A key part of your estate plan is setting out how you’d like to pass on assets to loved ones. There’s more than one option to consider, so read on to find out more.
Your estate plan should consider how you’ll use your assets during your life and what you’d like to happen to them when you pass away. Last month, we explained what you may need to consider when taking stock of your estate and how the value of your assets may change during your lifetime. This is an important step to understanding your estate and who you’d like to benefit from it.
Now, read on to find out your options when you want to pass on assets.
A will is a common way to leave assets to loved ones when you pass away. It’s a legal document where you set out exactly how you’d like assets to be distributed.
There are several different ways you can pass on assets through your will. For instance, you may leave a proportion of your estate to each beneficiary, or you may choose to name specific assets you’d like them to receive.
Even if your affairs are straightforward, you should still take the time to write a will. Without a will, your assets will be passed on according to intestacy rules, which may not reflect your wishes. Not having a will could also lead to delays in the probate process and conflict among beneficiaries.
A trust can be a useful way to pass on wealth during your lifetime or when you pass away while retaining more control over the assets if you wish to.
A trustee that you choose will manage the assets placed in a trust on behalf of the beneficiary. You can set out how you want the trustee to use or distribute the assets.
You may create a trust for a child and state you want them to have the assets when they reach the age of 25. Or you can set up a trust to provide an income for loved ones without giving them control of the assets held in it.
Trusts may be right for your estate plan if you want the assets to be used in a specific way, or you want to ensure they remain within the family, for example, to protect assets being lost in a divorce.
Trusts can be complex, and you may not be able to reverse the decisions you make. So, taking both financial and legal advice before you proceed can be useful and ensure the trust acts in the way you want.
In some cases, you can use a trust to reduce a potential Inheritance Tax (IHT) bill, as, provided it meets certain conditions, the assets placed in a trust are no longer yours. You may need to consider IHT if the total value of your estate exceeds the nil-rate band, which is £325,000 for the 2023/24 tax year.
While leaving an inheritance is the traditional way to pass on wealth, gifting during your lifetime could be beneficial too. Not only could you lend loved ones financial support during key moments in their life, but it also means you get to see the impact of your gift.
According to a report from the Institute for Fiscal Studies, around 5% of adults receive a substantial gift over a two-year period. This rises to around 30% among adults in their 20s and early 30s.
The research found gifts are most commonly received to mark milestones, such as purchasing a home or getting married, or in response to an unexpected life event, including being widowed.
When making gifts, it’s essential you consider your own long-term financial security; could gifting mean you have to adjust your lifestyle later in life or that you couldn’t weather a financial shock? Reviewing your financial resilience first means you can feel confident when gifting.
If your estate could exceed IHT thresholds, it’s important to note that some gifts could be included in your estate for IHT purposes for up to seven years. These are known as “potentially exempt transfers”.
Some gifts are immediately outside of your estate when calculating IHT, so if you’re thinking about gifting to reduce a tax bill, making use of these could be valuable. Please contact us to talk about gifting and IHT to create a plan that’s tailored to you.
When you’re deciding how to pass on wealth, there’s no right or wrong answer. Your circumstances and priorities play a key role in what makes sense for you. Please contact us if you have any questions about passing on wealth and creating an estate plan you can rely on.
Read our blog next month to learn more about IHT and the steps you could take to reduce a potential tax bill and leave more to your family.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate tax planning or estate planning.