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Three simple rules for planning your estate

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Tuesday February 4, 2014 at 10:00am
I speak to a lot of clients about their estate planning and it has struck me that the reason many seem disinterested is that the industry has created a perception that estate planning is all about saving Inheritance Tax. Instead what clients are interested in is understanding and being able to articulate what they want to happen when they die. Once we have decided this they want to ensure that it does then happen. Tax saving is always important but keeping wealth in the family and avoiding family disputes and unnecessary legal fees are seen as more important by many clients.

Rule number 1: Know your number and spend the rest

Your number, as I have discussed in previous blogs is the amount you need to save in order to live the rest of your life without working. This is the amount of money needed to fund the rest of your life assuming you have no income from going to work.

Once you know this number then any surplus income is not needed. Hence from a planning point of view, you have permission to spend it. If you can’t possibly do this, and many people can’t or don’t want to, then give it away. If you are going to give it away then do it via a loan from a trust. This is another topic I have written blogs about and it is a really important distinction.

If you live 7 years after you have given the money away, either directly to someone else or into a trust, then that money is outside your estate and so not chargeable to inheritance tax. Like most things in life there are some things you need to be aware of like there is a maximum of £325,000 you can give away each 7 years without triggering a 20% IHT charge. So take advice before you do anything big.

Rule Number 2: Even small estates benefit from estate planning

That’s right, even if your total assets net of liabilities are below £325,000 for a single person or £650,000 for a married couple then estate planning is still for you. Yes even though you are not going to pay any Inheritance Tax you can still improve on your situation.

By using trusts in your lifetime or on death in your Will you can safeguard your share of the house from being eaten up by long term care fees charged by the local authority. Likewise you can protect your estate from being passed outside your family. If once you are gone your spouse remarries then your wealth is available for a family other than yours. Many clients are rightly concerned that the consequences of our legal system do not come back to haunt their children.

Rule number 3: Plan your estate and get the outcome you want

As accountants we see what happens when clients do not leave clear and planned instructions on their death. Imagine a business with some value, used to provide income for the family and no protection should the main shareholder, who is also normally the main director, die. The result is confusion, lack of income and dispute over what is to happen and who does what. This is even more painful if one of the children works in the business and the remaining spouse wants all children to be treated equally and so they get a share of a business they don’t understand or work in or have any interest in.

I give this as an example of the myriad of problems that do arise through a failure to address the inevitable issue of death of a key business owner.

So my advice to clients is always, whilst you are of sound mind and still involved in the business make sure that you properly look after your family. Provide them with certainty through clear instructions that are properly thought out.

Provide them with security by leaving assets into trust and thus giving them the substantial security that the structure of a trust provides.

And finally don’t let them pay tax that you could easily have avoided if you had arranged your affairs properly in the first place.

Our first Estate Planning Seminar was held last Wednesday but we will be holding more in the future. If this is of interest please give me a call or email.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here