Financial Planner Will Hodgson explains the importance of Estate Planning for your future generations.
Thinking about your own mortality isn’t necessarily a pleasant exercise, but planning ahead with Wills and trusts could give you the peace of mind of knowing that your loved ones will be looked after when you’re gone.
So what is a Will? It’s a legal document that conveys your wishes and instructions with regard to the distribution of your assets when you die, along with other important decisions. Your assets can include property, businesses, bank accounts, investments and personal effects. A Will can also outline your wishes to make gifts to family members, friends, charities or religious groups.
Your Will also ensures that your heirs receive their inheritance quicker and with fewer legal difficulties. Writing a Will can stop assets passing automatically to those you would not wish to benefit from your estate.
“Say not you know another entirely, till you have divided an inheritance with him.”
Johann Kaspar Lavater
If you die without a Will then your estate will be subject to the Laws of Intestacy. This can cause a number of issues, including (but not limited to):
- - Challenges to your beneficiaries’ inheritance from estranged family members.
- - The estate being left to unintended beneficiaries or distributed in unfair shares.
- - The surviving spouse not being left with enough money to maintain their desired
- standard of living.
If intestate, decisions regarding your estate and how it will be distributed will ultimately be left in the hands of the Courts, where your wishes could be dismissed. Going through the Courts can be time-consuming, costly, and emotionally draining for your loved ones. It has been known to divide families and deprive the intended beneficiaries of their inheritance.
Take Michael and Sarah as an example: they are married and each has an adult child from a previous marriage – Bradley (Michael’s son) and Lucy (Sarah’s daughter). Michael and Sarah wish to leave their respective assets to each other first and then to their children in equal shares. If Michael dies intestate, the majority of his assets could pass to Sarah. If Sarah dies intestate too though, her assets will pass to her direct bloodline (Lucy) with Bradley receiving nothing from his late father's or stepmother’s estates.
To avoid this, Michael and Sarah could write Wills nominating each other and both children as the executors of their estates, with explicit instructions to pass on the proceeds of the estate to the surviving spouse on first death and then to Lucy and Bradley upon second death. This describes a ‘basic’ Will, which simply outlines how your estate is to be distributed. Whilst this is an excellent starting point, it does not fully solve the problem; there are further steps that should be taken to ensure that the assets you leave behind remain with those that you wish to benefit from your estate.
There are a number of scenarios that can result in your spouse, children and other beneficiaries losing out on some or all of what should be left to them. Going back to Michael and Sarah - assume that they do set up Wills and Michael dies first, leaving all of his assets to Sarah in the first instance. If Sarah remarries then her existing Will will be invalidated, and so she might draw up new ones with her spouse with a similar agreement to that which she had with Michael. Michael’s intention was for his remaining assets and his share of the family home to be split 50/50 between Bradley and Lucy upon Sarah’s death, but now this could all pass to Sarah’s new spouse and later be distributed according to his own Will, with the children missing out on their inheritance altogether.
This is where trust planning can help to protect your family assets and ensure that they are passed down correctly through the generations. Executors of the estate will be instructed via the Will to action the setting up of a trust into which assets are placed. Trustees are nominated to look after the trust on behalf of the beneficiaries, who are entitled to receive the proceeds.
So, Michael and Sarah set up trusts via their Wills, nominating each other and their children as the executors of the estate and also as trustees. The surviving spouse will be able to utilise the assets of the trust with the children being the ultimate beneficiaries. Now when Michael dies, his assets will be placed into trust for Sarah’s benefit, and upon her death any remaining trust assets will be passed onto Bradley and Lucy, regardless of Sarah’s own estate planning arrangements. There are other potential benefits of this method for Bradley and Lucy as trusts can be of great assistance in presevering wealth in various ways throughout the generations.
For many families in the UK the majority of the estate is tied up in the family home, therefore appropriate trust planning can be very important when ensuring that wealth is distributed through the generations according to your wishes. Trusts are a complex area of Estate Planning though, and it is recommended that you seek independent advice before arranging them alongside your Will.
Will Hodgson BSc(Hons) DipPFS
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The Financial Conduct Authority does not regulate trust planning, Will writing and legal services.
The details relating to the laws of England & Wales are correct at the time of publication, and legislation may change.
BBT Estate Planning's advisers are regulated members of The Society of Will Writers and Estate Planning Practitioners.
The scenario included is for information purposes / general guidance only and should not be interpreted as advised recommendations.