Inheritance Tax & Estate Planning: Engage Guide To Wealth Management
Part 3: Diversification, Risk and Protection.
Diversification & Risk.
The Importance of Investment in Estate Planning: Investment plays a crucial role in maintaining and growing the value of your estate over time. Effective investment strategies can help ensure that your wealth keeps pace with inflation and that your estate remains robust enough to provide for you and your loved ones.
Diversification
Diversification is the practice of spreading your investments across a variety of assets to manage investment risk. By not putting all your eggs in one basket, you can insulate your wealth from specific investment and market risks.
Rebalancing Your Portfolio
Over time, your investments will grow at different rates, causing your portfolio to drift from its original allocation. Regularly rebalancing your portfolio ensures that it remains aligned with your risk tolerance and investment goals, preserving your wealth for future generations.
Risk Management in Estate Planning: Estate planning involves managing various risks that could impact your wealth and the transfer of your estate to your loved ones. These risks include investment risk, sequencing risk, volatility, inflation, changes in tax laws, and personal circumstances like divorce or death.
Mitigating Financial Risks
1. Diversification: As discussed, diversification is a key strategy for managing investment risk.
2. Insurance: Life insurance and other forms of insurance can provide a safety net for your estate. For example, life insurance can provide a lump sum to cover IHT liabilities, ensuring that your beneficiaries do not have to sell assets to pay the tax.
3. Liquidity Planning: Ensuring your estate has sufficient liquidity to cover expenses like IHT and probate costs is crucial. This might involve setting aside cash or investments that can be easily liquidated.
4. Regular Reviews: Estate plans should be reviewed regularly to ensure they still meet your goals and are aligned with current laws and market conditions. Changes in your personal circumstances, such as marriage, divorce, or the birth of a family member, should prompt an immediate review of your plan.
Legal Risks
Legal challenges, such as disputes over a will, can derail your estate plan. To mitigate these risks, ensure that your Will is clearly drafted, up to date, and reflects your current wishes. Involving a solicitor or estate planner in the process can help ensure that your Will is legally sound.
Protection.
Wills - The Cornerstone of Estate Planning: A Will is a legal document that sets out how you wish your estate to be distributed after your death. Without a will, your estate will be distributed according to the rules of intestacy, which may not reflect your wishes.
What to Include in a Will
Executors: These are the people responsible for administering your estate. Choose individuals you trust to carry out your wishes.
Beneficiaries: Clearly state who you want to inherit your assets and in what proportions. This can include family, friends, and charities.
Guardians for Minor Children: If you have minor children, your will should name guardians to care for them if you and your partner pass away.
Funeral Wishes: You can include instructions for your funeral, though these are not legally binding.
Keeping Your Will Updated
Your Will should be reviewed regularly, especially after major life events like marriage, divorce, the birth of a child, or significant changes in your financial situation. Keeping your will up to date ensures that it continues to reflect your wishes.
Avoiding Common Pitfalls
1. Ambiguity: Be clear and specific in your instructions to avoid misunderstandings and disputes.
2. Failing to Update: An outdated will can lead to unintended consequences, such as excluding a new spouse or child from your estate.
3. DIY Wills: While it is possible to write your own Will, these can have errors and omissions. It’s advisable to work with a solicitor to ensure your Will is right for you and your circumstances. Mistakes in a DIY Will can be far more costly than paying for a professional Will.
Lasting Power of Attorney (LPA): An LPA is an essential legal document that allows you to appoint someone you trust to make decisions on your behalf if you become unable to do so due to illness, injury, or cognitive decline.
Having an LPA ensures that your personal, financial, and medical affairs are managed according to your wishes, even when you cannot actively participate in the decision-making process.
The Two Types of LPA
1. Health and welfare LPA: For decisions about your medical treatment, living arrangements, and daily care. This might include decisions about life-sustaining treatment or where you should live if you can no longer live independently.
2. Property and financial affairs LPA: For managing your finances, including paying bills, managing bank accounts, and dealing with property matters.
Key Considerations
Choosing the right person to act as your attorney is critical. This individual should be someone you trust implicitly to act in your best interest, as they will have significant control over your affairs. You can consider appointing more than one attorney or a backup attorney to ensure continuity if your primary choice is unavailable when needed.
Communication is key. You should discuss your wishes and values with your chosen attorney to ensure they understand your preferences. This will help guide their decisions in line with your desires. It is important to review and update your LPAs to ensure they reflect changes in your circumstances, relationships, or wishes, giving you and your loved ones peace of mind that your affairs will be handled according to your current intentions.
The Role of Life Insurance in Estate Planning: Life insurance can be a valuable tool in estate planning, offering a way to provide for your loved ones and cover potential IHT liabilities.
The proceeds from a life insurance policy can be paid outside of your estate and used to pay IHT; potentially ensuring that your beneficiaries receive the full value of your estate, depending on the level of protection in place.
Types of Life Insurance
Term Life Insurance: This type of policy provides coverage for a specific period (e.g., 10, 20, or 30 years). It is typically less expensive than whole life insurance and can be used to cover IHT liabilities that might arise if you die during the term of the policy.
Whole of Life Insurance: Unlike term insurance, whole of life insurance provides coverage for your entire life, as long as premiums are paid. It can be an effective way to ensure that funds are available to cover IHT and other estate-related expenses, regardless of when you pass away.
Joint Life Insurance: This type of policy covers two people, usually a married couple. Depending on the policy type and your requirements if might payout on either the first or the second death. Selecting the right policy will depend on how you plan to share your estate.
Writing Life Insurance in Trust
To ensure that life insurance proceeds are not included in your estate for IHT purposes, consider writing the policy in trust. When a life insurance policy is written in trust, the proceeds are paid outside of the estate, rather than forming part of your estate. This can be a highly effective way to avoid increasing the IHT liability on your estate.