems impossible to save IHT and be allowed full access to capital in the trust. However, this can be accommodated to some extent by the use of a ‘gift and loan trust’, or in some cases simply a ‘loan trust’. A trust is created (sometimes incorporating a nominal gift) and an interest-free loan is made to the trustees, who invest it in an investment bond. If you want a regular payment to supplement income, the loan can be repaid in instalments. If not, the loan just remains outstanding until such time as repayment is required. The outstanding balance of the loan is part of your estate at all times, and IHT savings are achieved through investment growth accruing to the trustees.
rights as a donor to regular capital payments. The remaining rights, such as the investment bond death benefit, are placed into trust for the beneficiaries. This actually creates a ‘discounted gift’, meaning the amount of the transfer for IHT purposes is reduced by the actuarial value of the retained rights – regular capital payments for the rest of your life. Therefore, as the donor, you have to accept that you can only receive the regular payment from the trust and no more. In fact, the payments must be made as they justify the discount on the gift, so you will receive the payments whether you want them or not. 3. A happy medium? Looking at the arrangements discussed so far, it may occur to you that there is an obvious need for something that is effective for IHT purposes but could also be adapted to circumstances.
The ‘flexible reversionary trust’, which is a settlement incorporating a reversionary interest, meets this need. The trust assets are a series of single premium life assurance policies – investment bonds – of different consecutive terms, so they can produce an annual maturity payment under the reversionary interest to the donor. If the trustees decide that a maturity payment is not appropriate, they can simply extend the term of the relevant policy to a future date. In this way, you have an IHT-effective gift plus non-compulsory capital payments if required. WANT TO REVIEW YOUR SITUATION? To arrange an appointment or to discuss any concerns that you may have in relation to making appropriate protection for you, your loved ones and your estate, please contact us – we look forward to hearing from you.
2. Is there a more effective way of saving IHT? Rights can be ‘carved out’ under the trust, rather than providing rights to regular capital payments for the donor to prove them being a gift with reservation. The trust assets will be in the form of an investment bond, which can provide regular withdrawals that satisfy your
The content of this publication is for your general information and use only, and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Will Writing, Inheritance Tax Planning or Taxation Advice. All figures relate to the 2017/18 tax year, unless otherwise stated.
04