Estate Planning & Wills: Where Should You Start?

While the prospect of passing away is an unwanted thought, it’s important to plan ahead, both to make the process of managing your estate easier for your loved ones, and to ensure your wishes are carried out.

Anticipating things like how your care home costs will be covered and making financial provision for those that you will leave behind can provide you and your loved ones with much-needed peace of mind. And by planning ahead, you may also be able to minimise any liability to inheritance tax.

The following guide to estate planning and wills looks at the difference between these two key legal terms, and how they can both be used to help financially protect you and your family in the future. We also look at putting in place a Lasting Power of Attorney (LPA), appointing a trusted friend or relative to manage your property and financial affairs, or to make important decisions about your health and welfare, in the event of mental incapacity.

 

What is the difference between estate planning and wills?

 

Broadly speaking, ‘estate planning’ is the process in which an individual anticipates and arranges, during the course of their own lifetime, for the management and disposal of their estate on death. This planning will typically include the bequest of assets to specific beneficiaries, reducing or eliminating uncertainties over the administration of the deceased’s estate, as well as measures to help maximise the value of that estate by reducing any exposure to inheritance tax. For these purposes, the ‘deceased’s estate’ refers to any money, property and possessions of the person who dies, minus any debts and liabilities.

However, for those looking to anticipate other eventualities, estate planning can also include putting in place suitable measures in preparation for any future incapacity, either due to illness or injury. In addition to appointing someone under an LPA, known as the attorney(s), to make decisions on the donor’s behalf if that person is no longer capable of making their own decisions, this could also include measures to protect the value of a person’s home from care costs and/or provisions around business succession planning.

In contrast, ‘wills’ refer to one of the many tools that can be used in the context of estate planning. A Last Will and Testament is a legal document setting out who will inherit the deceased’s estate and to what extent, ie; the beneficiaries, plus who will be responsible for administering that estate on the testator’s death, ie; the executors. The Will is usually the simplest device for planning the distribution of a deceased’s estate. Other estate planning tools can include the use of trusts, both testamentary and lifetime, as well as lifetime gifts.

 

Why is it so important to make a Last Will and Testament?

 

Taking stock of all your assets, valuing your estate and documenting your final wishes within a written Will is one of the most important parts of the estate planning process. This is because, in England and Wales, if you die without leaving a valid Will, the law will determine who inherits what you own. In legal terms, this is known as dying intestate.

If you die intestate, your money, property and personal possessions will be distributed in accordance with the rules of intestacy, which restrict the beneficiaries to specified classes of relatives, in a set order of priority. As such, there is potential for this to have unwelcome ramifications in relation to the distribution of your estate. Under these strict rules, if an estate is valued at more than £270,000 and there are surviving children, grandchildren or great grandchildren of the person who died, any spouse or civil partner will inherit:

 

• all the deceased’s personal property and belongings
• the first £270,000 of the estate, and
• half of the remaining estate.

 

The remaining half of the deceased’s estate will then be split equally between any children of the deceased, or any grandchildren or great-grandchildren. If there are no surviving direct descendants, the spouse or civil partner will stand to inherit the entire estate.

The rules of intestacy do not recognise modern family relationships, such as unmarried and unregistered partners, even if you live together. The rules also only make provision for natural and adopted children, not step-children. It is possible for certain classes of people to make a claim for reasonable financial provision from a deceased’s estate — including anyone who had lived with the deceased for at least two years before their death or who was treated as the deceased’s child, including a step-child — but there is no guarantee the court will find in their favour. These claims can also be complex and costly to pursue.

As such, if you have a partner or family that depend on you financially, especially if you are unmarried or have not entered into a civil partnership, ensuring that your Will is legally compliant and clearly drafted can avoid any unnecessary disputes after you have died. In this way, you can adequately protect your loved ones from future financial uncertainty.

 

What to consider when making a Will

 

If you are simply outlining who should inherit your estate when you pass away, and if your assets are not complicated, writing a Will can be relatively straightforward. In many cases, however, the Will may need to contain complex trust mechanisms or provisions to deal with various other matters, including protecting the inheritance of minor children or vulnerable beneficiaries, as well as who should take care of any children or run any business. The ultimate end goal of estate planning and wills can only be determined by your specific objectives, where these may be as simple or complex as your wishes and needs require.

Still, regardless of where your estate lies on a scale of straightforward to complicated, there are various key matters which must be considered in every case, including who you will appoint to act as your executors and who will be the beneficiaries of your estate.

 

Appointing executors

 

An executor is somebody that you nominate to deal with your estate after you die. An executor could be a friend, relative or professional, although it is important that you trust them to carry out your final wishes and that they feel confident administering your estate. This could include closing your bank account(s), paying off any debts and taxes, and selling or transferring your property so that the proceeds can be shared between the beneficiaries.

You will need to appoint at least one executor, up to a maximum of four. If you are choosing friends and family, it is best that you appoint at least two executors, making allowance for the possibility that one of them dies before you do, or they decide that they no longer want the responsibility of acting as your executor and opt to renounce this role. Alternatively, if you appoint a sole executor, you can name a replacement in the event that they cannot act.

 

Choosing beneficiaries

 

The beneficiaries are those individuals who stand to inherit some or all of your estate after you die, in accordance with the terms of your Will. There is no rule against people named in your Will as beneficiaries also being your executors, where it is common for executors and beneficiaries to be one in the same. This means that if you have any adult children, who you are confident will be able to effectively deal with your estate when you die, you can appoint them as executors, while still ensuring that they inherit under the Will.

When choosing beneficiaries, there are no hard and fast rules, where this is entirely a matter for you. This is referred to as testamentary freedom. For example, if you are in a relationship, you may choose to leave the bulk of your estate to your other half, especially where you have shared responsibilities like bringing up children or paying a mortgage. If, on the other hand, you are a single parent, you may wish to share your estate between your children. Equally, you may no longer be in contact with any family, or only have distant relatives, in which case you may choose to leave everything to a close friend or to charity.

 

Estate planning tools

 

In addition to making a valid Will, other estate planning tools can include the use of testamentary and lifetime trusts, as well as gifts made during the course of your own lifetime to help reduce any liability to inheritance tax on your death.

 

Trusts

 

A trust mechanism can be used for all sorts of different reasons, from ring-fencing property to protect its value from residential care home fees to protecting the inheritance of minor children or vulnerable beneficiaries. The trust is a special legal mechanism in which the trust property is managed by appointed trustees. You can choose who to appoint as trustees, including family members or even professionals. In the case of testamentary trusts, you can also leave a letter of wishes with your preferences as to how the trust assets should be used, helping to guide the trustees’ decisions once the trust comes into effect.

Testamentary trusts, typically included within the testator’s Will, are often established by those who wish to make provision for the care of children or other dependants, whereas lifetime trusts are mainly concerned with asset protection, both in life and on death. In either case, this type of legal arrangement can also be used as a means of making various types of tax savings, including but not limited to inheritance tax when you die.

 

Lifetime gifts

 

When it comes to inheritance tax savings, one of the most effective ways of minimising the extent to which your estate will be exposed to any liability, is by making gifts during your lifetime. As the law currently stands, inheritance tax will be payable on your estate after you die on anything over and above the basic nil-rate band of £325,000. This essentially means that if your net worth exceeds this threshold, tax will be payable on any sum in excess of this amount, typically at a rate of 40%. There is an additional residence nil-rate band of £175,000, but this is only applicable if your estate will include a qualifying residential interest to be inherited by a direct descendant, such as a child or grandchild.

For those who are married or in a civil partnership, by law you can pass your money, possessions and property to your spouse or civil partner entirely tax-free. For other loved ones, including any children, you may want to take advantage of the annual exemption of gifting up to £3,000 per year tax-free or, alternatively, utilise what are known as potentially exempt transfers (PETs).

Under a PET, a gift of any amount can be excluded from the value of your estate, provided this was made more than seven years before you die. Even where a valuable gift is made within seven years of death, it may still be subject to less inheritance tax than if the gift had not been made at all. This is because, under the taper relief rules, tax will be payable on a sliding scale for any gifts made between three to seven years.

 

Lasting Power of Attorney and estate planning

 

Estate planning is not solely about what happens to your possessions and property on death, and how much you can help those who stand to inherit from your estate. It is also about protecting yourself, during your own lifetime, not least if you become mentally incapacitated and unable to make your own decisions in either the short or long-term.

By putting in place an LPA, this will ensure that trusted people will be making decisions in your best interests, including things like where you will live, what day-to-day care you will receive, whether your home should be sold and even having a say about any life-sustaining medical intervention. The making of an LPA should also form part of any crisis management plan to help minimise the risks to any business in the event of critical illness.

 

Common errors to avoid

 

When it comes to estate planning and wills, there are various common errors that people make, not least attempting to make financial provision for their loved ones through a do-it-yourself Will or putting in place an LPA without first seeking specialist legal advice.

The law surrounding Wills, trusts and other legal mechanisms to help plan for the future can be complex, with serious consequences if you get this wrong. For example, where a Will has not been properly executed, this may be challenged on the basis that the Will is invalid. The net effect may be that those who ought to benefit will miss out under the rules of intestacy. It is only by making a ‘valid’ Will that this will ensure your final wishes are enforceable. As such, specialist advice must always be sought from an expert in estate planning and wills, allowing you to explore all available options and tailor the use of different legal arrangements to suit your specific set of circumstances.