Preserving and protecting your wealth

In life, we all want to retain the wealth we create for ourselves in our lifetime but also to plan ahead for the benefit of future generations. That’s when it becomes vital to consider estate planning in order to protect your accumulated wealth for future generations. Whilst the threat of Inheritance Tax (IHT) could be viewed as the most significant risk, additional issues such as divorce, bankruptcy and the cost of long-term care makes it even more important to think carefully about the financial future for you and your loved ones.

Through sensible and simple planning, it’s possible to protect and retain most, if not all, of your wealth. However, before you begin, there are some important issues to consider and include in your approach.

Establish how Inheritance Tax (IHT) might affect you

First, it’s vital you establish whether your estate is liable to Inheritance Tax (IHT).

The days are long gone when IHT could reasonably be regarded as a tax only for the very wealthy. Many of us still think that we are unlikely to be affected by it, but many of us would be wrong. The IHT threshold – officially known as the ‘nil rate band’ – currently stands at £325,000. Consider what your house is worth today. For many people, this alone is enough to exceed the threshold.

Married couples and civil partners can pass assets to each other without paying IHT, while they are alive or on their death. A fairly recent change of rules also allows them to transfer any unused portion of their nil rate band when they die. So it’s now possible for the surviving spouse or partner to leave assets of up to £650,000 before IHT becomes payable. (It’s important to remember that, under English and Welsh law, the full nil rate band of £650,000 is not available to unmarried couples.)

Make sure you have an up-to-date Will

Everyone should make a Will, as the effect of dying intestate (without a Will) can have significant financial impact on your loved ones. Under the rules on intestacy, assets are distributed according to a prescribed set of rules that are unlikely to reflect your intentions. For example, the rules do not recognise long-term partners and instead depend on factors such as the number of surviving relatives and their relationship to you. Additionally, if assets pass to your children and not your surviving spouse/ civil partner, this could result in Inheritance Tax (IHT) becoming payable sooner than necessary.

A properly drafted Will can help ensure your assets pass to those you intended, whilst also providing the opportunity to mitigate Inheritance Tax (IHT). As legislation evolves and personal circumstances change, it’s also essential you review your Will arrangements regularly.

Keep things simple for you and your beneficiaries

Although estate planning can involve many complex issues, simple solutions should not be ignored. Whatever your intentions for distributing wealth, it makes sense to involve your chosen beneficiaries in your planning and make sure they fully understand your plans.

Consider other threats to your wealth

Make sure you don’t lose sight of other threats such as the cost of long-term care, or the possibility of one of your beneficiaries divorcing or being declared bankrupt. By planning carefully, it’s possible to not only mitigate Inheritance Tax (IHT) but shelter assets from other risks to your family’s wealth. As explained within this briefing, an appropriately drafted Will and lifetime trusts can be effective solutions.

Be realistic about your finances

Making sure you have enough money to live comfortably must be your priority. Only then should you think about ways of preserving wealth for your beneficiaries. While estate planning is about keeping wealth in the family, it should never be at the expense of maintaining an acceptable lifestyle.

Fortunately, solutions exist that help you balance estate planning with your lifestyle needs.

Where gifting is not appropriate, investing in qualifying business assets can remove the value of these assets from you estate for Inheritance Tax (IHT) purposes after just two years, whilst retaining full ownership and control.

Keep your arrangements flexible

Nothing is certain in life. So make sure your arrangements can adapt to changes in your personal or financial circumstances, such as the addition or removal of beneficiaries, and future legislation or HMRC practice. Once more, it pays to ask some pertinent questions:

• Do you expect your family circumstances to change? For example, might your intended beneficiaries marry, divorce or have more children? Ensure your plans can accommodate these changes. Using discretionary trusts rather than absolute trusts enable you to accommodate new additions to the family, whilst also sheltering assets should a beneficiary divorce or be declared bankrupt.
• Do you anticipate needing access to a lump sum, or a regular income, at a future point?

It’s never too early to plan ahead

While some solutions, such as arranging life assurance held in trust to protect a future potential tax liability are effective immediately, others that rely on lifetime gifts only deliver their full benefit after seven years. As you age, your health deteriorates and the likelihood of surviving seven years reduces. These factors, coupled with difficulties securing life assurance in older age, mean it’s never too early to put your plans in place.

Avoid the pitfalls of estate planning

There are other potential threats to preserving your wealth and lifestyle:

• When planning with the family home, particular care is needed to ensure that you retain the right to live there. Although gifting your home direct to your children may, at face value, appear to be an option, legislation designed to prevent tax avoidance could result in you not achieving the Inheritance Tax (IHT) saving you were anticipating. Your children may also find themselves incurring the burden of paying Capital Gains Tax (CGT) when the house is eventually sold on your death.
• In addition, your children may also be able to sell your home during your lifetime without your consent. Equally, if your children were to subsequently divorce, or be declared bankrupt, your home may need to be sold as a direct result.
• In your efforts to mitigate Inheritance Tax (IHT), you may inadvertently trigger CGT.

Act now or pay later

There are many potential solutions for planning your estate. However, putting the right plans in place can be time-consuming and complex. That’s where expert advice can help, discussing the options and recommending the right approach for your particular needs. Whatever your circumstances, it’s wise to act now not later in order that you can be reassured in knowing that you have the plans in place to preserve and protect your wealth.

 * & ** Laing & Buisson, Care of Elderly People Report 2009
*** Telegraph.co.uk 18/7/10
**** The Insolvency Service