Last month you may have read about how and when you might want to take control of your parents finances, and some of the key issues you need to consider.
- Ensuring their financial paperwork is up to date
- Managing the finances relating to their living arrangements
- Covering the cost of any future potential care needs they may have.
Apart from stressing the importance of ensuring your parents have up-to-date wills in place, we decided that last month’s article would not consider any issues relating to their legacy.
So, this month you can now read about some simple estate planning measures that can assist them in getting their finances in order and help them to help you, and other family members, protect your inheritance.
One important point we would stress is that estate planning can be a complex subject. Because of this, we would strongly recommend that you seek expert advice, both for your own arrangements, and those of your parents.
It’s important to have conversations about passing on their wealth
In the previous article we made the point that people are often reluctant to talk about their financial issues and their wealth, and how this reluctance can be heightened when it comes to your family.
It’s understandable that conversations about end-of-life issues can be awkward, and there can be a tendency to avoid them, or to speak only in vague terms.
When you do decide to grasp the nettle and initiate a conversation about inheritance, one recommendation we would make is to position it in terms of wanting to help protect their quality of life, and to ensure their wishes are met when it comes to how their wealth is allocated and applied after they die.
Three other points to bear in mind with regard to their estate planning arrangements are:
- The sooner you start planning, the more time you’ll have to discuss their wishes.
- There is no one-size-fits-all estate plan. The best plan for your parents will depend on their individual circumstances.
- Their needs may change over time, so you will want to ensure their plans are regularly reviewed.
You should ensure other family members are involved
Death and money can be very emotive issues to talk about at the best of times. If you then mix in the matter of inheritance, and the potential of being the beneficiary of what could be a substantial sum of money, it’s understandable that the issue of family wealth needs to be handled carefully.
Because of this, it’s always advisable to include other family members in your discussions with your parents about their financial arrangements. This can help avoid any distrust or lingering resentment, and suggestions that you’re looking to benefit yourself.
Your siblings, and other family members may have different opinions as to what is best for your parents or how their assets should be divided.
It’s also worth bearing in mind that when thinking about estate planning and the division of assets, your parents’ view of some relatives may not align with yours.
I know from personal family experience, that it can be personal possessions that can cause issues, even things that has little monetary value but a great sentimental value. Making sure key items are outlined and agreed could also be considered and made clear as part of their legacy planning.
You need to get a clear idea of their objectives
While you are likely to want to ensure your inheritance is protected as far as possible, a key point to confirm is what your parents priorities are when it comes to their legacy planning.
You probably already have an idea of what they care about but it’s important to understand that estate planning covers a wide variety of issues. Factors you, and they, will want to consider could include:
- Charitable donations and other philanthropic allocation of their wealth
- Supporting younger family members with educational funding
- Assets they may want to pass to friends and non-family members.
You may also find that they already have plans in place to efficiently pass on their wealth. It’s well worth reviewing these, especially if they were set up some time ago, and may – as a result – no longer be effective for their intended purpose.
It’s also worth regularly reviewing any succession planning measures they set up to ensure they are always appropriate for their needs and objectives.
Finding out what their objectives are is key. It makes sense to ascertain whether they would prefer to pass assets on while they are still alive so they are able to witness the happiness their gift brings, or leave it as a legacy after they pass on.
Find out if Inheritance Tax is likely to be an issue
Once you have an idea of objectives and their priorities, a good next step is to get a clearer idea of the value of their wealth, and how it’s made up.
This will give you an idea as to whether Inheritance Tax (IHT) may be an issue, either now or in the future.
This should include a valuation of all their assets including:
- Other savings
They may not have previously appreciated potential IHT issues, but the rapid increase in residential property values, and favourable investment growth could mean that effective estate planning measures could be required.
Managing gifts and transfers of wealth
If you have realised that there will be a substantial IHT liability when both your parents pass on, you will probably encourage them to take steps to reduce their liability if they haven’t already done so.
A detailed estate plan will be dependent on the value of their assets, their intentions, and any existing arrangements they may have.
One important point we would stress at this stage, is that it’s incredibly important to get expert help when it comes to IHT planning. As we pointed out in an article explaining why DIY Inheritance Tax planning can be bad for your wealth, mistakes really can be costly and leave you facing an unwelcome tax bill.
There are several gifting rules that they could take advantage of. We’ve previously looked at how to gift your assets, and it’s well worth reading about some of the key gifting opportunities.
As well as gifting, it’s also worth your parents considering a strategy for transferring wealth before their death to other family members, as this can help reduce their IHT liability.
A key point to bear in mind, however, is that a seven-year rule applies on any transfers or gifts of this kind, which means that the amount of IHT payable tapers down in the seven years from the date of the transfer.
This makes it important for your parents start the process of estate planning, and the distribution of assets, as soon as possible.
It’s also important that they keep an accurate record of the gifts they make for reporting purposes.
Trusts can be an effective estate planning option
It’s also worth considering the use of trusts as part of your parents estate planning arrangements.
Not only does putting assets in trust remove them from the value of their estate for IHT purposes – although the seven-year rule still applies in these circumstances – it also means that those assets are protected for the intended beneficiary by a legal framework. Plus, a third-party has control of following the terms of the trust in terms of how and when the trust assets are distributed.
We have previously written two articles on the subject of using trusts in estate planning. Both of these, regarding excluded property trusts and three common trusts that are used, are worth taking a look at.
One word of caution: Trusts are not always straightforward to set up, and mistakes can prove costly. We would always recommend that you get professional help when setting them up.
Get in touch
If you would like to talk to us about your own, or your parents, estate planning arrangements, please get in touch.
You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.