What Is Estate Planning, And Why Do You Need It?
Estate planning is a comprehensive process you undertake in preparation for your death; it encompasses the management of your estate – meaning, any properties, assets and money belonging to you – ahead of, and in the event of your demise. Estate planning includes: the creation of an unabridged list of your assets, funds and debts; the writing of your will and designation of its executors; the planning stipulations and funding for your funeral; and the management of fund distribution to your loved ones to avoid inheritance tax.
This can be quite the undertaking, even if you believe your estate to be fairly small. But despite the work involved, estate planning with the help of an advisor confers a number of benefits to you, and to your family. These benefits are as follows:
Reducing estate taxes
Inheritance tax is applied to every UK estate after the death of the estate-holder; it represents a 40% tax rate on any value above a £325,000 threshold – meaning if your assets are worth a total of £500,000, the £175,000 above the threshold will be taxed. There are various ways in which the government reduce this tax rate, taking into account charitable donations and other specifics, but nonetheless this is a significant amount of your estate. With careful estate planning, you can reduce the ‘cost’ inheritance tax causes your loved ones.
A chief example is in the giving of monetary gifts; gifts of any amount can be given to your loved ones, in excess of 7 years prior to your death. Within 7 years, even these gifts can be subject to inheritance tax. But gifts below £3,000 are exempt from taxation, meaning you can draw up yearly payment plans to deliver tax-free inheritance money to your loved ones up until your death.
Creating an airtight will is a key part of the estate planning process, and can make life significantly easier for your family and friends after your passing. Through your will, you can designate recipients of specific parts of your estate, from property to business assets and even funds. Designating these clearly and succinctly will ensure they are disbursed to the correct family members – a particularly important part of the process, especially if you are the main source of income for a spouse or child. Failing to designate beneficiaries will result in court judgements over who receives what in your estate, which could result in your spouse or child not receiving adequate inheritance.
Eliminating family difficulties
Effective estate planning can also remove burdens from your surviving family in other ways – not only in the prevention of in-fighting over who inherits which part of your estate, but in the handling of your funeral. Via your estate plan, you can make arrangements for your own funeral, as well as set funds aside for your family – taking pressure off immediate family to organise your funeral, and preventing them from spending money they might not have to honour your wishes.