One of the distinguishing characteristics of being human, it is said, is that we know one day we will die.
Yet, despite this inevitability, too many of us continue to stick our heads in the sand when it comes to this sensitive area of financial planning.
In our experience, the subject of estate planning typically arises when it has been identified that a client has surplus assets and therefore has more money than he or she will be able to spend in their lifetime.
In other cases, it can be that a client has decided to make a significant gift to a loved one.
For those who are considering distributing some of their wealth to family members, it is important that they review their own circumstances first.
Once money has been given away, it is more difficult to then ask for it back. In addition, making a gift and continuing to benefit from it in some shape or form can have unwelcome tax implications.
If surplus capital is available, the next question anyone looking at estate planning must ask is: what is the purpose of giving money away? Is it to make a gift or is it to mitigate against inheritance tax or both?
If managing their IHT position is the priority, it is vital that clients seek professional tax advice. There are multiple options available to help reduce estate taxes, but some routes can be highly complex and are subject to ongoing regulatory change.
The first stage
The first stage of estate planning, then, is to conduct some fact-finding and truly understand all the assets owned, whether that be cash, property, investment or trust funds.
The client’s income must also be reviewed. This may include pensions income from past employment, state pensions, dividends or rental income from properties.
Once we know what income they can expect for the rest of their life, we need to examine the cost of their lifestyle and work out whether there is a surplus or a shortfall – do they have more annual income than they have expenditure, or do they have more annual expenditure than they have income?
For those who are not relying on the assets they own to generate income, for example if they have a guaranteed annual pension income, it is a much easier conversation, as they are better placed to bestow a gift without making a material impact on their lifestyle.
If it is the other way round and the client’s income is less than what they want to be able to spend annually, then it is a different conversation – giving away too much too soon could leave them without the funds they require to live out the rest of their lives in the manner they please.
At this point, we would introduce cash flow modelling to identify how much a client needs to retain and how much they can afford to give away right now.