It's never too early...

It's never too early to start estate planning so you can leave more to those you love. Simon Wong provides clarity on some common pitfalls that you might be unaware of.

by Simon Wong

Senior Wealth Planner

This is a cry often heard from many walks of life and we all know it’s true: the sooner we get on and do it, the better.

Sorting out one’s personal finances is often one of those things we put to the side – wait for that rainy day when we really can’t think of anything else to do. But inevitably, something more important or interesting comes along because, let’s face it, looking at your pension arrangements or trying to find the best interest bearing bank account, is not the most exciting way to pass the time.

Thanks to the pandemic-induced change in most of our daily routines, many of us have more time on our hands and, with such seriousness as the pandemic making us all feel our mortality a little more, planning has never felt so sensible.

However, more often than not, when looking at our financial position, at the top of the list are the mortgage, banks accounts, outstanding loans including any car finance etc. Second might come our pension arrangements but somehow it is hard to spend too much time on something (retirement) that might be up to 20 years away!

The area that is often forgotten is estate planning.  Thinking about what will happen to our wealth after we’ve gone. The truth is, that as soon as we have got any assets, be that a house or a pension or children, we should start making plans, as it’s never too early.

We asked Simon Wong, a chartered wealth planner at JM Finn to look at some common pitfalls made when embarking on estate planning:

Assuming you’re too young for estate planning: Given the uncertainty of life, it’s advisable for you to go through the process of estate planning as soon as there are assets involved.

Writing your own Will: it is often tempting for people to write their own Wills to save on professional fees. There are, however, important formalities that need to be complied with and an incorrectly prepared Will may be invalid. If you die without a valid Will, then the rules of intestacy will decide how your estate will be shared out. This may lead to your chosen beneficiaries not receiving their inheritances or unnecessary inheritance tax (IHT) being paid.

Failing to update your Will: Estate planning is an ongoing process, especially when it comes to your Will. When you die, the Will is going to be the document that governs how your estate is distributed, even if it has not been updated to reflect current situations and relationships. It is crucial to ensure that the content of your Will is current, especially if key circumstances change.

Giving away assets: you are subject to inheritance tax on assets you own at your death and on assets given away within seven years. A logical solution may be to formally give away assets, such as artworks or jewellery or property. However, there is legislation in place so that giving away assets from which you can continue to benefit will normally result in either i) the assets remaining in your estate (Gift with Reservation of Benefit) or ii) a liability to pay an income tax charge on the value of the benefit (Pre-Owned Assets Charge).

There may also be capital gains tax consequences in disposing of assets unless relief is available to you. Common reliefs include spousal exemption, Private Residence Relief, holdover relief for qualifying categories/assets (e.g. business assets, unquoted shares, agricultural land, Chargeable transfers into a discretionary trust).

Giving away assets to avoid probate: you may plan to give away assets before death so that the intended beneficiary will not have to wait until probate before becoming entitled to it. If advice is not taken, a double tax whammy may be incurred, in the form of capital gains tax by you and IHT by your beneficiary.

Cheques cashed after death: one might assume that if you write a cheque, the gift would take effect immediately saving the beneficiary of having to wait for probate.  However, as soon as an individual's death is certified, their bank must be notified and the account is then frozen, leaving those holding cheques unable to cash them. 

Pensions subject to IHT: pensions are normally exempt from IHT, where the pension scheme trustees have discretion over the payment of benefits, subject to any expression of wishes you have. But, certain lump sum death benefits can form part of your estate for IHT where they are paid from buy-out plans (Section 32), retirement annuity contracts (Section 226) or a small number of occupational schemes.  This is because nobody has discretion over who should receive the benefits and they are paid directly to your estate. The death benefits from buyout plans and retirement annuity contracts may be removed from your estate by assigning them into a trust during your lifetime.

Withdrawals from pensions: As pensions are normally outside your estate for IHT purposes, you should consider using investments which are subject to IHT, such as ISAs and share portfolios, to fund your retirement first.

Writing off loans: any outstanding loans, even informal ones, will form part of your estate. The Inland Revenue will not consider that a loan has been forgiven, unless there is formal evidence of the intention. It is not enough for you to waive a debt verbally or by a letter; it must be done by way of a deed and formally witnessed. 

Simon Wong, Wealth Planner, JM Finn 

To learn more about estate planning, please contact us here.

The information provided in this article is of a general nature. It is not a substitute for specific advice with regard to your own circumstances.

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