What Is Estate Planning

20th March 2009   

A basic estate plan is not difficult to produce. Many of us believe that the process of estate planning should be left until the later part of a person’s life, however, effective planning during the earlier stages of your life can produce significant benefits and will also put in place adequate measures to ensure that your affairs will be dealt with correctly. It is also an important tool which guarantees that your loved ones and any beneficiaries to your will are not left with unnecessarily high tax bills.

Estate planning is often an on-going process, the length of which can only be determined by each individual’s circumstances and affairs. The primary outcome of estate planning remains constant, this being the distribution of an individual’s estate after death to any named beneficiaries. Beneficiaries are often named in individuals Will or in any Trusts set up during that person’s lifetime.

Furthermore, estate planning is an important tool used to avoid tax bills, both for the individual in question and for the beneficiaries and dependants who gain from the individual’s estate after their death.   

Estate planning makes use of various tools some of which are explained below.   

Wills    

Despite many people's perception, Wills need not be a lengthy and confusing document. Creating a Will is a relatively straight forward process and the simplest of Wills can be drawn up and signed within a matter of hours, if necessary. However, one drawback of creating a simple Will is that they do not make full use of legal tax avoidance methods available to the testator and may not accurately reflect the full intentions of the testator.   

Furthermore, a Will can create Trusts which protect the testator’s assets for their named beneficiaries and future generations.   

Trusts      

Trusts in their various guises are a multi functional legal tool predominantly used to ensure that property is dealt with in an acceptable way after the death of the owner, or in a situation where an individual no longer holds the capacity to do so themselves.          

The type of trust(s) a person decided to create during their lifetime will often be reflected in that individual’s personal estate and financial affairs. For instance, creating a Nil-Rate Band Discretionary Trust can be used to ensure that full use is made of inheritance tax exemption rules, this in the long run could saved the named beneficiaries tens if not hundreds of thousands of pounds after the death of the settlor.   

Living trusts may also be an option when beginning the process of estate planning. They primarily have three functions:    

1. The avoidance of probate - Assets that are placed in a living trust, are considered separate from the remainder of the estate, and as such they are not required to go through the probate process.

2. Will provide peace of mind regarding assets in the event that the settlor becomes incapacitated or otherwise incapable of dealing with those assets. A living trust allows for the settlor to appoint successor trustees, who will assume responsibility for managing the trust if the original settlor-trustee becomes unable to do so.    

3. Asset protection is another significant benefit of a living trust. Some individuals use living trusts to mitigate the effects of bankruptcy. When bankruptcy is declared, creditors have almost free reign to take the bankrupt individual’s assets in order to recoup their loans. 

Assets transferred into a living trust, however, are no longer legally owned by the individual but rather by the trust itself. As a result, creditors are unlikely to ‘attack’ these assets after a period of time. Clearly there are a number of questions to be answered regarding the morality of this choice.

You should always consult with a specialist to ensure that you are making the most from your estate, by putting in place the correct procedures you can ensure that you are protecting your loved ones from incurring high tax bills.