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What is estate planning and why is it important?

12 minute read

Learn what’s involved and why it’s important to have arrangements in place

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What is estate planning and why is it important?

Estate planning is a key part of managing your finances both during your lifetime and after your passing. But it’s more than just writing a will. 

Estate planning is about ensuring your assets are distributed as you wish, after you’ve gone, and securing your family’s financial future. In this article, we’ll explore the essentials of estate planning and its importance.

What is estate planning?

At its core, estate planning is an exercise in foresight and common sense. It involves making plans for the smooth transfer of your estate – your assets, liabilities and personal affairs – after your passing to your chosen beneficiaries while also addressing your healthcare wishes and providing for your dependents. 

Your estate includes everything you own, from your home and car to bank accounts, investments, life insurance, and personal belongings. Everyone has an estate, regardless of its size, and leaving behind a clear plan is crucial, otherwise the state will decide how to allocate your assets.

Key aspects of estate planning include:

  • Writing a will
  • Setting up trusts
  • Power of attorney

We will explore all of these in more detail below. But for now, remember estate planning isn’t just about preparing for the end of your life; it’s about organising your financial affairs so your goals and wishes are respected even when you can no longer voice them. 

While some aspects of estate planning can be undertaken independently, the complexities of financial laws and regulations often warrant professional advice.

Seeking guidance from a financial adviser can help ensure your estate plan is robust, compliant with current laws, and tailored to your unique circumstances. A financial adviser can also offer invaluable advice on structuring your estate to minimise tax liabilities and avoid potential disputes among beneficiaries.

The importance of estate planning

As mentioned above, estate planning is more than just a legal necessity; it’s a strategic step to ensure your assets are managed and distributed according to your wishes:

  • Control over asset distribution: Without an estate plan, your assets may be distributed according to standard legal protocols, which might not align with your personal wishes. Estate planning ensures your assets go exactly where you want them to.
  • Minimising taxes and legal complications: A well-structured estate plan can significantly reduce potential inheritance tax and other related costs. This means more of your estate goes to your beneficiaries and less to tax obligations.
  • Providing for your family’s future: By laying out clear instructions, you offer peace of mind to your family, knowing they won’t face legal hurdles or financial uncertainty during an already difficult time.
  • Addressing special circumstances: Whether it’s providing for a family member with special needs, ensuring care for minors, or even detailing your wishes regarding your own healthcare, estate planning covers these critical aspects.

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6 Key elements of estate planning

Estate planning involves several key components, each playing a vital role in ensuring your estate is managed and distributed according to your wishes:

1. Wills and Trusts

At the heart of estate planning lies wills and trusts. 

Wills

A will is a legal document outlining your wishes for how your assets should be distributed after your death. It allows you to appoint guardians for minor children, designate an executor to oversee the administration of your estate, express your funeral preferences, and even leave instructions for the care of pets. 

A will is essential for ensuring your assets are distributed according to your intentions, preventing the courts from making decisions on your behalf. Without a will, your assets are distributed according to standard legal protocols. Not to mention, having a clear and legally valid will can help prevent disputes among family members and ensure your wishes are respected.

Trusts

Trusts, on the other hand, are legal arrangements that hold assets for the benefit of designated beneficiaries. They offer a higher degree of control over how and when your assets are distributed. Unlike a will, which comes into effect only after your death, a trust can be used to manage your assets during your lifetime and beyond.

There are various types of trust for different purposes. For instance, a Discretionary Trust can be used to set aside assets for beneficiaries, like children or grandchildren, and gives the trustees the discretion over when and how to distribute these assets. This can be particularly beneficial for managing Inheritance Tax liabilities. 

Another example is a Protective Trust, often used to protect the interests of vulnerable beneficiaries, such as those who may not be able to manage their finances themselves.

Trusts can also be useful in more complex family situations, such as blended families, or in cases where you want to provide for a beneficiary but have concerns about their ability to manage a lump sum inheritance. 

2. Beneficiary designations

An often overlooked aspect of estate planning involves beneficiary designations. These are specific instructions that you attach to certain assets, outlining who will inherit them upon your death. Common assets typically include retirement accounts (like pensions or Individual Savings Accounts), life insurance policies, and certain types of bank accounts.

Unlike assets covered in a will, assets with beneficiary designations are transferred directly to the named individuals, bypassing the probate process. This makes the transfer quicker and can also provide tax advantages in some cases.

It’s important you regularly review and update beneficiary designations to ensure they align with your current wishes and adapt to any changes in your family circumstances. One thing to bear in mind when designating beneficiaries: do try and coordinate them with your overall estate plan. 

For instance, if your will states one thing but your life insurance policy beneficiary designation says another, it can lead to confusion and potential legal disputes among your heirs.

3. Power of attorney

This allows you to appoint someone you trust to make decisions on your behalf in the event you become unable to do so. There are two types of power of attorney: one for health and welfare decisions, and another for financial decisions. Each plays an important role in managing your affairs according to your preferences:

  1. Lasting power of attorney for health and welfare: A power of attorney for healthcare is a legal document that grants authority to a designated individual to make medical decisions on your behalf if you become unable to do so yourself. This trusted individual, known as a healthcare proxy, will act as your voice in making decisions about your medical treatment, ensuring your wishes are respected.
  2. Lasting power of attorney for property and financial affairs: A power of attorney for property is a legal document that empowers a designated individual to manage your financial affairs if you become incapacitated. This individual, known as a financial proxy, will have authority to handle your finances, pay bills, and make financial decisions on your behalf, ensuring your financial obligations are met and your assets are protected.

4. Executor and guardianship nominations

An executor is an individual appointed in your will to oversee the administration of your estate after your death. If you have children, appointing a guardian in your will can ensure their care in your absence.

Executor nomination

The executor’s responsibilities include:

  • Locating and gathering your assets
  • Paying off your debts and taxes
  • Distributing your assets to your beneficiaries according to your will
  • Maintaining records and preparing tax returns

Choosing a responsible and trustworthy executor will help ensure the smooth and efficient administration of your estate.

Guardianship nomination

A guardian will be the main person looking after your children, in the event of your death. The guardian will be responsible for providing for your children’s physical, emotional, and educational needs until they reach legal adulthood. When selecting a guardian, take into account factors such as age, values, parenting style, and proximity to your children.

5. Healthcare directives

Also known as living wills, these directives specify your wishes regarding medical treatment for end-of-life care if you’re unable to communicate them yourself. They provide clarity and guidance to healthcare professionals and your family about the medical treatments you do or do not want to receive, ensuring your medical care aligns with your values and beliefs.

6. Tax planning

Tax planning is an integral part of estate planning as it involves strategies to minimise the tax burden on your heirs. Effective tax planning is about striking a balance between complying with legal obligations and maximising the value of your estate for your beneficiaries. Tax planning can involve a range of strategies and considerations including:

  • Utilising tax-efficient gifting strategies: One way to reduce your estate’s tax liability is through gifting. The UK tax system allows for certain gifts to be made tax-free. Understanding these rules can mean you pass on parts of your estate to your heirs while you are still alive, potentially reducing Inheritance Tax liabilities.
  • Establishing trusts: As mentioned above, trusts can be a powerful tool in tax planning. By placing assets into a trust, you might be able to shelter them from certain taxes, including Inheritance Tax, depending on the type of trust and how it’s structured. Trusts can also provide a level of control over how and when your assets are distributed, which can further aid in tax-efficient estate planning.
  • Taking advantage of tax deductions and exemptions: Finally, the UK tax system offers various deductions and exemptions that can be beneficial in estate planning. For instance, estates left to a spouse or civil partner are usually exempt from Inheritance Tax. Similarly, gifts to charities are both Inheritance Tax-free and can reduce the Inheritance Tax rate on the rest of your estate. Being aware of and effectively utilising these can significantly reduce the tax burden on your estate.

Do keep in mind tax laws and regulations can and do change, as can your financial situation. A financial adviser can provide bespoke guidance, ensuring your estate planning strategies are not only compliant with current legislation. but are also optimised to reduce your estate’s tax liability.

Estate planning across different life stages

Estate planning isn’t a one-time task but a continuous process that should evolve as you move through different stages of life. And the approach you take to it can vary significantly depending on your age, family dynamics, and financial situation, for example:

Young professionals and families

For those just starting their careers or families, estate planning might seem premature. It’s easy to think of it as something for the future, but the best time to start is now. The sooner you have a plan in place, the sooner you’ll have peace of mind. Now is the ideal time to write a will and nominate guardians for young children. It’s also a good time to begin thinking about life insurance and setting up trusts for your children’s future.

Mid-life considerations

Life events such as marriage, divorce, the birth of children, or significant changes in financial circumstances necessitate a review and adaptation of your estate plan. This could mean updating your will, reviewing your life insurance coverage, and considering how to best protect your assets from potential long-term care costs.

Preparing for retirement and beyond

As you approach retirement, estate planning now becomes increasingly focused on ensuring your assets are preserved and passed on efficiently. This includes planning for potential Inheritance Tax liabilities. 

Failure to plan for this can result in a significant portion of your estate going to tax payments instead of your beneficiaries, setting up lasting powers of attorney, and making sure your pension arrangements are in line with your estate planning goals.

While DIY estate planning resources are available, they often cannot match the tailored advice that a professional can offer. Regardless of your life stage, a financial adviser can provide guidance specific to your situation, ensuring your estate plan stays relevant and effective, providing peace of mind that your wishes will be honoured and your family will be looked after.

Risks associated with estate planning

Having said all that, like everything in life, estate planning does have certain risks associated with it, particularly if it’s not approached carefully. Understanding these risks will help ensure your estate plan achieves its intended goals:

  • Legal complexities and errors: Estate planning involves navigating complex legal frameworks. Errors in documentation or a lack of understanding of legal requirements can lead to disputes or your wishes not being carried out as intended.
  • Tax implications: Failing to consider the impact of taxes, especially Inheritance Tax, can significantly reduce the value of the estate passed on to your beneficiaries. An ineffective tax planning strategy within your estate plan can lead to unintended financial burdens.
  • Family disputes: Without clear, legally sound instructions, estate planning can sometimes lead to family disputes. This is particularly true in cases of blended families or when significant assets are involved. Clear communication and professional drafting of documents are vital in mitigating this risk.
  • Changes in legislation: The legal landscape, including tax laws and estate planning regulations, can change. Plans that were effective at the time of creation might become less so if they are not reviewed and updated in line with new legislation.
  • Inadequate provision for dependents: Failing to adequately plan for the care and financial support of dependents, especially minors or family members with special needs, can lead to challenges in guardianship and financial management after you’re gone.

Starting your estate planning journey

Embarking on your estate planning journey can seem daunting, but with the right steps and guidance, it will become a manageable and essential part of your financial well-being. 

Here’s how to get started:

  1. Seek professional advice: The first step is to consult a financial adviser specialising in estate planning. At The Wealth Point, for example, we can provide tailored advice based on your unique circumstances, family dynamics, and financial situation.
  2. Gather and organise your documents: Compile a list of your assets, including property, investments, insurance policies, and any valuable personal possessions. Also, consider your debts and liabilities, as these will need to be addressed in your estate plan.
  3. Consider your beneficiaries and your wishes: Think about who you want to inherit your assets and in what proportions. Also, consider any specific wishes you have regarding the distribution of your estate.
  4. Think about guardianship and power of attorney: If you have children or dependents, decide on their guardianship. Additionally, consider who you would trust to manage your affairs if you became incapacitated.
  5. Review and update regularly: Once your estate plan is in place, review it regularly and especially after major life events e.g. divorce, death, marriage, births. This helps ensure your plan always reflects your current wishes and circumstances.

Starting your estate planning journey with these steps will put you on the path to ensuring your assets are managed and distributed as you wish, providing peace of mind for both you and your family.

Estate planning with TheWealthPoint

While it’s possible to draft an estate plan yourself, consulting a financial adviser will ensure your estate plan is comprehensive, legally sound, and tailored to your unique circumstances and goals, especially if you have diverse assets or complex family dynamics. 

Ready to start planning?

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FAQs

Is power of attorney more powerful than next of kin?

Yes, having a power of attorney in place is more powerful than being someone’s next of kin. Contrary to popular belief, being someone’s next of kin does not legally entitle you to make decisions regarding their health or finances by default. Being next of kin tends to mean that you are legally allowed to receive information about an individual, provided they have named you and given consent. This does not give you any legal power to make decisions on behalf of the person; a power of attorney must be arranged for this to happen.

Who can overrule a power of attorney?

The Office of Public Guardian can choose to remove an attorney if they have evidence to do so once they have conducted an investigation into their actions. This can happen in cases in which the OPG has sufficient reason to believe the attorney is abusing their position or does not act in the best interests of the donor.

How much does estate planning cost in the UK?

The cost of estate planning in the UK will vary depending on what steps you choose to take and who you choose to work with. Will writing can vary in the hundreds and arranging power of attorney will generally depend on how many individuals you are appointing. We charge ÂŁ750 for the writing of a basic will and two powers of attorney and ÂŁ1,250 for a couple.


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