Erica Hancock: Messed laid plans – five estate-planning ‘red flags’

Many people are, unfortunately, still less comfortable with the idea of estate-planning and will-writing than they are with other types of financial planning, writes Erica Hancock

Perhaps this is because they feel the information they need is difficult to find, hard to understand or uncomfortable to think about. Whatever the reason may be, because a lot rests on this type of planning, it is just as important to get it right for your clients and their families. With this in mind, as a wills and probate practitioner, I wanted to raise some red flags we commonly come across in our day-to-day work.

Failing to have a plan

While there is a plan for where people’s estates pass if they do not have a will (intestacy), this is not necessarily the plan your clients may have in mind. The intestacy rules do not accommodate diverse changes in family structures like those that we have seen over the past three decades.

Marriage rates are declining in the UK, with people choosing to co-habit rather than marry before starting a family. While the intestacy rules may accomplish what a person intends, it is not likely. You should therefore ensure your clients have a will in place that outlines their ‘plan’ for their estate after they pass away.

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Online or DIY wills v professionals

There has been a noticeable change in how people ‘shop’ over the past two decades. People like to compare prices and the internet has provided an easy route to do this. Indeed, there are now hundreds of websites that allow people to prepare their own wills and trusts from the comfort of their own home. While this can be a cost-efficient option, clients should have all of the facts of what these documents really mean and the consequence of putting these in place – especially where trusts are involved.

Estate planning should represent a culmination of a well thought out financial and estate plan – and a collection of standalone documents does not a plan make. There are also the formalities of these documents: if these are not followed, there is little point in having them in the first place.  A professional can offer advice that relates to the client’s specific financial and personal life and will listen to the client’s concerns/issues before providing a solution.

Clients failing to review the plans they have in place

If the point above does not apply to your clients and you have already helped to prepare their will and estate plans then, unless they regularly review their plans, their family may find what they have in place no longer fits their circumstances on death.

Once clients have written their wills and lasting powers of attorney, they often think everything is complete. Unfortunately things change, families change, people marry, divorce and have children, laws change – and especially tax laws! Clients need to review their plans to make sure that what they intended is still relevant.

Maximising annual gifts

While this may not be an option for all your clients, gifting is the oldest and easiest way of reducing their estate for tax purposes. A substantial number of allowances are available to an individual, including annual exemptions, exemptions for specific occurrences, such as a child getting married, charitable allowances and so on.

Most allowances are not used and, while certain ones can be claimed in the year the death occurs and prior year, when calculating inheritance tax, this usually only results in a small saving. By making gifts over a long period, clients can transfer significant sums of money out of their estate.

There are strict rules that do need to be followed – for example, rules surrounding gifting assets and continuing to use them – so it is advisable your clients speak with you before they consider making large gifts.

Leaving assets outright to adult children

There is a growing concern in recent years over passing assets, within wills, directly to children. Family circumstances change, people divorce and it is more acceptable to have large amounts of debt. Parents are therefore concerned about leaving large inheritances to their children in case the ‘fruits of their labour’ are lost in divorce settlements or claimed by creditors.

For as long as trusts have been in existence, the idea of controlling assets from the grave with a set of instructions has been considered acceptable and an often sought-after planning tool. Whether or not to leave assets in trust for adult children depends on many factors; not the least personal preference.

That said, clients really do need to obtain advice to ensure the most appropriate trust is used. Professional assistance in running these trusts should also be considered to ensure the client’s wishes are carried out.

Erica Hancock is legal services director at APS Legal & Associates