13 May 2021
by Scott Palmer, Chartered Financial Planner
This week represents Dying Matters Week, a campaign led by Hospice UK to promote awareness and support changing knowledge, attitudes and behaviours towards dying, death and bereavement. The campaign believes in an open culture that talks about death and encourages people to talk about their wishes towards the end of their lives. This often leads to thoughts on the financial aspects of life and how to plan for passing on wealth to the next generations.
While talking about death is not a pleasant conversation, planning for the distribution of your assets can give peace of mind over what happens after you pass away. A few simple decisions now can help you keep control of your assets and reduce stress for you and your loved ones later in life.
Failing to plan your estate carefully could cost you dearly. Most people understand the importance of this, yet according to law firm Withersworldwide, it is estimated that 60% of the UK population still think of estate planning as ‘too difficult’ and never create a Will. With Inheritance Tax charged at 40%, increasing property prices and general political and economic instability, planning the future has never been more important to ensure that those you leave behind are protected, both financially and otherwise. This will help to ensure:
Estate planning is different for every individual and the complexity will depend on the assets involved and the family make-up. Generally speaking, the main stages of estate planning involve:
A basic Will directs your assets to be passed to your chosen beneficiaries. However, there are multiple options available. You can use your Will to create Trusts, leave charitable legacies and to make gifts to any number of individuals you choose. The more complex your situation, the more important it is that you seek legal advice to ensure that your wishes can be carried out.
Power of Attorney
A Power of Attorney allows you to nominate a trusted relative or friend to make important decisions for you when you can no longer make them yourself. If you lose capacity and do not have a Power of Attorney in place, your family or carers will need to make an application to the Court of Protection. The Court will then appoint a ‘deputy’ to act in your interests. This means that important decisions over your care, medical treatment and financial management can be taken out of your hands resulting in delays, conflict and stress for everyone involved. While many put off these decisions until later life, the irony is that by the time you need a Power of Attorney, it will be too late to create one.
Gifting & Trusts
Younger generations now face a series of difficulties in building wealth. This is due to the combined impact of rising house prices, insecure employment and higher debt (including student debt).
University students making their first loan repayments in 2017 had an average outstanding student loan balance of £34,800. This was more than double the amount in 2012 (£17,000) and triple the amount in 2008 (£10,870) (Source: Student Loans Company and Department for Education Statistics publication - SLC SP 01/2018). When you also consider that house prices have increased by 259% in real terms over the last 30 years, whilst wages have only increased 68% during this time, it is easy to see why it is becoming difficult to get on the housing ladder and save for future retirement (Source: ONS, Housing affordability in England and Wales). According to an Investopedia article fromJune 2020, those in their 20s and 30s face the most uncertain economic future of perhaps any generation since the Great Depression.
This can give thought to annual gifts and lifetime gifting strategies as a way of helping to prepare younger family members for a better financial future. Not only are there tax benefits of doing this, it can also allow you to see them enjoy an inheritance whilst you are still alive.
As well as making direct gifts, Trusts can come into force during your lifetime or after your death. This will depend on the type of Trust and what you want to achieve. Trusts are complex and there can be tax consequences, so careful planning is required in this area.
Another consideration is your future health. The costs of adult social care can vary considerably according to the level of need. Estimates are difficult to obtain and long-term Government policy in this area is currently unknown. In 2010, the Dilnot Commission estimated 50% of people aged 65 and over will spend up to £20,000 on care costs, and that 10% would face costs of over £100,000. For those who can afford to have an estate planning strategy for their family, it is unlikely that the State or their Local Authority will be generous enough to support you with the full costs of any care you may need in later life. Therefore, before gifting is considered, you should try to safeguard against large care costs. Provision of £100,000 per person is a helpful benchmark and, if not required, can be passed to beneficiaries on death.
Finally, it is possible for some that a family business can be the centrepiece of intergenerational wealth transfer. This can raise complex tax, legal, and financial planning concerns. Another question may be which family members will continue to be part of the business and remain committed to its ongoing success? It is important to consider the business transition in light of overall estate planning goals, particularly if there are heirs who aren’t involved in the business.
It may feel overwhelming to consider all of these issues, especially if your assets or family situation are not straightforward. Each individual will have differing needs and there is no ‘one size fits all’ solution when considering how to deal with your finances later in life or pass on wealth to the next generations. Breaking it down into small steps or consulting a solicitor or professional adviser to help with the process can make it more manageable. In the end, it is important to have a plan in place.
No news or research content is a recommendation to deal. It is important to remember that the value of investments and the income from them can go down as well as up, so you could get back less than you invest. If you have any doubts about the suitability of any investment for your circumstances, you should contact your financial advisor.