What is estate planning?

What is estate planning?
  • Financial planning
  • 5 minute read

Estate planning is a fundamental part of wealth management no matter how much wealth you have accumulated. Not only does an estate plan help to ensure that those who are important to you will be taken care of when you’re no longer around, but it can also help ensure that assets are transferred in an orderly manner, and that inheritance tax (IHT) liabilities are minimised.

Quite often, people fail to put an adequate estate plan in place because they find it difficult to discuss their own mortality. In the UK, for example, more than half of all adults don’t even have a will[1]. Ignoring this component of the wealth management life-cycle can backfire, however. Without a proper estate plan, no one can be sure of your final wishes. If you want to ensure that your wealth is preserved for future generations, and passed on efficiently, an estate plan is crucial. With that in mind, here’s a look at how estate planning works.

A summary of estate planning

Put simply, estate planning is the process of developing a clear plan that details how you would like all of your property to be distributed after your death. It involves putting documentation in place to ensure that your assets are transferred in line with your wishes.

Your estate consists of everything you own. This includes savings, investments, pensions, real estate, life insurance, and personal possessions. Debts and liabilities are subtracted from the total value of all assets.

One thing that’s important to understand about estate planning is that it’s for everyone, not just the wealthy. Some estates are larger than others, however, everyone has one. And we all have one thing in common – we can’t take our assets with us when we die.

Why is estate planning important?

Estate planning is important because it gives you control over what happens to your assets when you pass away. You want to make sure that the assets you’ve worked hard to accumulate during your lifetime go to the people you care about the most. You also want to ensure that your assets are passed on in an orderly, tax-efficient manner. By clearly detailing your wishes in an estate plan, you can eliminate uncertainty in relation to what will happen to your assets in the future.

If you pass away without an estate plan, no one can really be sure of how you were planning to distribute your wealth. This means that the process of dividing up your assets could become complicated. Without an appropriate estate plan, your family may end up spending a substantial amount of time and money battling over your assets.

What are the benefits of estate planning?

Estate planning offers a number of benefits. Firstly, it provides peace of mind. With an estate plan in place, you can relax, knowing that your family will be taken care of if you pass away. Having an estate plan in place will also put your family at ease.

Secondly, estate planning can help minimise IHT liabilities. If not properly planned for, IHT can potentially cost family members a significant amount. In the UK, £5.4 billion was collected in IHT receipts in the 2018/2019 financial year. This was roughly 60% more than the amount collected five years earlier[2]. While this increase in receipts was partly the result of rising asset prices, it was also a result of people failing to put an adequate estate plan in place. By planning ahead, you can ensure more of your money and other assets are left to your beneficiaries instead.

In addition, estate planning can make the intergenerational wealth transfer process far more efficient. Without an estate plan in place, beneficiaries can face a complex probate. This is the process of dealing with the estate of someone who has died. The advantage of an estate plan is that it can minimise the expenses and delays that are associated with probate. Bear in mind that estate planning isn’t just about passing on your wealth when you’re no longer around. It’s also about thinking about your financial situation now so that you can make the most of life. You may prefer to gift assets to heirs while you’re still alive.

How estate planning works

At its core, estate planning involves making a plan in advance, and naming who assets should be distributed to after you die. However, a robust estate plan involves much more than that.

Some of the most important parts of the estate planning process are:

  • Writing a will. This is a legal document that lists how you would like your assets distributed in the event of your death. In most parts of the UK, a will needs to be formally witnessed and signed to make it legally valid. A will should be reviewed regularly in order to ensure that it’s still appropriate.
  • Making a Lasting Power of Attorney (LPA). This is a legal document that appoints one or more people to make decisions on your behalf. If you lose the mental capacity to manage your own finances in the future, an LPA will provide you with an element of protection.
  • Planning for IHT. This involves understanding the value of your assets and developing a plan to minimise IHT liabilities. Setting up trusts and gifting assets while you are still alive are two strategies that can potentially minimise IHT.

You can find more estate planning tips in this article here.

It’s also worth pointing out that estate planning is an ongoing process, not a one-time event. Your estate plan should be reviewed and updated as your financial situation changes over time.

In conclusion, estate planning is an integral part of wealth management. No one can predict what will happen in the future, however, an estate plan helps to ensure that those who are important to you will be taken care of. The earlier you begin the estate planning process, the more prepared you and your family will be.

To find out more or if you have any questions about estate planning, don’t hesitate to request a call back

Please note that any tax benefits will depend on your personal tax position and rules are subject to change. Rules can vary between different regions of the UK and we recommend speaking to a tax specialist for your regional rules.The value of investments can go down as well as up, and you may get back less than you invested.

[1] https://www.which.co.uk/news/2018/12/half-of-adults-dont-have-wills-but-what-happens-to-your-children-when-you-die/

[2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/832126/IHT_Commentary.pdf

 

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