Estate Planning 101 for the Hardworking Finance Professional

By Rosamond McDowell, Head of the Private Client team at law firm Payne Hicks Beach

Over the COVID period, at a time when many businesses were struggling or in decline, estate planning work just got busier. That might have been a factor flowing from an increased sense of mortality, or perhaps people just had a bit more time on their hands to deal with their personal planning. Since the end of lockdown, busyness levels have continued to rise, indicating perhaps an increased level of awareness of the need to get one’s affairs in order, just in case. In this article I cover ten “back to basics” estate planning questions for the unwary, and note why they are important:

Have you made a Will?

If you haven’t, the rules of intestacy will apply to the distribution of assets after your death. Anyone that you might wish to benefit, who does not have a blood tie to you, will receive nothing, and will be left having to make a claim, and hope for agreement from the heirs who take under the intestacy rules, or the mercy of a judge.

Even if you are married or in a civil partnership, the rules of intestacy do not coincide with the rules of inheritance tax, so your partner might end up with an unexpected inheritance tax bill, and having to share your estate with minor children.

Have you made Lasting Powers of Attorney?

If you lose the capacity to make decisions for yourself, not having made LPAs, a family member or friend would need to make an application to the Court of Protection to be appointed as a ‘deputy’. Making LPAs allows you to choose your attorney(s) and set out your wishes for how they are to deal with your affairs. LPAs come in two types, one for dealing with your property and finances, and the other with health and welfare decisions. You can make either or both. You can also make an Advance Decision to Refuse Medical Treatment in extremis if that is something you feel strongly about.

Have you considered the impact of inheritance tax when you die?

IHT is charged at 40% on the whole of your estate, if there is no available exemption or relief. If a person is relying on inheriting the whole of your estate, rather than 60% of it, it is worth considering mitigation strategies, including gifting outright or (where possible) into trust, and maximising the use of any available exemptions or reliefs.

Are you married or in a civil partnership?

If so, the spouse exemption from inheritance tax may apply (subject to a possible wrinkle if you and your partner have different domiciles. But you still need a Will. Even if you have made a Will, a subsequent marriage or civil partnership will revoke your Will, and you will need to make a new one.

If you are considering marriage or civil partnership, you should certainly consider entering into a prenuptial agreement, which, though not absolutely legally binding, will nonetheless be persuasive in settling any claim on divorce or dissolution, particularly if carefully drawn.

Are you co-habiting?

People often make the mistake of believing that cohabitation (sometimes called “common law marriage”) affords rights to inheritance. That is incorrect. Your partner may have a right to raise a claim against your estate, but nothing passes to a cohabitee automatically. If you do make a Will providing for your cohabitee, you will need to factor in the inheritance tax burden, because of the absence of the spouse exemption.

If you are considering moving in with a partner, it is worth considering a cohabitation agreement, which will determine your rights to particular assets during the partnership and on its termination.

Are you in second a marriage/relationship, with two families to provide for?

Both your children and your partner will have expectations. Some may even have an entitlement to make a claim against your estate. Being clear and agreeing expectations and rights will potentially avoid years of painful litigation.

Are you resident and domiciled in the UK?

If you hail originally from outside of the UK, and are not resident in the UK or have been resident here for fewer than 14 tax years, there may be opportunities available for planning, including in particular the creation of “excluded property” trusts, that will keep your estate outside of the UK tax net. Rules were introduced in 2017 to prevent long term residents from claiming non-dom status on an unlimited basis, but the planning opportunities in the first years of residence were protected.

Where are your assets situated?

If you hold assets outside of the UK, you will need to have in mind two particular matters. First, taxes; consider what taxes may apply in relation to the assets, both in the UK and in the country of situs, and whether a double tax treaty will be available to alleviate any double taxes. Consider also the tax planning opportunities that holding foreign assets may afford, particularly if you are not (or not yet) domiciled in the UK.

Secondly, legal issues; consider how that property will be transferred or dealt with if you die still holding it. You will need to consider whether local laws apply, directing who might inherit. You might need to make a Will locally, dealing with those assets. You could consider whether there is an opportunity to elect to have a particular system of law apply, that might afford you the freedom to decide who will inherit. Such elections are sometimes possible under the local laws applicable in a particular jurisdiction, but more often under international treaties, for example the EU Succession Regulation.

Do you own your own business?

An entrepreneurial spirit is a great bonus, and can lead to huge financial rewards. However, it can also lead to much complexity if your exit, particularly a sudden exit on death, is not properly planned for. Consider who your key personnel are, and who will carry on running your business if anything should happen to you. Consider whether your family or heirs will wish to carry on running the business, or whether a sale strategy is called for. Consider whether “key man insurance” is advisable, to provide your business partners or company with a pot of cash in the event of your death, to enable your family to be bought out.

On the plus side, an interest or shares in a trading business or company may benefit from a special relief from inheritance tax, potentially at 100%. Making full use of business property relief from inheritance tax is a very useful planning device.

Have you got life insurance?

Life insurance can be an extremely useful tool, whether for covering an inheritance tax risk, or for providing a pot of money for a family or (as noted above) to facilitate the buy-out of a business interest. Insurance policies should be placed in trust, so as to avoid a charge to IHT on the value of the death benefits.