What are the things you need to think about when it comes to estate planning?
Make a Will
This should be obvious but it’s important. If you don’t make a will, then your estate will be distributed according to the laws of intestacy, which means there’s a set way that the money is dished out and it might not be what you would prefer. There are such glaringly obvious benefits to making a will, why do so many people never get round to it?
Because they don’t like thinking about what happens after they die, which, while understandable, is a mark of financial immaturity. I tend to put it a bit more kindly when I’m talking to my clients one-on-one, but here on the podcast and in the blogs, I’m just going to tell you to grow up and make a will before it’s too late. If there’s one thing the Coronavirus crisis has taught us, is that nothing can be taken for granted, and certainly there’s no guarantee of a long life.
Wills are also a useful planning tool. If you want to give to some charities you can do so in your will easily enough and there will be no inheritance tax on any gifts to charity. Plus if you give 10% of your estate to charity, any IHT on the remainder is reduced to 36% too.
For most of us, our will doesn’t need to be complicated. A great place to start is with Farewill. I interviewed their CEO a while back and he was superb. Farewill are totally disrupting the ‘death industry’ as they call it and do quite a bit more than wills.
ACTION POINT: For a 20% discount off their already low prices for an online will, go to Farewill.com/meaningful20. While you’re at it, talk to them about Lasting Powers of Attorney, which I’m not dealing with in depth here because I’ve done that before.
Make a WID File
A WID file is a ‘When I die’ file. Cheery, huh? The idea came from a client who told me she’d made a SID file and that my business card was at the front of it. She’d told her kids to call me and I’d sort everything out for them. SID stands for Should I Die, but I had to remind her that it’s not a case of if but when! It’s amazing I have ANY clients really…!
So, a WID file it is, and it’s basically a one-stop shop for everything that needs sorting when you’re no longer around. It should contain your will and any funeral instructions of course. A list of all your bank account, insurance policies, monthly direct debits, investments, pensions and everything else financial would also be really helpful. Your gift register should go in there if you have one.
ACTION POINT: Make a WID file and let your nearest and dearest know where you keep it. Keep it up to date if anything changes.
Consider Trusts, but Only if Absolutely Necessary
Trusts are a complex area of financial planning, though they are much more common than they were when I started practising back in 1998, I’d say, though I have no evidence for that! A trust is a mechanism for ring-fencing money for a given purpose. It allows you to direct how money is used, who can benefit and in what circumstances.
Which all sounds great, but there is a downside. A trust is its own entity for tax, and the tax rates for a trust are broadly the equivalent of an additional rate taxpayer, so 45% on income, 38.1% on dividends, all that stuff.
Plus there are potential inheritance tax implications too if you make significant gifts into trusts during your lifetime. And you can even turn the 7-year rule into a 14-year rule if you mess up the timing and interaction of different kinds of gifts.
All this is to say that if your estate is in a position where trusts are likely to be of benefit, then you’re probably getting comprehensive legal and financial advice anyway. Which is good, because setting up trusts is not something you want to do off the back of some comments on a podcast.
No action point here, just an exhortation to tread carefully with trusts. If you want to know more, I have a comprehensive video series that looks at them in more detail. Find part one here, part two here and part three here.
A thought provoking series, thanks.
Much to consider.