How To Avoid The Top 5 Estate Planning Mistakes

Mistake No.1 - Not having an Estate Plan or a Will

An Estate Plan is a document which plans for and sets out the methods for disposing of your Estate - which are all your worldly possessions (home, money, car, investments etc.) An Estate Plan tries to ensure that your intended beneficiaries will receive what you want them to receive, and it also attempts to maximise the value of your estate by reducing taxes and other expenses.

It is important to realise that whilst an Estate Plan includes a Will as its core document, it often uses other legal processes to achieve the aim stated above. A typical Estate Plan may include trusts, property ownership, powers of attorney and other legal documents which will be explained later in this report.

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At this point you may cry "I don't need a Will, my affairs are very simple - I am married and it will all go to my wife/husband".

Well, you should still plan your Estate and make a Will for three simple reasons:

First by having a Will you remove any uncertainty about your intention for your spouse to inherit your entire estate, should that be your wish. Did you know for example that if you die without a Will (intestate), the Laws of Intestacy say that if you have children your spouse is only entitled to the first £250,000 of your estate outright, with the remainder being shared with your children.

You can see how this could cause serious practical difficulties if you were to die without a Will, leaving your spouse potentially short of money or possibly even having to sell the house to give money to your children.

Secondly if you are not married but are co-habiting your partner is not entitled to any of your estate in the event of your death. There is no such thing in inheritance law as a 'common law spouse' and your partner may have to fight in the courts for a share of your estate if you die without a Will

The third reason is that by not making an Estate Plan you also miss out on other important issues such as appointing guardians for your children. Many Wills I see do not address these important issues, just covering the bare basics and leaving your family potentially exposed to both unnecessary upset and cost.

Mistake No.2 - No appointment of guardians for children

We review a lot of existing Wills and a very common mistake is where a Will has been made several years ago and not updated to reflect the client's current situation. It is a common practice for example to have a Will made when you buy your first home - at a time when you didn't have any children and your life was more straightforward.

If you have children under the age of 18 then you need to appoint a guardian who would care for them in the event of your death. Whilst it is rare for both parents to die before their children it does happen, and we do sometimes read in the papers of a tragic accident where both parents are killed and their children are orphaned.

Without a Will naming your chosen guardian in your Will it will be up to the Courts to decide who is to take care of your children, and it may not be the person you would want it to be. Your family would also have to go to the expense of legal representation to apply to be made guardians, should there be a dispute.

If you are not married you also need to consider the legal issue of parental responsibility if the mother of a child dies. The father does not automatically have the right to guardianship of a child, however it is possible for a mother to grant parental responsibility during her lifetime by applying to the Court, and importantly to name the father as guardian of the child/children in her Will so that his right to care for them after her death is clearly established.

Finally, a common choice for parents would be for one of their own parents to care for their children in the event of their deaths. It may be that if left to chance the Court would decide that a grandparent is too old to care for a child, however if they are named as the guardian in your Will the Court would not rule against this appointment.

Mistake No.3 -Estate plan hasn't been reviewed at least every 3 years

So many Estate Plans/Wills are drafted and put in a drawer and virtually forgotten about. It is as though we have mentally ticked off the fact that we have it sorted out and forget about it.

We review many such plans and in the majority of cases something has happened in the person's life to invalidate their plan entirely, or mean that if it were to be used would not reflect their wishes.

Here are some life events which point to the fact that you need to review/update your plan:

· You have become married or divorced

· An executor has died or moved away from you

· You have decided to exclude someone from your Will

· You have had a child or another child

· You have a grandchild or more grandchildren

· Your spouse has passed away before you and you have re-married or are contemplating getting re-married

· You have received a substantial bequest from another person's estate

· You no longer own a specific gift named in your will

· You have become concerned about the possible impact of care home fees on your estate

· The value of your estate has increased to beyond the threshold for inheritance tax

· You wish to make provision for the care of your pets in the event of your death

· You wish to name people who can manage your affairs if you were to become mentally or physically incapacitated

· You want to express your wishes regarding your medical care should you suffer a serious illness

· You want to outline your plans for your funeral such as burial or cremation, religious or secular service etc.

For these reasons and more an estate plan is a living document which should be reviewed on at least a three yearly basis, or more regularly if something changes such as the examples given above. So, get your documents out of a drawer and see if they cover any of the points above which you feel strongly about.

Mistake No.4 No Inheritance Tax (IHT) planning

The current threshold for inheritance tax is an estate worth £325,000. If your property, car, savings, investments, holiday home/rental property, any life insurance policies not written in trust etc. add up to more than this figure in value then your estate will be taxed on 40% of the excess value. So, for example if your total estate is worth £425,000 the tax bill will be 40% of £100,000 or £40,000.

This bill has to be paid before the estate can be distributed, and will therefore reduce bequests you have made to your loved ones. Every individual has a nil rate band (the £325,000 exemption) and for married couples or civil partners recent changes in the law mean that it is possible for one person to transfer their nil rate band onto the survivor.

This transfer is not however automatic and it needs to be carefully documented on first death to ensure it can be claimed by the second person's estate. Remember that the gap between two parties dying could be tens of years, and therefore it is important to get advice about this area if you need to claim both nil rate bands.

This change has put many estates outside the scope of inheritance tax which would have previously been liable, as before the first person's nil rate band was effectively lost if they transferred all their assets to their spouse, as on second death only one nil rate band was applicable. Currently it is possible for a married couple/civil partnership to have a combined estate of £650,000 without liability to inheritance tax.

For non-married couples it is not possible to claim your partner's nil rate band on second death, and therefore leaving all your assets to your partner on first death could cause an IHT problem on second death.

One possible solution is to gift assets to someone other than your partner on first death, however doing this could cause financial hardship - or in a situation where the majority of assets are held in property it could be impossible to do so.

You may also use one of a number of gifting allowances to reduce the value of your estate, however it is important to remember than anything you give away must be a true gift and not a 'gift with reservation'. If you 'give' your house to your children, for example, but continue to live in it rent-free then it is likely that it will be considered a gift with reservation of benefit and be brought back into your estate for inheritance tax calculation purposes.

Any lifetime gifts which are not classed as exempt are classed as "potentially exempt transfers" and may be brought back into your estate for Inheritance Tax purposes for up to seven years after the date of the original gift.

It is also possible to use a range of trust arrangements to place assets outside your estate whilst retaining control over how the proceeds are given to beneficiaries. This can be a complex area with possible tax issues to consider and it is important to seek specialist advice.

The gift allowances are subject to regular review by the taxman and it is important to keep up-to-date, especially if you are planning on making any substantial gifts outside your estate.

For many people provided they are in reasonable health it is possible to purchase a whole of life insurance policy the proceeds of which aims to pay any inheritance tax liability on second death. The policy is set up on a "joint life, second death" basis and in a trust, so that the proceeds are available to the beneficiaries to pay the tax bill.

It is beyond the scope of this report to go into all the aspects of inheritance tax planning, however it is important to realise that leaving everything to each other and then to your children may not be the most effective way to pass on as much of your estate as possible to your loved ones.

Mistake No.5 - 'Sideways disinheritance' not considered

This is an emotive issue and one many of us do not like to consider, however it is increasingly common.

Sideways disinheritance is where a couple (married or otherwise) decide to make an estate plan where they leave all their worldly goods to each other on first death, on the understanding that when the second person dies the remainder of the estate will be left to their children.

Unfortunately life has a way of being more complicated than that, and nowadays it is increasingly common for a widow/widower/partner to marry again after the death of their other half.

In the event of remarriage a Will is invalidated. The new husband/wife becomes your main heir and will inherit the majority of your estate. The Laws of Intestacy come into play again. This situation becomes even more complex if a new spouse has children from a previous relationship, in other words any inheritance your children might receive as the residue of an estate would have to be shared with their step-siblings.

How can this be avoided?

By creating an estate plan which ensures that your share of your main asset, your home, is ring-fenced for the benefit of your children no matter what the marital situation of your spouse after your death. Through the use of a Property Protective Trust and possibly a simple change in the title of your property it is possible to give your spouse the right to reside in your 'share' of the property after your death for the remainder of his/her life, and your share of the house will then pass to your own children.

Your spouse is free to gift his or her share of the property to their chosen beneficiaries after your death - which may well be your children, or perhaps a future spouse/children etc. This property protective trust is drafted into your Will as part of a comprehensive estate plan and requires the revision of your existing documents if not already included.

This trust can also be effective in protecting an inheritance against the effects of the possible divorce of one of your children whereby assets could otherwise pass to an ex-spouse as part of a settlement.

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