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How to ensure an estate is set up properly

This article is part of
Guide to passing on wealth after you die

How to ensure an estate is set up properly
(Olia Danilevich/Pexels)

It is important to ensure that the estate is set up properly and any insurance policy designed to mitigate inheritance tax is up to date and effective. 

A crucial step for the adviser to take while the client is still alive is to ensure that the will is up to date. Dying without a will or with one that is out of date can cause enormous problems to those left behind.  

Another consideration, especially for married people, might be to move bank accounts or other assets into joint ownership so the survivor receives them automatically instead of waiting.

An important part of IHT planning, according to Martin Stanley, chartered financial planner at Rowley Turton, can be life assurance plans designed to meet the bill.  

However it is important they are set up in the right way.

Stanley says: “If the payout goes into the estate of the deceased person themself, then that just represents more money to be taxed. Instead, typically, life assurance plans are set to pay into a trust, which being outside of the deceased’s estate is free of tax itself and the proceeds are available straight away.”

But Stanley cautions that there are some pitfalls with using life assurance for IHT. 

“For one thing, it’s easy for the amount of cover to fall behind the sum needed – indexed plans are available, though uncommon.  

“Another very common problem is that the normally used whole-of-life plans are often subject to steeper and steeper premium increases over time – sometimes, so much so that they become unaffordable and end up surrendered before they ever have a chance to pay out.   

"Guaranteed premium plans are available, but are much more expensive. Advisers and clients should consider this very carefully, well in advance, to give the best chance of their planning being successful." 

Estate value and IHT

Another key step an adviser should take when trying to ready the estate for the inevitable is to determine if the value of the estate is significant and is likely to lead to IHT thanks to a chargeable estate on death after deducting allowable debts, reliefs, exemptions and nil rate bands.

In the will, for example, what does it say about who is to inherit the estate?

According to Ian Smart, product architect at Royal London, this can affect how much IHT is payable.  

He says: “If they don’t have a will, they should be advised to write one. You also need to consider the value of their estate and whether any exemptions are available. 

“For example, if they are married or in a civil partnership and leaving everything to their spouse or civil partner, there is no liability on first death, but a liability could arise on the second death and appropriate cover should be considered to provide funds to pay the liability.