What do you need to consider when planning your legacy?

If leaving your loved ones a legacy is important to you, effective estate planning can help. There are many different areas to consider, and it can seem a daunting task. After all, no one wants to think about leaving those we care about behind. However, taking steps to ensure your estate is in order and wishes are known can give you peace of mind and provide security for your beneficiaries.

The best steps to take when estate planning will depend on your personal goals, but there are some key questions that can help set you on the right path.

1. What is the value of your estate?

Deciding how to divide up your estate will be difficult without knowing its full value.

Your estate covers all your assets, from money that’s easily accessible in a current account to investments and property, as well as material possessions. It can take some time to understand the full value of your estate, but it’s a worthwhile task.

It’s important to note that your pension can also be used to pass on wealth to a loved one. For some, it can be a tax-efficient way to leave an inheritance to those you care about, as it’s may be exempt from Inheritance Tax (IHT).

It’s also crucial to keep in mind that the value of your assets can change over time.

2. Is gifting some of your wealth now something you’re interested in?

Depending on your financial situation, gifting wealth now could provide an attractive option that benefits both you and your loved ones.

Doing so means you get to see the joy and financial security that your wealth can bring to those you care about. For many of the younger generation, an inheritance will come too late to help them achieve milestones, gifting is an alternative.

If you do decide to gift wealth, you should be aware of the gifting rules. Some gifts, including a monetary gift up to £3,000 annually and gifts paid from your income, are immediately outside of your estate for IHT purposes. Other gifts are considered potentially exempt from IHT. If you die within seven years of a gift being given, it may be liable for IHT.

You’ll also need to think about how gifting could affect your financial situation. Would taking a lump sum out of your estate now affect your income over the long term? Financial planning can help you answer this question and weigh up the short, medium and long-term implications of gifting.

3. Who do you want to benefit from your estate?

With an idea of the value of your estate and whether you’ll support loved ones now, it’s time to think about who you want to benefit from your estate when you’re gone.

Once you have a list of beneficiaries, the next step is to decide how your estate will be divided. There are several different options here. You could, for example, leave fixed lump sums to loved ones, known as a pecuniary bequest. You can also choose to leave a portion of your entire estate to a beneficiary; a residuary bequest would leave a percentage of your estate once debts, liabilities and other costs have been settled.

4. Is your will up to date?

Without a will, none of the above would matter. If you die without having a will in place, your assets are distributed according to Intestacy Rules. For many people, the Intestacy Rules don’t align with their exact wishes.

The only way to ensure that your planned legacy is carried out is to have a will in place.

Around 60% of adults don’t have a will, leaving them at risk of their estate being distributed in a way that doesn’t match their wishes. Even if you already have a will, it’s worth reviewing it. Over time, your wishes and the value of your estate can change significantly, and your will should reflect this. It’s recommended that you review your will every five years and following big life events.

While you’re updating your will, naming a Power of Attorney is also an important step to take. A Power of Attorney gives someone you trust the ability to make decisions on your behalf should you no longer be in a position to do so.

5. Is your estate likely to be liable for Inheritance Tax?

Only around one in 20 estates in the UK pay IHT. However, the amount collected by HMRC is increasing.

The current Nil-Rate Band for IHT is £325,000. If the value of your estate is less than this, no IHT is due. The additional Residence Nil-Rate Band can also be used if you’re leaving your main home to children or grandchildren. This can increase the amount you’re able to leave without incurring IHT to £475,000, rising to £500,000 in April 2020.

The IHT threshold has remained unchanged for several years. This, combined with rising property prices, means it’s possible that your estate could be liable for IHT without you being aware.

If you’d like advice when estate planning and are thinking about how you’ll pass your estate on to the next generation, please contact us.

Please note: The Financial Conduct Authority does not regulate Inheritance Tax Planning. Levels of and reliefs from taxation may be subject to change and their value depends on your individual circumstances.

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