4 essential estate planning principles

Estate planning very broadly involves maximising your wealth and then arranging your affairs to utilise that wealth to provide financial security for yourself and your family, in the manner of your choosing, while benefiting from as much tax saving as possible.

Here are five brief estate planning tips that you should be aware of:

1. ‘Don’t let the tax tail wag the dog’

While in pursuit of every possible tax saving obtainable, people sometimes forget that tax avoidance is only one aspect of estate planning.  The overriding objective when all is said and done, is often to secure the use of your wealth for your family’s benefit.  In order to achieve the best outcome for your loved ones, you might have to accept that payment of some tax is inevitable in order to secure what would prove best for your family from a practical and real-life point of view.  Ask yourself what really matters to you.

2.Consider your affairs in the round

Lifetime tax and estate planning means that you also have to consider your Will.  Your Will needs to take your lifetime planning into account to reduce the chances of additional tax becoming payable as a result of your death.  Obviously you do not want your beneficiaries to receive less than was intended simply because you did not make a suitable Will with a solicitor who is capable of understanding and giving effect to lifetime estate planning.

3. Remember that sharing wealth with your spouse is also good for tax reasons!

It is still beneficial for the wealth of married couples to be split between them.  While it is not necessary to make sure each of you have exactly the same level of wealth, making sure that there is some genuine equalisation is obviously safer for the ‘poorer’ spouse and provides the best scope for tax planning. Simple examples of sharing property to save tax are as follows:

If one party to a couple owns a second property in his or her own name, which might be sold, capital gains tax at the point of sale (if any) could be reduced as a result of the property being in the ownership of both spouses.  This works because each individual has an ‘annual exemption’ to set against any capital gains tax and the couple would be effectively able to use two annual exemptions instead of one.  The annual exemption for 2015/16 is £11,100.

For an example on income tax, if the same property above was rented out to produce income (which is taxed at higher rates than his or her spouse), it would be possible to transfer that property in some proportion that spouse in order for some of the rental income to be charged to income tax at his or her lower rates of income tax.

4. Take 5 to 10 minutes to think about whether either you or your spouse would end up in financial difficulties if one of you died. If so, when and why?

There are steps you can take to avoid unnecessary financial hardship if one of a couple dies.  It is possible to pay monthly premiums for the benefit of life assurance so that upon death of one spouse the other receives a lump sum payment from the insurer, which can be used for general living expenses, child-care or perhaps to pay off or pay down any mortgage on the family home.

It is also possible to pay monthly premiums for income payment protection.  If the main breadwinner is unwell, say, and unable to work, such a policy would typically kick in after a period of about 6 months, to pay a guaranteed monthly income to the family.  This could be set up to provide fully for income needs or to top up income needs as necessary, and would be paid by the insurance company until the main breadwinner recovers or becomes a certain age (typically 65 years). 

The financial products mentioned above should be arranged through a suitably experienced and independent financial advisor.  




Posted on January 19, 2016 in Knowledge

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