Estate Planning mistakes to avoid

You’ve worked hard, built a career, maybe set up and managed a successful business. As a result, you’ve accumulated a portfolio of savings, investments, and assets over the years. You’re all set for a happy and stress-free retirement; you may be looking forward to spending more time with your family, taking extended holidays to far-flung places, starting a new adventure, or simply sitting back and enjoying the good life without the usual routine of work.

Even though money gives you the chance to do the things you’ve always wanted to do, it can also sometimes be a burden. The more you have, the more challenging it can be to manage, which is why we’d recommend having a solid, trustworthy financial planning team alongside you.

If you’re hoping to leave money to the next generation, a good financial planner can help you make informed decisions. It’s the best way to make sure your money goes where you intend it to go, and your beneficiaries aren’t facing an unexpected tax bill.

With that in mind, here are some of the most common mistakes people make when planning their estate.

As soon as you have a family, make a Will and review it regularly to keep it updated. A Will allows you to leave detailed instructions about who you want to inherit your estate, when and in what proportion. If you die without a Will, then the distribution of your estate will be defined by the rules of intestacy, which has significant administrative and financial ramifications. Did you know that if you’re unmarried, your partner will not automatically inherit your estate? Or, if you remarried, any children from a previous marriage may be disinherited?

At the same time as making a Will, you should also consider setting up Lasting Powers of Attorney and put guardians in place if you become unable to manage your own financial affairs.

The rules around tax, savings and inheritance are constantly changing. Unless you have the time and the inclination, it’s unlikely you will keep up with all of them. To add to the complication, wealthier individuals often hold assets in more than one country. If that’s you, you will need to pay close attention to the rules around residency and domicile, and how this might impact your estate.

On death, as in life, no one wants to pay more tax than they need to. Inheritance tax (IHT) is a big money earner for the government; according to the OBR, in 2019-20 IHT raised £5.1 billion¹. 

IHT is normally 40 per cent on the value of an estate above a threshold of £325,000. Any unused threshold may be transferred to a surviving spouse or civil partner, increasing their combined threshold to up to £650,000. If you leave your home to your children, there’s an additional transferable main residence nil rate band of £175,000 (£350k per couple). If you have assets already in excess of the nil-rate band, any excess could be liable to IHT. And if your estate exceeds £2m, you will also start to lose entitlement to the residence nil rate band.

There are a number of ways of reducing your IHT, and a financial planner will be able to advise which ones are most appropriate for you. For instance:

With all that said and done, don’t become so obsessed with minimising IHT (or any other tax) that it conflicts with your wider investment strategy. A sound financial plan will give you the best of both worlds.