Putting a comprehensive estate plan in place is one of the most effective ways to protect your legacy and ensure it passes in alignment with your wishes.
However, many people either delay the process or focus on just one or two elements, which can leave gaps that may lead to unnecessary taxes or outcomes that don’t reflect their intentions.
Ensuring such gaps are accounted for is more important than ever. Over the coming decades, around £7 trillion is set to pass between generations amid the “great wealth transfer”, according to FT Adviser, so it’s increasingly important to have a watertight plan in place.
Read on to discover five steps for building a comprehensive estate plan.
1. Plan for Inheritance Tax
Inheritance Tax (IHT) can have a significant impact on the value of your estate, so understanding how it works and having a strategy in place is key to ensuring your legacy aligns with your wishes.
The main IHT allowances are known as the “nil-rate bands”, and there are two:
- The standard nil-rate band –This is available to everyone and is worth £325,000.
- The residence nil-rate band – This is available if you pass on your main residence to direct descendants and is worth £175,000. It tapers if your estate is worth over £2 million and is no longer applicable once the value exceeds £2.35 million.
Married couples can combine their nil-rate bands, meaning you and your partner could collectively pass on up to £1 million IHT-free by making full use of them. Remember, anything you leave to your spouse is also exempt from IHT, so it’s a good idea to plan together if possible.
The value of your estate above these allowances is charged 40% IHT, but there are further steps you can take to improve its tax efficiency:
- Giving gifts while you’re alive can help you pass on your wealth to your loved ones while reducing the size of your estate.
- Placing assets into trust can also mean they fall outside of your estate for IHT purposes.
- Investing in Business Relief (BR) schemes can allow you to pass on certain assets free from IHT. You can typically pass on up to £2.5 million of eligible assets with 100% relief, and when combined with a spouse or civil partner, you could collectively pass on up to £5 million.
A financial planner can help you structure your estate in a way that aligns with your wishes and makes full use of any allowances available under the current rules.
2. Keep your will updated
Your will is the foundation of your estate plan, as it sets out how your assets should be distributed. Without a will, your estate will be split according to the laws of intestacy.
Maintaining an up to date will not only ensures your wishes and intentions are met but can also be key for IHT planning. For example, by making full use of your spousal exemption, you can pass everything to your partner IHT-free and combine your nil-rate bands and BR allowances.
Even if you already have a will, it’s important to keep it up to date. Changes in your family circumstances, financial position, or legislation can all affect whether your existing will remains suitable.
As such, it’s a good idea to review your will after major life events, such as births, marriages, deaths, or a significant financial shift, to help ensure it continues to reflect your wishes.
3. Plan for loss of capacity
A comprehensive estate plan isn’t just about what happens after death; it should also consider how your finances are managed during your lifetime if you’re no longer able to.
A Lasting Power of Attorney (LPA) allows you to appoint someone you trust to manage your affairs if you lose capacity. There are two types of LPA, one for financial matters and another for health-related decisions.
Without an LPA in place, your loved ones may need to go through a legal process to gain authority to act on your behalf, which can be time-consuming and stressful. It also means that decisions will be made by default rather than in accordance with your wishes.
As such, setting up an LPA in advance ensures your affairs will be managed smoothly and in line with your preferences.
4. Update your pension nominations
Pensions are likely a significant part of your overall wealth and can play an important role in estate planning.
While they have traditionally been a highly valuable estate planning tool, this is set to change next year as pensions will be liable for IHT from April 2027.
So, with changes to how pensions may be treated for IHT purposes in the future, it’s increasingly important to review who you have nominated to receive these benefits.
Keeping nominations up to date ensures your pension aligns with your wider estate plan and is passed on in a way that supports both your wishes and overall tax efficiency.
5. Write a letter of wishes
While legal documents such as wills and trusts set out the formal structure of your estate, they don’t always capture the full context behind your decisions.
A letter of wishes can support your will by providing extra guidance to those responsible for your estate. This might include explaining your intentions, outlining how you would like assets to be used, or offering direction on more complex arrangements such as trusts.
Because it is not legally binding, a letter of wishes can be updated more easily as your circumstances evolve, which can help ensure your wishes remain clear over time.
Get in touch
A financial planner can help you create a comprehensive estate plan that ensures your immediate needs, legacy wishes, and beneficiary concerns are all met.
To speak to a financial planner, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
