Given the choice between giving money to your favourite friend or relative, your favourite charity or the taxman, very few people would choose the taxman. This is exactly the choice people have on their death, but many of them end up giving a disproportionate amount to the taxman because they never get around to putting plans in place during their lifetimes. So why the hesitation?
I don’t want to tempt fate
Many people are naturally hesitant to talk about death and leaving their assets to their loved ones. However, contrary to their fears having a Will and planning how to leave their assets will not increase their chance of dying.
More importantly, making those plans can help to avoid significant administrative issues and family arguments on death. Difficult as it may be, it is easier to sort these issues today than leave others to sort them in the future.
What if I need the money?
We spend a significant part of our lives saving money ‘for a rainy day’, whether that is for retirement, a period of redundancy or something unexpected. It is therefore psychologically difficult for us to start spending those savings or giving them away. No matter how wealthy a person is, there is always a nagging doubt – ‘what if I need it?’
A financial planner can show you how much money you can afford to spend or give away.
A financial planner can show you how much money you can afford to spend or give away. Using details of your current savings, income and expenditure alongside your plans for the future, they can forecast your finances to find out if you will have enough money. They can also take into account potential problem scenarios, such as needing to move into a care home or the spouse with a higher-paying pension dying before their partner.
Armed with this information, you can enjoy later life more fully. You can spend your savings more freely, or give money to your family and see them enjoy the benefits of those gifts. If you think you might need the money in the future, there are also options available which will allow you to make a gift while retaining access to either a regular income or to a series of future payments. These can either be taken if needed or deferred if not.
Now is not a good time to give them money
Whatever the reason, now may not be a good time to give away money. Perhaps there’s a son or daughter with money troubles or whose business is about to fail. There may be a child who is about to divorce or who is not capable of managing the money currently due to an extended period abroad. However, delaying can also be costly as it takes seven years before a gift will reduce your Inheritance Tax liability.
In these cases it is often a good idea to use a trust rather than make outright gifts to your beneficiaries. The gift will still leave your estate for Inheritance Tax purposes after seven years, but you can choose who will benefit from the money, when to make gifts and how much you give them. You can also choose how the money is invested in the meantime.
My beneficiaries are too young or immature
You may not believe that your beneficiaries are capable of looking after the money responsibly. Many parents have memories of their children (or nieces and nephews) when they were young and irresponsible – even if they are now fully grown with children of their own.
A trust allows you to make a gift today but control when and how that money is distributed.
Alternatively, you may decide that your children don’t need the money and you would prefer to help your grandchildren instead, but either they are too young or you are worried about giving them control of the money. Either way, using a trust allows you to make a gift today but control when and how that money is distributed, and how it is invested in the meantime.
I would rather leave my beneficiaries a legacy on my death
Some people would prefer their beneficiaries to receive a legacy on their death rather than during their lifetime, but this can be very inefficient when it comes to Inheritance Tax.
Gifts made on your death may be subject to 40% Inheritance Tax, but this doesn’t usually apply to gifts made during your lifetime if you survive for seven years afterwards. On top of this, if you hold back from making gifts and your estate is valued above £2 million when you die, your beneficiaries may not benefit from the residence nil rate band (the additional £125,000 allowance for passing on your home).
One way around this is to make gifts into a trust during your lifetime and give guidance to the trustees that they should only distribute the money to the beneficiaries after your death. This approach offers the best of both worlds – Inheritance Tax savings and a larger legacy received only on death.
They should carve out their own way in this world
Warren Buffett, once the richest man in the world, said he wanted to leave his children "enough money so that they would feel they could do anything, but not so much that they could do nothing." Many people have similar concerns that leaving too much money to their children deprives them of the satisfaction that working hard and achieving goals can bring. If this applies to you, you could put money aside in a trust that could be used if ever things change and your children or a future generation fell on hard times.
Alternatively, you may wish to consider giving money to charity either during your life or in your Will. Both types of charitable gifts can help to reduce Inheritance Tax, and lifetime gifts are also likely to benefit from Gift Aid, which can reduce Income Tax. If you intend to gift large sums of money to charity then you could also consider creating your own charitable trust.
Are you ready to start estate planning?
If any of these reasons sound familiar to you or you just want to start estate planning, speak to one of our experts by booking a no-obligation initial consultation. We can speak to you over the phone or meet you at your home or nearest Tilney office. Simply complete this online form, call us on 020 7189 2400 or email email@example.com.
If you would just like to find out more about the different options you have when it comes to estate planning, download our guide to estate planning and Inheritance Tax.
This article was previously published on Tilney prior to the launch of Evelyn Partners.