How to plan your estate

The benefits of estate planning and why everyone needs an estate plan


What is estate planning?

The aim of estate planning is to make sure that after you die everything you own is passed on according to your wishes, in a tax efficient way, with the minimum of fuss.

Your estate is made up of any assets you own, and can include:

  • Cash
  • Savings
  • Property
  • Investments
  • Possessions and valuables
  • Insurance polices.

An estate plan covers how your estate is managed and how your assets are transferred. It can also provide instructions for what should happen if you become incapable of handling your own affairs, prior to your death.

Leaving your affairs unattended can cause further distress for loved ones at an already difficult time. That's why it's important to put a plan in place for what happens in the event of your death.

There's no specific age at which you should start estate planning, but many advisers suggest starting as soon as you reach adulthood. You would then revisit your plan every few years to be certain it remains up to date.

Why is estate planning important?

Estate planning can help make sure your loved ones are looked after when you've gone. As such, it shouldn't be ignored. Despite the complexities involved in putting a plan together, it offers various advantages.

The benefits of estate planning

Benefits include:

  • Working out the value of your estate
  • Making sure your estate is divided up as intended
  • Minimising the amount of Inheritance Tax your loved ones might have to pay
  • Ensuring a quicker transferral of assets when you die
  • Making sure all your affairs are in order and (in most cases) nothing is left for either chance or the courts to decide.

How to plan your estate

Estate planning involves a series of steps. The key ones with regards to financial matters are as follows. Depending on your circumstances, you may wish to consider some or all of these when making plans for your own estate.

1. Make a will

Perhaps one of the most important aspects of estate planning is writing a will. Sometimes called a last will and testament, this is a legally binding document expressing your final wishes regarding your estate and its assets.

In a will, you name the person or persons, organisations, or charities you want to leave the various parts of your estate to. You also name an executor, who is responsible for handling the estate and seeing that the instructions within the will are followed.

Without a valid will, distribution of your assets becomes subject to the rules of intestacy.

These rules dictate who receives what, with legal spouses and civil partners first in line (even if separated at the time of death), followed by children, grandchildren, siblings and so on. It can sometimes mean that all or part of your estate doesn't pass to those you intended. 

To ensure this doesn't happen, you should make a valid will as part of your estate planning process.

2. Consider a lasting power of attorney (LPA)

Although no longer relevant once you've died, a lasting power of attorney is a vital consideration when planning your estate. It allows you to appoint an 'attorney' or 'attorneys', typically a member of your own family, who will then have the power to either help you make decisions, or make them on your behalf.

This is in the event of you becoming physically or mentally incapable of handling your own affairs.

There are two types of LPA, but for the purposes of estate planning, the property and financial affairs lasting power of attorney is the more relevant. This gives the named attorney the power to make any financial and property-related decisions on your behalf.

Once registered, this LPA can be used immediately, if you give your permission. Otherwise, it only becomes active if you can no longer make your own decisions.

3. Minimise your Inheritance Tax (IHT) liability

Following your death, your estate becomes liable for Inheritance Tax. The current IHT charge is 40% and is payable on everything over a £325,000 threshold, with an additional £175,000 available if you own a property. The exception is where the beneficiary is a spouse or civil partner, who are exempt from the tax.

If your estate exceeds the basic £325,000 threshold and you intend to leave all or some of it to anybody other than a spouse or civil partner, there are ways in which you can mitigate the amount of IHT your loved ones have to pay.

From gifts to trusts, you can find out more about reducing the Inheritance Tax liability for your loved ones in our Guide to Inheritance Tax planning.

Please bear in mind that advice in relation to inheritance tax planning is not regulated by the Financial Conduct Authority.

Tax treatment depends on your individual circumstances and may be subject to change in future.

4. Set up a trust

Whether looking to reduce the Inheritance Tax bill for your loved ones, or holding assets until a child or grandchild is old enough to manage them responsibly, a trust can be a beneficial part of estate planning.

A trust is a legal contract, which names a 'trustee' (person, persons or a company) to look after assets on behalf of a beneficiary named in a will or trust deed. Depending on the type of trust you choose, the assets may be inherited upon your death, managed indefinitely by the trustee (for instance, if the beneficiary is a vulnerable person), or transferred when a certain condition is met (i.e. a child reaches adulthood).

Whichever type of trust you choose, the assets will be kept solely for the beneficiary and can't be divested, sold or spent by anybody else.

As you give up ownership of the assets when setting up a trust, they are no longer part of your estate. This is the basic principle of how trusts can be used to lower an Inheritance Tax bill.

Setting up a trust can be a complex process though, especially with regards to Inheritance Tax. Speaking to a financial adviser beforehand can help you ensure that a trust is the right option for you.

Why everyone needs an estate plan

Making sure your wishes are met, when you're no longer here to express them, can reduce needless complications for your loved ones. An estate plan can help to do this, as well as ensure they are taken care of as intended.

Why you need an estate plan:

  • You're the one making the key decisions about your assets, not the courts
  • You can reduce Inheritance Tax, where possible
  • Your chosen executor will oversee your estate
  • You have control over who makes your financial decisions if you are no longer capable.

Can I do my own estate planning?

It might be tempting to arrange your own estate plan, but it's not a simple process. An estate plan is more than just a series of steps written down on paper. It's made up of various legal documents, such as the will and trusts. The complexities of these documents mean that without professional help, mistakes are easily made.

A financial adviser or a solicitor is best placed to help you with your estate planning, ensuring that it meets both your needs and the necessary legal requirements.

You might be interested in…

Are ISAs subject to IHT?

Find out if Inheritance Tax is payable on ISAs, including contributions paid into a Junior ISA.

Financial advice

Discover ways you could meet your financial goals, including IHT planning, by speaking to a Specialist Financial Adviser from Wesleyan Financial Services.