Six Steps to Sort Out an Inheritance for Your Loved Ones

Half of people over 50 hope to leave a financial legacy to their loved ones, new data suggests, and 11 percent are willing to sacrifice the quality of their own retirement to achieve it.

In a survey conducted by life insurance firm SunLife, 27 percent said their children’s financial health was their top monetary concern.

As a result, leaving an inheritance to children and grandchildren is a top priority for many people.

In fact, a third of retirees reported giving a substantial amount – £15,978 on average – to their loved ones as an “anticipated inheritance”.

This despite their own financial worries: 73 percent of people over 50 say they are worried about the rising cost of living, and 37 percent fear running out of money in retirement.

Mark Screeton, chief executive of SunLife, said: “Our Life Well Spent report shows that people over 50 are guided by family: 87 per cent consider family to be what makes them happiest.”

However, he added: “It can be difficult for older generations to consider setting aside an inheritance without making huge sacrifices in terms of their own financial well-being.”

This is Money looks at where you should start when it comes to planning what you want to leave your loved ones.

1. Write a will

Making a will is an essential step in ensuring that your financial and other wishes are respected when you die.

Without a will, your entire estate could be left to your spouse or divided among your children or grandchildren if you do not have a surviving partner.

Setting out your wishes in a will means that your estate will be divided how you want.

“Be specific,” says Amy Nelson, head of private clients at Bakerlaw Solicitors. ‘Consider potential scenarios, such as what happens if a beneficiary predeceases you.

‘Life circumstances change, so it is essential to review and update your will regularly. Marriage, divorce, births and deaths within the family may require revisions to ensure that your will reflects your current intentions.’

It is never too early to put your wishes in writing, as wills can be updated at any time. It is recommended that you review your will at least every five years.

2. Establish power

It is also a good idea to establish a power of attorney to be prepared for a scenario where you are unable to make the necessary decisions.

“These legal documents designate people you trust to make financial or healthcare decisions on your behalf during your lifetime, whether at your direction or if you are unable to do so,” Nelson says.

When doing so, Nelson recommends choosing people you can trust, who understand what your wishes are, and who will fulfill their responsibilities.

‘Discuss your preferences with the chosen lawyers and with the substitute lawyers you designate. Make sure they understand your values ​​and priorities regarding health care and financial matters,” Nelson says.

A power of attorney can be established for both your financial affairs and your health and well-being. In many cases, it would be advisable to have both types of powers.

When it comes to powers of attorney or wills, Nelson recommends seeking legal guidance on the subject to ensure accuracy and legality, and to ensure that your wishes are legally binding.

3. Value your assets

When writing your will, it is a good idea to make a list of the items you want to include and have an idea of ​​the approximate value of your estate.

This will ensure that you are taking into account all the money and property that is available to you, as well as what your loved ones may have to pay in taxes.

“It is tempting to understate the value of high-value items, such as property, to minimize tax, but HMRC investigations have increased significantly in recent years, with the undervaluation of property being a major target,” Ian Dyall, head of Evelyn’s estate planning. The partners said This is money.

It says anyone planning their estate should get two independent valuations to confirm the value of their property.

The final value will be calculated based on the open market on the date of death, but having a solid estimate when settling your affairs can help ensure your tax bill is minimized.

When planning what to leave your family, you should make the most of the tax-free wrappers that are available in the form of gifts, trusts and private pensions wherever possible, as they will generally not be included in your taxable estate.

4. Mitigate the inheritance tax

Once you have an idea of ​​what you have to give away, the next step is to make sure your loved ones get as much as possible by reducing your inheritance tax bill in the future.

“Mitigating the estate tax is a balancing act between saving taxes, on the one hand, and maintaining access to the money you will need to ensure your financial security, on the other,” Dyall said.

‘The starting point is to look for strategies that provide tax savings with little or no loss of access. An example of this would be ensuring that your will makes the most of your nil rate band, residence nil rate band and any nil rate band you may claim from a deceased spouse,” he said.

The nil rate bands are the amount you can pass on to your loved ones without requiring them to pay inheritance tax.

Read our full guide to inheritance tax for more details on these thresholds.

Money from personal pension plans can also be transferred free of inheritance tax. Beneficiaries currently pay no tax on inherited pensions up to the limit of the deceased’s lifetime allowance if the owner dies before age 75, or their normal income tax rate if they are age 75 or older.

If you can, it may be advisable to live off other assets you have to preserve this tax-free inheritance for your loved ones.

Giving gifts also allows you to pass money on to your children while you’re still alive, and you have a tax-free gift allowance of £3,000 each year, as well as unlimited small gifts of £250 to as many people as you like. If you live seven years after the donation is made, it will be exempt from inheritance tax.

Dyall said: ‘There is a limit to how far you can go without looking for ways to reduce liability that reduce access to existing assets, but many people can donate money or spend more money without sacrificing their financial security.

“Cash flow analysis of your future income stream and your anticipated expenses can help determine how much you can safely give away or spend.”

Investing in life insurance could also be something to consider. Life insurance payouts are tax-free, so your loved ones won’t have to pay income taxes or capital gains taxes on the money they receive.

Life insurance can be counted as part of your estate for inheritance tax purposes, but it is possible to avoid this by having a policy “written in trust” for your beneficiaries.

This has its pros and cons and is worth checking before doing it.

5. Should I use a trust?

According to SunLife, many people planning their inheritance have specific ideas in mind about where they want their money to go. A fifth have donated money to help family members buy a home, while 15 per cent have given money for a wedding and 14 per cent for a holiday.

If you have specific ideas about who in your family you want to have control of your money and what they can spend it on, you may want to consider putting it in a trust.

Dyall said: “Trusts can be useful if you are concerned about having some control over how money is used, or want to protect assets from a beneficiary’s divorce or bankruptcy, but you can generally only put up to £325,000 into a trust per donor in any seven-year period, otherwise there will be a 20 per cent inheritance tax charge on the excess.

“Many people prefer to use trusts because then they can have some control, as trustees, over who benefits, when they benefit, how much they receive, how the money is invested, etc.”

On the other hand, direct donations beyond your allowance could be a useful option since you’ll be around to see how the money is used.

Of course, going beyond your gift allowance means your funds may be subject to taxes.

6. Consider financial advice

It may be tempting to take on the burden of estate planning yourself.

After all, your goal is to leave as much of your estate as possible to your loved ones, so it seems counterproductive to shell out for professional advice.

However, while the fees associated with financial advice may be a bit of a setback, it could be more effective in the long run. This is especially the case if you have a lot of money or assets to play with.

Professional counseling can also provide you with as much or as little help as you need. For example, a financial advisor could simply help you find the private pension product that best suits your needs.

On the other hand, you could hire a financial planner to create a complete picture of your finances and a roadmap tailored to your position.

The other benefit is that some of the pressure of estate planning will be taken off your shoulders, allowing you to make the most of your retirement.