Estate Planning – 4 Simple Mistakes which are made every day. Why not avoid them?
4 Easy Estate Planning Errors.
Estate planning is a tricky topic to discuss because it involves facing death and all sorts of other unpleasant issues. People who have worked hard their entire lives to protect their families and to pass on their wealth often put off the discussion until “one day,” leaving that final step either undone or in a mess.
Despite good intentions, it is easy to make mistakes even when they do carry out estate planning.
4 common estate planning mistakes.
1. Outdated or Unsigned Estate Planning Documents.
Countless times widows or widowers discover documents they thought had been signed but actually never did. The sinking feeling when they discover they are NOT properly provided for under the Rules of Intestacy must be awful.
Or the estate planning documents are 10, 20, 30 or more years old and have never been seriously reviewed.
Typical reasons for their behaviour include.
Inability to face death; denial about the possibility of their own death.
The “manyana” complex — “I’ll worry about that tomorrow”. One day it won’t come.
Lack of desire to pay a professional to review and/or revise documents.
Inability to make a decision such as who will serve as guardian of minor children, executor or trustee.
How do we motivate you, that client to contact us sooner? The Financial Adviser and Accountant are the gatekeepers of all financial information and, for the most part, are meeting with or speaking to you at least once a year. It is wise when discussing tax returns to lead the discussion to financial planning and to estate planning. A coordinated financial approach serves the client and the adviser well.
2. Lack of Coordination between the Estate Planning Documents and Ownership of Assets.
Twenty-five years ago, most clients owned the bulk of their assets in individual names. At death, those assets passed through the terms of the Will to their named beneficiaries. Virtually all wills contained a standard clause that mandated that any debts, administration expenses and estate taxes be paid from the residue of the estate. The residue of the estate is the common pool of assets that are not specifically gifted and pass as a basket to the “residual beneficiaries” – usually the spouse of children. Alas, the times have changed.
For many clients a significant amount of the net worth is not held in individual names and do not pass under the terms of the will but rather direct to the heirs. Assets that pass outside the estate may include life insurance, annuities, pensions and death in service benefits as well as pension funds.
Of course, most of this won’t happen without advance estate planning.
If the client names certain individuals as beneficiaries of those assets, leaves a Will that specifies that the residue of the estate (anything they own solely at death and not specifically bequeathed to others) will pass to someone else. They will direct that the Inheritance Tax is to be paid from the residue, then the inadvertent consequence of this plan may be to in effect substantially disinherit the residuary beneficiary (usually the spouse or children) since that is the source of the funds that must be used to pay the debts, administration expenses and estate taxes. Instead, the client could have apportioned the expenses and/or estate taxes among the recipients of the assets so that whenever an asset is given to a beneficiary, that asset bears its proportionate share of the IHT.
Understanding the consequences of how apportionment vs. residue plays out becomes even more complicated when the client has made taxable gifts during their lifetime. When that happens, the valuation of that gift is taken into account in determining the taxable estate, but the asset could be long gone. When significant gifts have been made, it is particularly important to ascertain the donor’s intent as to who should bear the burden of the taxes and to make sure that the language of the estate planning documents backs up that intent.
3. Lack of Understanding that a “sale” at below market value is a Gift for IHT purposes.
It never ceases to amaze me how many clients believe that “selling” property to a child for consideration of £1 is a sale and not a gift (less the £1). The lack of understanding that the transfer was a taxable gift can wreak havoc on the plan and on the composition of the taxable estate. Gifts of as little as £250.01 to an individual could be taxable. Weddings frequently create potentially taxable gifts which go unreported. On death within 7 years, the executors could be defrauding HMRC.
We now live in a transparent world. It is very easy for any Tax Inspector to access the Land Registry website and find out about the history of land transfers. Anyone can do it!Today, it is routine for the Taxman to do so.
Likewise, if you have a pair of vases worth £100,000 as a pair but £30,000 individually, and you give one to a child, the taxable loss to your estate is £70,000!
4. Life Is a Movie, Not a Snapshot – Estate Planning is a Moveable Feast.
Planning is a process that should never end.
It should begin when there are assets, partners and/or young children and should evolve and become more sophisticated as life progresses. There are different issues that a client faces as they pass through the stages of life — single, married, divorced, widowed or remarried. In each of these phases, the focus should be on what is meaningful in that phase.
For this to work, it is important that the client remain engaged in a discussion with their estate planning adviser team and that the planning not be so complicated that it stuns the client into paralysis. It should also not be so complex or expensive that the client finishes this phase and is reluctant to move to the next one.
For most of us, the crystal ball of estate planning does not go more than five years. Families change, health changes, tax changes and the law changes. The goal is to get the client on the path and to keep him or her there through all of the phases of life. Helping the client through each phase and encouraging the planning as part of the ongoing relationship between the accountant, IFA and the client is a very valuable service to the client and their family.
Contact Legacy Trusts Estate Planning division to find out how our Peace of Mind Service can help you move steadily and painlessly in the right direction.