What is Estate Planning All About?

Writing a Will and estate planning go hand-in-hand. But what exactly is estate planning all about and why is it something that requires thought and attention? Let’s find out.

What is an Estate?

Estate and inheritance tax planning is something many people feel doesn’t apply to them. In reality, an ‘estate’ is everything you own including your house, your possessions, your bank accounts, pension, insurance policies, your car, jewellery, artwork, heirlooms and so on. Every asset you own, when put together, becomes your estate. So, estate planning is relevant to virtually everyone.

What is Estate Planning?

You can’t take your estate with you when you die. Therefore, it’s important to control who your assets go to when you pass away, be it friends and family or an organisation/charity you feel passionately about.  To ensure your wishes are carried out, you need to provide detailed instructions stating who you want to receive assets, what you want them to receive and when you want to receive them. This is called estate planning and will ensure you have the final say beyond the grave. A lack of a Will and a lack of estate planning can result in your assets being divided up according to the law, which might not be to your preferences.

Estate Planning and Inheritance Tax

Estate planning also involves dividing up your assets with the least amount paid legal fees court costs and taxes – especially inheritance tax. Currently, you don’t need to pay any inheritance tax (IHT) on the first £325,000 of your estate. This is referred to as the nil-rate band. However, IHT is paid at a rate of 40% on the proportion of your estate valued above the nil-rate band.

If you leave your property to your child or grandchild, the tax-free threshold increases to £450,000. This also applies to stepchildren, adopted children or foster children and is called the residence nil-rate band. It’s a complicated area and should be discussed with a qualified professional. There’s no IHT to pay if you leave your whole estate to your spouse or civil partner. Again, seek legal advice for case by case clarity.  Gifts to charity are completely exempt from IHT and if your estate is liable for IHT and you leave 10% or more of it to charity, then a reduced IHT rate may be applicable to the rest of your estate.

Other Ways to Avoid Inheritance Tax

Avoiding Inheritance Tax means having an airtight private wealth management and estate planning strategy. Other things you can do include gifting friends and relatives before you die so that the overall amount of assets you leave behind is below the £325,000 threshold. You are permitted to give cash gifts of up to £3,000 a year, so estate planning in advance is a must. You might also choose to set up a trust fund for your children as these are completely exempt from inheritance tax.

Estate planning will help you to legally avoid taxation while ensuring your loved ones can benefit from your estate.