Trusts & Lifetime Planning
It is never too early to think about estate planning however if you born before 1970 now is the time to really start planning.
Prudent estate planning utilises statutory exemptions, allowances and reliefs.
When someone dies, the value of their estate needs to be determined to establish whether inheritance tax (IHT) is payable.
It is also sensible to get financial advice on how best to ensure that your pensions and other assets are able to pass to your beneficiaries in a tax efficient way.
There are many considerations and you may well need financial advice however the 10 main things to think about are:
1) Wills More Info
During your lifetime, it is essential that you have an up to date Will to ensure that your estate goes to who you want it to go to and that your wishes are carried out. Our advice is to make sure you have a will in place and ensure that it is under continual under review.
Family circumstances will naturally change over time and rules concerning tax efficiency change annually.
There have been several significant changes to the inheritance tax rules in recent years:
The Residence nil-rate band
In April 2017 the Government introduced an extra allowance called the Residential Nil Rate Band (RNRB). If you leave your residence to a “direct descendant” there is an additional allowance of £125,000 per person. This is due to increase by £25,000 in April 2019, and a further £25,000 in April 2020.
Once these further increases have taken place, this will give a total of £500,000 that a person could pass to their children without having to pay IHT provided certain conditions are met. Any further amount is then taxed at 40%.
This represents a tax saving to a married couple of £140,000 from 6 April 2020 so it is essential to capture that relief where circumstances allow.
The Transferable Nil Rate Band
The introduction of the transferrable nil rate band enables the nil rate band (currently £325,000) to be transferred to a surviving spouse.
Previously, nil rate bands were not transferrable and so it was important to “use it or lose it”. Wills were often drafted to incorporate a legacy of the nil rate band on discretionary trust which were often costly to administer. The transferrable nil rate band has rendered this kind of planning unnecessary. It is therefore vital to review your wills to remove such potentially costly clauses.
2) Lasting powers of attorney More Info
Although for the most part we are living longer many people lose mental capacity due to accidents, dementia, Alzheimer’s or just old age.
If an individual loses capacity, their bank accounts are effectively frozen until the court makes an order for an applicant to access those accounts in order to pay bills and day to day living expenses.
Getting court orders can be time consuming and expensive. We recommend that our clients put in place lasting powers of attorney (LPAs), one for property and financial affairs and one for health and welfare, as soon as possible.
For further information please see our page on Lasting Powers of Attorney.
3) Provision for yourself
You will no doubt have thought about your own financial needs in retirement. You may well have thought about having an emergency pot of cash set aside for a “rainy day”.
This can also be extremely helpful on your death so that executors can pay bills and funeral expenses and partners and children can access funds faster.
Care home fees
As we are all living longer, the reality is that many of us will require care.
Care and nursing homes can be expensive and so it is important to plan and prepare for these costs.
The pension regime has undergone significant reform over the last few years and continues to evolve.
Currently on death, in most cases any remaining pension pot can be passed to one’s heirs free of IHT with the funds then being drawn as income and taxed as the beneficiaries’ income.
You should consider maximising pension contributions.
5) Lifetime gifting and planning opportunities
Certain gifts can be made to children and grandchildren who need to fund university and school fees, or want to get on the property ladder. You might want to consider lending money.
It certainly makes sense from an IHT perspective to make gifts during your lifetime so the gifts are classed as potentially exempt transfers, and potentially free of IHT, provided you survive the gifts by seven years.
Lifetime gifts also help to reduce the overall estate so that ultimately the estate is smaller on death and therefore there is less IHT to pay.
Lending money allows for greater asset protection the capital will not become exposed if there are financial or marital difficulties later on.
6) Allowances and reliefs
There are many allowances and reliefs available. The ‘spouse exemption’ allows everything to pass to a surviving spouse (or civil partner) free of tax on the first death.
There are a number of ways of giving money away during your lifetime that can help to reduce the value of your estate.
These include giving up to £3,000 in gifts annually to beneficiaries. Giving other gifts of up to £250.
Parents can give £5,000 to each of their children as a wedding gift and grandparents up to £2,500.
7) Life insurance
Life insurance products can be a useful way of planning for any IHT exposure.
8) Charitable giving
Any gifts to charity are tax free.
Also the rate of IHT applied to estates on death is reduced from 40% to 36% where a minimum of 10% of the estate is left to charity.
9) Tell the family
If there are particular items you want to pass to certain individuals then these need to be clearly indicated.
10) Business assets and business succession
For those who own and run their own business, it is advisable to consider what will happen to the business after they are no longer around.
Business assets can often qualify for relief from IHT, but clients will need to be thinking about what needs to be done in order to maximise this.
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