Although we all know that death is inevitable and out of our control, truly internalising this fact and putting a plan into action is beyond most of us, even with the best of intentions.
Our London based Chartered Financial Planner, Joe Roxborough, explores he key factors to consider when looking at end of life planning. Often speaking about our own deaths can be easier than discussing the deaths of our loved ones like parents and older spouses. It isn’t uncommon to find that many clients do not want to discuss what they might inherit themselves at the risk of sounding morbid or insensitive, but this is equally as important.
Property and the resident's nil rate band
Property is almost always a major asset for investors, and the government has grabbed headlines by increasing the nil rate band to £1m for those with property assets with the ‘Resident's Nil Rate Band’ (RNRB).
However, as with all government giveaways, the devil is in the detail. Most importantly, if the total estate of the deceased is worth more than £2m, the extra RNRB will be eroded away (back to zero, if the estate is big enough). Secondly, the beneficiary must be a direct descendent of the deceased - so nieces, nephews et al. will not be able to benefit. This is the tip of the iceberg. If clients can benefit from the full £1m allowance, this will be a huge windfall for their beneficiaries, so we continually try to arrange assets of our clients to meet the criteria needed where possible.
Inheritance tax (IHT) is a very strange tax. Firstly, it’s a very blunt tool, levelled at a rate of 40% at almost all assets above the nil rate band, and can also be used retrospectively on gifts already given by the deceased if the timespan between gift and death is insufficient. That's the bad news, but the good news is that, with a little planning, it is also an eminently avoidable tax - perhaps more so than any other. The use of trusts, gifting, IHT exempt investments (such as Business Property Relief (BPR) qualifying holdings and pensions), utilising full allowances (such as gifting from income or gifts at weddings etc.) and accurate record keeping can add huge value to the investor - both in life and in death.
Having a will
It is always important to have a will in place and to regularly review it to ensure it is still in line with your wishes. In the interests of dying tidily, leaving your estate to the whims of the intestacy rules or - worse yet - a beneficiary whom you would rather no longer benefited, is highly undesirable, and can result in a legal dispute for loved ones at the worst possible moment. Unlike many financial planning issues which can be time consuming and expensive, will writing for most people is a simple process if your affairs are relatively straightforward.
A clients’ biggest concern is usually the uncertainty inherent in end of life planning. Most plans we make in life (e.g. retirement, moving, having children or not) are under our control to some degree.
Death is both inevitable and unknowable.
With increasing numbers in need of care homes and state provisions stretched to breaking point, those with means wish to prepare for a rainy day so that they can have the best possible care when necessary.
However, clients would prefer for their beneficiaries not to be clobbered with an enormous IHT bill if they never needed such care provisions.
Avoiding IHT is probably the largest concern, along with its counterpart ‘how much is enough?’.
Cash flow modelling
Cash flow modelling and planning with other family members gives the client the best tools to visualise the future both for themselves and for their descendants and, although nothing is guaranteed other than death and taxes, we can at least create the best plan possible - which is better than no plan at all.
A longer-term financial plan of regular gifting alongside spending and IHT reduction where possible is the best way to proceed for most investors.
Most people’s investment pots did not develop overnight; nor should they be decumulated in such a fashion. A gifting and IHT mitigation plan can be made over the forthcoming decade, for instance, with a term assurance plan to broadly match the period involved to pay any tax bill should the worst happen. When most investors start to think about IHT planning they are not necessarily in the position to gift most of their assets away immediately.
However, they also recognise that they will not make use of much of their wealth in their lifetime and that they are better to have too much than too little, come what may from a tax point of view.
Therefore, rather than reacting in a kneejerk fashion, protection for this period of flux is recommended as clients move towards later life planning (also, who knows what the rules will look like in 2028?) and a plan suited to the clients need. This can also be adapted to the changing needs of the client and the whims of investment market and government regulation as events unfold. Learn how we can help you with planning for end of life.
Get in touch with an Ascot Lloyd adviser who can discuss a personalised plan with you, and is most suitable to your needs.