Some people will say that estate planning is a closed book to them – and leave it at that. Others might fall for the common misconceptions that estate planning only makes sense if you own property or have other assets of significant value. Many of us don’t prioritise planning ahead for the end of our life or for a scenario where we might become incapacitated as those events don’t seem on the horizon yet.
Estate planning might seem like a daunting chore but is actually an extremely empowering and thoughtful process that you and your loved ones will benefit from on many different levels. This guide will help you understand what estate planning is all about, why it’s so important and takes you through the key components of an estate plan as well as what advantages it holds to have one.
What is an Estate?
Almost everybody has an estate. It includes everything you own – no matter how modest or extensive. Your estate might consist of one or several properties, your company – if you have one, all your cash and money in your savings account, investment products like bonds or life insurances, your car(s), furniture, clothes and shoes, collectables, jewellery, and any other personal items you possess.
Why is Estate Planning Important?
The better questions to ask are: How do you want your assets distributed when you die? And who do you trust enough that you’d want them to make important medical and financial decisions for you if you should become unable to do so yourself due to an accident or illness?
Because this is what estate planning is about: It’s a powerful tool to plan ahead and make provisions according to what you want to happen with your estate and how you want your personal affairs handled.
One goal is to minimise the emotional and financial burden on your family. You do this by making your wishes known – as detailed as necessary yet as simple and straightforward as possible – to avoid confusion and misunderstandings that could be the cause for potential falling outs and feuds. Writing a will and setting up one or several trust funds, taking out insurances and making gifts during your lifetime will allow you to pass your assets on to your loved ones in the most effective way and protect them from having to pay huge amounts of inheritance tax or other taxes. Due to more limited resources regarding time and money, good estate planning actually has a bigger impact on families with modest assets compared to wealthy families, even though the latter might be more invested in preserving and protecting what’s theirs.
To debunk another common misconception: Estate planning is not something you do once, it’s an ongoing process that allows for flexibility. Your estate plan can and should be adjusted with any major changes in your life circumstances or updated to make the best use of relevant laws as they evolve. Ideally, it will include conversations with your loved ones about the legacy you want to leave behind and what you hope your estate can achieve for future generations or causes/charities you care about. Communicating openly is also important to let your family know where to find important legal documents, financial records, and insurance policies. This way, you and your loved ones can enjoy the time you have together with the peace of mind that all your affairs are in order, and everything will get handled the way you envisioned it.
When is the Right Time to Plan Your Estate?
Short answer: Now! The earlier in life you start planning your estate the easier it’ll be and, as mentioned above, your estate plan will evolve with you. You might argue that you’re too young to think about estate planning in your 20s or even in your 30s. Legally, you can write a valid will once you’ve turned 16 (Scotland) or 18 years old (England & Wales).
The same goes for writing a living will (advance directive) and a power of attorney. With these legal documents, you are choosing a person you trust implicitly to make important medical and financial decisions for you should you find yourself incapable of making them yourself. You leave that person instructions regarding the medical care you do and do not wish to receive. This way, you can ensure that your loved ones are not left wondering what you would have wanted and don’t have to face unthinkable decisions. None of us knows if and when we will become incapacitated due to an accident or severe illness or when death comes knocking on our door – sadly, these things happen to people of all ages and being in what most consider the prime of their life can’t protect you from it.
Planning your estate early on in life, also makes it easier to and allows for more flexibility when making arrangements for your retirement – financial or otherwise. To give just one example: According to the Alzheimer’s Society, one in every 14 UK citizens over the age of 65 has dementia. Numbers are rising every year. The cost of dementia in the UK is £34.7 billion a year, and the Alzheimers Society has stated that people with dementia typically pay £100,000 for dementia care, sometimes reaching £500,000.. Whereas many expect that they’ll spend and therefore need less money when they get older, these figures tell a different story and underline the importance of making end of life planning a part of your life – not just for the peace of mind, but also for your own financial security when you are most vulnerable.
What Should Be Included in Your Estate Plan?
Your estate plan consists of several different types of legal documents. The following section will give an overview of the key components of estate planning and some basic considerations for each one of them.
Inventory of all your assets (and debts)
Before you start planning how you want to protect and distribute your assets, you need to take inventory of everything you have. This includes but is not limited to:
- Properties
- Land
- Vehicles (cars, motorbikes, bicycles, jet-skis, boats, etc.)
- Cash (savings and checking account)
- Companies, stocks, bonds, and shares
- Title deeds, (life) insurances, pension benefits
- Art, antiques, other collectables
- Jewellery, family heirlooms and other personal items
- Digital assets like domains, websites, movies, music, courses, etc.
- Intellectual property: Patents, copyrights & royalties
- Any debts
Estimate the value of every single asset
Once you have reviewed them, you need to estimate the value of each item to be able to calculate the total value of your estate. If there is no obvious monetary value to an item, try and value them based on what value you imagine they’ll have to your beneficiaries.
How to best protect your assets and your family after your death
- Carefully choose guardians for your children (minors) if you have any. You want to name a guardian who already has a relationship with your children, someone whom they trust, who shares values and ideas that are similar to your own regarding raising children but also life in general and is financially, emotionally, and mentally capable and willing to take on this responsibility.
- Choose who you’d like to take care of your pets.
- Set up legal directives like a living will/advance directive, a power of attorney, with your specific wishes and instructions on how you’d like your finances handled, medical decisions to be made and medical care to be arranged in case you should be unable to do so yourself. It’s advisable to include plans and provisions for potential disability or long-term care.
- Set up trust funds and/or make gifts during your lifetime. This allows you to pass on your assets in an efficient way and can help avoid hefty taxes for your loved ones.
- Check who is named as beneficiary on your insurance policies and retirement accounts and update them if needed. A wrong name on the document, for example, that of an ex-spouse, can override what you put in your will.
Choose your beneficiaries
To make sure your assets get distributed to the right people, you need to choose and name your beneficiaries in your will and on certain documents (see point above). You want to consider naming contingent beneficiaries in case the primary beneficiary dies.
Funeral wishes and expenses
You may want to outline your wishes for your final send-off in a document separate from your will. This will save your family from having to make decisions during an emotionally difficult time. To minimise the financial burden for your loved ones, you can make provisions for your funeral expenses. One way of doing this is through a prepaid funeral plan or funeral insurance.
Many of our clients decide to pay for their funerals in advance knowing that it will relieve the burden of cost, and the decision making required at a time of grief and loss. All funeral plan providers now have to be regulated by the Financial Conduct Authority and a list of these authorised providers can be found by searching the FCA Register.
www.fca.org.uk/consumers/funeral-plans/providers-list
Make your family and loved ones aware of your will
Let your family and loved ones know that you have planned your estate. Communicate openly what you hope your assets will achieve when you are gone and what special needs and circumstances you’ve considered (that not everybody might be aware of). Be as transparent as you can and want to be and mention that nothing is set in stone as your estate plan will evolve with your and your family’s lives and the changing circumstances they bring. Make sure that your loved ones know where important documents are stored and how to access them when the time comes.
Our clients receive complimentary access to MyDigiSafe, a digital vault to store all your important documents. For complete peasce of mind, get started today.
Benefits of Estate Planning
In 2021/22, inheritance tax receipts were £6.1 billion according to the HMRC. As this number illustrates, potential tax savings are one of the main benefits of good estate planning. If done right, most of your money and other assets will go to your loved ones or a cause/charity you care deeply about rather than the state.
Estate planning also empowers you to use your assets cleverly to provide yourself with a retirement income and make provisions should you need extensive care.
It is not just about the money and how it can benefit yourself as well as your family, but more importantly about the peace of mind estate planning brings. Taking care of it like you’d of a house and garden by cleaning and maintaining them regularly, allows you to live in the present moment and enjoy life to the fullest in the here and now.