What is Estate Planning?

Estate planning is an important but often overlooked activity. Effective planning early in life gives the opportunity to ensure that your affairs are dealt with in a satisfactory manner after your death and, perhaps just as importantly, that your beneficiaries and dependants are not subject to an excessive tax bill. A basic estate plan need not be difficult to produce, but the potential benefits are significant.

There is no single definition of estate planning. Rather, it is a continual process and one which will differ depending on the circumstances and affairs of the individual in question. The basic goals, however, tend to remain constant. Primary amongst these is the eventual disbursement of estate assets to the beneficiaries intended by the owner. This can be achieved through a number of means, some of which are detailed below.

Another important goal is the minimising of a tax liability, both for the individual in question and for their dependants or beneficiaries. Finally, another common goal of estate planning is the avoidance, wherever possible, of the involvement of a probate court or the necessity for guardianship and incapacity proceedings.

Wills

An effectively planned estate will make use of a number of different tools. The most important of these is the will. Depending on the complexity of the individual’s affairs, a will need not be a lengthy or confusing document. However, very simple wills are frequently inefficient as they do not make full use of all of the legal methods of tax avoidance available to the testator. It is all too common, for example, for a will to simply state that the testator’s entire estate is to be left to their surviving spouse. As is demonstrated elsewhere on this site, this can be a highly inefficient course of action in instances where the value of the estate will exceed the Nil-Rate Band – that is, the inheritance tax exemption threshold.

Trusts

Trusts are also hugely important estate planning tools. These can be used for a variety of purposes and in a variety of circumstances. Indeed, a Nil-Rate Band Discretionary Trust can be used to ensure that full use is made of the inheritance tax exemptions. The employment of such a trust can save beneficiaries thousands of pounds after the death of the settlor (that is, the individual establishing the trust).

Similarly, so-called ‘living trusts’ can be used to ensure, amongst other things, that the affairs of the settlor are dealt with effectively in the event of their incapacity. In a different vein, living trusts can also be used to minimise the risk to your estate from creditors; they can often be used to separate assets from the estate of the settlor and therefore prevent them from being attacked by individuals to whom money is owed.

Detailed advice on all of the estate planning tools listed here is available in articles elsewhere on this site. If your affairs are particularly complex, however, you should always seek independent financial advice when forming an estate plan. Indeed, it is generally a good idea to consult with a solicitor before taking any decisions in this field, as poorly drafted documents can render your plan ineffective.