When we talk about safeguarding our future and the legacy we leave behind, Will and Estate Planning hold immense significance. Dealing with such matters can be daunting, often making people defer these decisions.
However, an effective estate plan minimises potential familial disputes, stress for your loved ones and can optimise tax savings. With that said, let’s look deeper into the ten common estate planning mistakes frequently made in the UK.
1 – Failing to Make a Will
Creating a Will forms the cornerstone of estate planning. It’s a legally binding document that describes how you wish your assets to be distributed and the person responsible for administering your estate. Imagine a scenario where a person passes away intestate, leaving behind a partner and their respective stepchildren.
According to UK intestacy laws, the stepchildren wouldn’t inherit anything despite being loved as much as biological children. To make matters worse, your partner might have to share the inheritance with other family members. In such a case, the bereaved partner might find it challenging to maintain the standard of living they were accustomed to. Therefore, the importance of Wills and Estate Planning extends beyond just financial security; it’s about protecting relationships and circumventing potential familial disputes.
2 – Postponing Powers of Attorney
Creating a Power of Attorney enables you to appoint a trusted person to make crucial decisions on your behalf if you’re incapacitated. This involves property, finances, medical treatment, and end-of-life care decisions. Let’s consider a case where a person suffers a sudden debilitating stroke without appointing an attorney. The Court would have to nominate someone, a process that could take months.
During this time, pressing financial matters might be left unattended, or worse; vital health decisions could be delayed, potentially worsening the individual’s health status. Thus, the establishment of a Power of Attorney not only prepares for unforeseen circumstances but also ensures continuity in managing your affairs.
3 – Neglecting to Make Lifetime Gifts
The Inheritance Tax (IHT) imposed on your estate value after death can be pretty substantial, claiming 40% of the estate value exceeding the nil rate band (£325,000 for individuals or £650,000 for married couples).
To better illustrate this, let’s take a hypothetical person with an estate worth £1 million. If they pass away without making any lifetime gifts, the IHT payable on their estate would be a staggering £270,000. However, if they had gifted £150,000 during their lifetime, the IHT would be reduced to a more manageable £190,000. This example emphasises the importance of lifetime gifts as an effective strategy for tax optimisation.
4 – Overgiving
While lifetime gifting can reduce the IHT, you must balance generosity with financial stability. Suppose you give away most of your assets early in life, aiming to reduce your IHT, but later require expensive long-term care. You may struggle to cover these costs, negatively affecting your quality of life.
Overgiving could also reduce your financial flexibility and independence. Thus, it’s crucial to consider your potential future needs before making significant lifetime gifts.
5 – Misusing Trusts
Trusts are an excellent way to set aside assets for your beneficiaries without relinquishing complete control. However, achieving the correct balance between tax efficiency and flexibility can be challenging.
For example, suppose you own a life insurance policy worth £500,000 and don’t place it in a trust. In that case, the policy payout forms part of your estate, potentially increasing your IHT liability. However, put the same policy into a trust. The payout doesn’t form part of your estate, and IHT liability would not increase. This underlines how trust planning can help maximise the value of your assets for your beneficiaries.
6 – Not Updating Your Will
Keeping your Will updated is another essential aspect of estate planning. Significant life events like marriage, divorce, the birth of a child, or a death in the family can significantly impact the distribution of your assets.
For example, if you’ve written a Will, then later divorce and remarry without updating it, your ex-spouse might still benefit from your assets. Your current spouse, unaware of the outdated Will, might face financial hardship after your demise. This underlines the importance of keeping your Will updated to ensure it reflects your current life circumstances and wishes.
7 – Overlooking the Probate Process
Understanding the UK’s probate process — a legal procedure validating your Will and ensuring your estate’s distribution according to your wishes — can ease the burden on your loved ones. Not understanding this process can cause unnecessary delays, adding to the beneficiaries’ emotional and financial strain.
For example, the estate’s distribution may be delayed if there are issues verifying the Will’s authenticity. In such cases, beneficiaries might face financial uncertainty and emotional stress during a time of grief, emphasising the need for understanding the probate process.
8 – Insufficient Asset Protection
Proper asset protection shields your wealth from potential claims by creditors or lawsuits. Suppose you’re a physician facing a malpractice lawsuit. If your assets haven’t been appropriately protected, your personal wealth might be at risk of being seized to settle the claim.
In contrast, an asset protection strategy could safeguard your personal wealth and ensure your family’s financial security, even in the face of such lawsuits.
9 – Ignoring Beneficiary Designations
Insurance policies and retirement accounts generally pass directly to named beneficiaries, bypassing your Will. Therefore, your beneficiary designations must align with your current wishes and overall estate planning goals.
For instance, if you fail to update your beneficiary after a divorce, your ex-spouse could receive your retirement funds, potentially leaving your current spouse or children without this financial resource.
10 – Not Consulting a Professional
The complexities of UK estate law often warrant the advice of a professional. A qualified estate planning solicitor or financial advisor can help you navigate the myriad rules and regulations, ensuring your estate plan aligns with your specific wishes.
Suppose an individual with a significant property portfolio tries to manage their estate planning independently, overlooking various aspects such as Capital Gains Tax and Stamp Duty Land Tax implications. They might leave their heirs with hefty tax bills that could have been minimised with professional guidance. Engaging an expert in Wills and Estate Planning can prevent missteps, helping you create a tailored, tax-efficient plan that benefits your beneficiaries.
Will and Estate planning is not a subject to be taken lightly or ignored until the last minute. The consequences of not making a Will, postponing powers of attorney, neglecting to make lifetime gifts, overgiving, misusing trusts, failing to update your Will, overlooking the probate process, providing insufficient asset protection, ignoring beneficiary designations, or not seeking professional advice can be pretty dire. The examples provided in each section of this article underline the necessity of proper estate planning.
Estate planning aims to ensure that your hard-earned assets are distributed according to your wishes, offering maximum benefit to your loved ones. Therefore, it’s crucial to familiarise yourself with estate planning and avoid these common mistakes.
Remember, a sound estate plan, crafted with professional guidance, provides you with peace of mind and ensures the financial security and well-being of your loved ones after you’re gone.