Iain Stevenson brings attention to the importance of communicating your estate planning.
Many consider estate planning to be the Marmite of financial planning – people either love it or hate it.
In any event, and regardless of your personal opinion, estate planning crucially underpins your family’s long-term financial security and can support you in mitigating tax liability – a goal that often appears high up on a dentist’s financial planning wish list.
A realistic scenario
Let’s bring this to life by using an example of someone who did some estate, wealth and legacy planning. They did this with the intention of achieving something.
For ease of calculations, let’s use a couple with an estate valued at £2m, with the main residential property being worth £750k and the other £1.25m being comprised of various investments and cash deposits. Let’s also assume for this purpose that the clients have two children, both financially independent.
With some basic calculations, you can find out that there is an inheritance tax (IHT) liability already at £400k. This is due to the tax-free threshold being set at £325k per person, plus a residential home allowance of £175,000 each and any additional value above this being liable for 40% IHT. Therefore, on this basis, each child would receive £800k and the couple’s third child (the Chancellor!) would receive £400k.
These clients may well have put some plans in place to mitigate this tax charge either partially or completely, or at least insure against it. This is where communicating what you have done is vitally important.
Communication is key
Imagine the scenario should one of these clients die. What often happens is that the two children in this case become super-vigilant and protective of the surviving parent. They want to help in whatever way they can. Clearly, this is a vulnerable client who has just suffered the trauma of losing their life partner, and children who want to protect for all the right reasons.
One area that the children look closely at is income and expenditure, so that they can, to the best of their ability and with the best of intentions, make sure that the surviving parent is secure financially and can maintain the standard of living to which they’ve become accustomed to in retirement.
They may discover, hypothetically, a payment of £561 per month, which the surviving parent may not be able to assign to a specific purpose from memory. So, the children simply cancel the direct debit with the bank. It’s the easiest thing to do, and they’ve ‘saved’ the surviving parent an outlay of £561 per month.
What they don’t realise is that they have just cancelled a joint-life, second death whole-of-life contract with guaranteed premiums and a guaranteed sum assured of £400,000, a policy that is in trust with both children as named beneficiaries, so that the inheritance tax bill can be paid.
Having just ‘cost’ themselves £400,000 and had they been armed with all the facts, they might’ve made a different decision.
You need to communicate your plans, wishes and arrangements to those that may influence future choices and decisions. It’s worth remembering that every dentist’s situation is different when it comes to inheritance tax liability.
For a clear picture, it may be worth speaking to a specialist financial adviser to truly understand how it can impact your situation.
Read more Money Talks columns
- Setting effective financial goals
- One financial New Year’s resolution to address
- To be private or not to be private?
- Analysing business risks for your practice
- Cost of living crisis and retirement.
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