How To Avoid The Top 10 Estate Planning Mistakes
Mistake No.1 – Not having an Estate Plan or a Will
An Estate Plan is a document which plans for and sets out the methods for disposing of your Estate – which are all your worldly possessions (home, money, car, investments etc.) An Estate Plan tries to ensure that your intended beneficiaries will receive what you want them to receive, and it also attempts to maximise the value of your estate by reducing taxes and other expenses.
It is important to realise that whilst an Estate Plan includes a Will as its chief document, it often uses other legal processes to unprotected to the aim stated above. A typical Estate Plan may include trusts, character ownership, powers of attorney and other legal documents which will be explained later in this report.
At this point you may cry “I don’t need a Will, my affairs are very simple – I am married and it will all go to my wife/husband”.
Well, you should nevertheless plan your Estate and make a Will for three simple reasons:
First by having a Will you remove any uncertainty about your intention for your spouse to inherit your complete estate, should that be your wish. Did you know for example that if you die without a Will (intestate), the Laws of Intestacy say that if you have children your spouse is only entitled to the first £250,000 of your estate outright, with the remainder being shared with your children.
You can see how this could cause serious functional difficulties if you were to die without a Will, leaving your spouse potentially short of money or possibly already having to sell the house to give money to your children.
Secondly if you are not married but are co-habiting your partner is not entitled to any of your estate in the event of your death. There is no such thing in inheritance law as a ‘shared law spouse’ and your partner may have to fight in the courts for a proportion of your estate if you die without a Will
The third reason is that by not making an Estate Plan you also miss out on other important issues such as appointing guardians for your children. Many Wills I see do not address these important issues, just covering the bare basics and leaving your family potentially exposed to both unnecessary upset and cost.
Mistake No.2 – No appointment of guardians for children
We review a lot of existing Wills and a very shared mistake is where a Will has been made several years ago and not updated to mirror the client’s current situation. It is a shared practice for example to have a Will made when you buy your first home – at a time when you didn’t have any children and your life was more straightforward.
If you have children under the age of 18 then you need to appoint a guardian who would care for them in the event of your death. Whilst it is scarce for both parents to die before their children it does happen, and we do sometimes read in the papers of a tragic accident where both parents are killed and their children are orphaned.
Without a Will naming your chosen guardian in your Will it will be up to the Courts to decide who is to take care of your children, and it may not be the person you would want it to be. Your family would also have to go to the expense of legal representation to apply to be made guardians, should there be a argument.
If you are not married you also need to consider the legal issue of parental responsibility if the mother of a child dies. The father does not automatically have the right to guardianship of a child, however it is possible for a mother to grant parental responsibility during her lifetime by applying to the Court, and importantly to name the father as guardian of the child/children in her Will so that his right to care for them after her death is clearly established.
Finally, a shared choice for parents would be for one of their own parents to care for their children in the event of their deaths. It may be that if left to chance the Court would decide that a grandparent is too old to care for a child, however if they are named as the guardian in your Will the Court would not rule against this appointment.
Mistake No.3 -Estate plan hasn’t been reviewed at the minimum every 3 years
So many Estate Plans/Wills are drafted and put in a drawer and virtually forgotten about. It is as though we have mentally ticked off the fact that we have it sorted out and forget about it.
We review many such plans and in the majority of situations something has happened in the person’s life to invalidate their plan thoroughly, or average that if it were to be used would not mirror their wishes.
Here are some life events which point to the fact that you need to review/update your plan:
· You have become married or divorced
· An executor has died or moved away from you
· You have decided to exclude someone from your Will
· You have had a child or another child
· You have a grandchild or more grandchildren
· Your spouse has passed away before you and you have re-married or are contemplating getting re-married
· You have received a substantial bequest from another person’s estate
· You no longer own a specific gift named in your will
· You have become concerned about the possible impact of care home fees on your estate
· The value of your estate has increased to beyond the threshold for inheritance tax
· You wish to make provision for the care of your pets in the event of your death
· You wish to name people who can manage your affairs if you were to become mentally or physically incapacitated
· You want to express your wishes regarding your medical care should you suffer a serious illness
· You want to outline your plans for your funeral such as burial or cremation, religious or secular service etc.
For these reasons and more an estate plan is a living document which should be reviewed on at the minimum a three yearly basis, or more regularly if something changes such as the examples given above. So, get your documents out of a drawer and see if they cover any of the points above which you feel strongly about.
Mistake No.4 No Inheritance Tax (IHT) planning
The current threshold for inheritance tax is an estate worth £325,000. If your character, car, savings, investments, holiday home/rental character, any life insurance policies not written in trust etc. add up to more than this figure in value then your estate will be taxed on 40% of the excess value. So, for example if your total estate is worth £425,000 the tax bill will be 40% of £100,000 or £40,000.
This bill has to be paid before the estate can be distributed, and will consequently reduce bequests you have made to your loved ones. Every individual has a nil rate band (the £325,000 exemption) and for married couples or civil partners recent changes in the law average that it is possible for one person to move their nil rate band onto the survivor.
This move is not however automatic and it needs to be carefully proven on first death to ensure it can be claimed by the second person’s estate. Remember that the gap between two parties dying could be tens of years, and consequently it is important to get advice about this area if you need to claim both nil rate bands.
This change has put many estates outside the scope of inheritance tax which would have before been liable, as before the first person’s nil rate band was effectively lost if they transferred all their assets to their spouse, as on second death only one nil rate band was applicable. Currently it is possible for a married associate/civil partnership to have a combined estate of £650,000 without liability to inheritance tax.
For non-married couples it is not possible to claim your partner’s nil rate band on second death, and consequently leaving all your assets to your partner on first death could cause an IHT problem on second death.
One possible solution is to gift assets to someone other than your partner on first death, however doing this could cause financial hardship – or in a situation where the majority of assets are held in character it could be impossible to do so.
You may also use one of a number of gifting allowances to reduce the value of your estate, however it is important to remember than anything you give away must be a true gift and not a ‘gift with reservation’. If you ‘give’ your house to your children, for example, but continue to live in it rent-free then it is likely that it will be considered a gift with reservation of assistance and be brought back into your estate for inheritance tax calculation purposes.
Any lifetime gifts which are not classed as exempt are classed as “potentially exempt transfers” and may be brought back into your estate for Inheritance Tax purposes for up to seven years after the date of the original gift.
It is also possible to use a range of trust arrangements to place assets outside your estate whilst retaining control over how the proceeds are given to beneficiaries. This can be a complicate area with possible tax issues to consider and it is important to seek specialist advice.
The gift allowances are unprotected to regular review by the taxman and it is important to keep up-to-date, especially if you are planning on making any substantial gifts outside your estate.
For many people provided they are in reasonable health it is possible to buy a whole of life insurance policy the proceeds of which aims to pay any inheritance tax liability on second death. The policy is set up on a “joint life, second death” basis and in a trust, so that the proceeds are obtainable to the beneficiaries to pay the tax bill.
It is beyond the scope of this report to go into all the aspects of inheritance tax planning, however it is important to realise that leaving everything to each other and then to your children may not be the most effective way to pass on as much of your estate as possible to your loved ones.
Mistake No.5 – ‘Sideways disinheritance’ not considered
This is an emotive issue and one many of us do not like to consider, however it is increasingly shared.
Sideways disinheritance is where a associate (married or otherwise) decide to make an estate plan where they leave all their worldly goods to each other on first death, on the understanding that when the second person dies the remainder of the estate will be left to their children.
Unfortunately life has a way of being more complicated than that, and nowadays it is increasingly shared for a widow/widower/partner to marry again after the death of their other half.
In the event of remarriage a Will is invalidated. The new husband/wife becomes your main heir and will inherit the majority of your estate. The Laws of Intestacy come into play again. This situation becomes already more complicate if a new spouse has children from a past relationship, in other words any inheritance your children might receive as the residue of an estate would have to be shared with their step-siblings.
How can this be avoided?
By creating an estate plan which ensures that your proportion of your main asset, your home, is ring-fenced for the assistance of your children no matter what the marital situation of your spouse after your death. by the use of a character Protective Trust and possibly a simple change in the title of your character it is possible to give your spouse the right to reside in your ‘proportion’ of the character after your death for the remainder of his/her life, and your proportion of the house will then pass to your own children.
Your spouse is free to gift his or her proportion of the character to their chosen beneficiaries after your death – which may well be your children, or perhaps a future spouse/children etc. This character protective trust is drafted into your Will as part of a comprehensive estate plan and requires the revision of your existing documents if not already included.
This trust can also be effective in protecting an inheritance against the effects of the possible divorce of one of your children whereby assets could otherwise pass to an ex-spouse as part of a settlement.
Mistake No.6 Impact of Care Home Fees has not been considered
We have discussed the possible impact of Inheritance Tax above, however for many people a bigger threat could come from having to pay for your care costs in later life.
With 1 in 4 men and one in 3 women over the age of 65 requiring residential care the odds are fairly short that it could happen to you or your partner, and these numbers are likely to increase in future due to a number of social factors such as the increasing inability of children to be able to provide care for their parents.
The average care home in Northern Ireland currently charges £538 per week, and the first target for the Local Authority to help meet this bill is your income. If pensions/investments etc. produce the care bill or more each week then your fees will be met from income, and your other assets will be untouched provided that the money coming in is sufficient to meet your care costs on an current basis.
If your income is below this level, and this is the case for the majority of retired people, then your assets – such as your home, are at risk and ultimately may need to be sold to pay for your care.
For a associate, provided one of you is over age 60 or dependent on your partner then the character is not at risk when the first person enters care, however the unfortunate scenario which typically plays out is that the first person dies leaving the complete character to the survivor. If that person then needs to rely on residential care the complete character could be at risk of being sold to pay for their care, as there is no longer a dependent/partner living in the house.
All your careful plans to leave your estate to your children/loved ones could consequently be thwarted as your assets will have been used to pay for you or your partner’s care. There are a number of ways to plan to either pay for the cost of care and/or to mitigate against it, for example to put assets into Trust and beyond the Local Authority care assessment.
Currently the character Protective Trust is effective in protecting the deceased partner’s proportion in the character from being used to pay the care bills of the surviving partner, should they require long-lasting residential care (as per the Community Care Act 1990).
Alternatively a Family Settlement Asset Trust has similar benefits and protects the whole character, instead of just half, and involves an immediate lifetime move into a trust instead of via your Will. To decide if either trust may be appropriate for your situation will require specialized advice.
The assessment for being required to contribute towards your care costs has as threshold for assets valued in excess of £14,250 (2010/2011) so you can see that many more households may be affected by this charge than a possible inheritance tax bill on assets worth £325,000 or more.
It is clear from articles appearing in the press that care home fees are becoming an increasing issue for Local Authorities and by extension, the Government, due to an ageing population in the UK which can no longer be supported on a pay-as-you-go system.
This is also something which you should not leave to the last minute to plan for, if you are 50 or over you need to consider it now. Making arrangements if you are in a state of health which is likely to require residential care in future would be likely to be considered a ‘deliberate deprivation of assets’ and any arrangements overturned to contribute towards your care costs.
Mistake No.7 No plans made to manage your affairs if you are incapacitated
Have you considered what would happen to your finances if you were to be incapacitated as the consequence of an illness, accident or mental illness? Most of us assume that the State will fix this problem without too much hassle. This, however, is not the case.
You may be shocked to hear that if you become mentally incapacitated (coma/stroke/dementia etc.) your bank is obliged to freeze your account under the Banking Code Of Conduct. This doesn’t just include an account in your only name, it also includes joint accounts!
The reasoning for this is simple, if you are mentally incapacitated the bank has a duty of care to you as you are unable to act on your own behalf, and they have to protect your money until such times as someone is legally granted ‘strength of attorney’ to manage your money. And guess what, your wife/husband/partner etc. doesn’t have that right automatically – already if they are the co-signatory on an account.
Image the chaos – you are incapacitated and your family can’t pay their bills, mortgage, buy groceries etc.
To be able to manage your affairs your family need to apply to the Office of Care and Protection (in N.Ireland) to be appointed as ‘Controller’ of your affairs. This course of action could take several months, may include a bill for legal representation and there is NO GUARANTEE your spouse or partner will be given the job. In certain circumstances the Court may appoint a specialized controller such as an accountant or solicitor who will be entitled to bill your estate for the costs of managing your affairs.
There is a straightforward solution to this called an lasting strength Of Attorney and everyone should have one for this reason. already if you don’t think you have much in the way of finances to control it nevertheless makes sense to have someone appointed as an attorney who could apply for state benefits on your behalf, should the worst happen.
By putting in place a legal document now naming one or more people to manage your affairs should you be incapacitated method that the document is freely obtainable to produce to your bank etc. should the worst happen, and if you lose mental capacity is registered at the Court within a matter of days instead of months and is doubtful to be contested.
If you check your estate planning/Will documents and you don’t have an lasting strength of Attorney, and you own any assets in your own or joint names, then this is something you should give a high priority to sorting out.
Mistake No.8 Life insurance policies not placed in a trust
There are two very important reasons why a life insurance policy should be placed in trust, however our experience is that the great majority are not arranged in such a manner.
First if a life policy in your only name (i.e. not joint) is not in trust in the event of your death it is paid out not to your partner or spouse but to your estate. This method that your other half will not have access to the money until probate is granted, and this can take several months. During that time of course bills will nevertheless have to be paid and this could cause hardship to your family.
Secondly by not putting a policy in trust it method that the value of the proceeds will form part of your estate and could be liable to inheritance tax. If you for example already have an estate worth up to the current nil rate band of £325,000 and a £100,000 policy is paid out, up to £40,000 in tax may have to be paid. This could be avoided by putting a policy in trust.
Fortunately it is often possible to put existing policies in trust retrospectively and this should be explored if you discover that your policies are not arranged in this way. Advice is basic however as there are a small number of situations where it might not be desirable to put a policy into a Trust.
Mistake No.9 Your funeral requirements may not be carried out
It may surprise you to know that your executors of your Will are not obliged to carry out your funeral wishes and may make in any case arrangements they consider appropriate. Having said that it is better to record your wishes in this regard in your Will, instead of leaving it up to your family to guess as to whether you wished to buried or cremated, a religious service or secular/humanitarian, flowers or donations to charity etc.
Increasingly people are also purchasing pre-paid funeral plans where their funeral is both paid for in improvement, and will be arranged according to your wishes.
If you are arranging such a plan it is important to store details of this alongside your Will paperwork, and to let your executors know, so that they do not position a separate funeral only to find out at a later date that you had it all pre-arranged.
Mistake No.10 The Will is not valid
Unfortunately every year in the UK around 17,000 Wills are invalidated for one of a number of reasons. If your Will is invalid it method that it is as though you have never written it, and either the laws of intestacy will apply or if a prior will document is found it may be used instead!
It is for this reason that we strongly recommend that you include the sets of a specialized will writer to help you draft your will, instead of going down the DIY or low-cost route.
Here are some of the most shared reasons for invalidating a will:
· The Testator (person making the will) pre-signed the will before asking a neighbour to observe it at a later stage
· The Testator signed the will in front of one observe, but the second observe didn’t sign until a later date
· The will is not signed by the Testator
· The will is not signed by any witnesses
· The testator and his spouse signed each other’s wills by mistake
Also by going down the DIY route you may leave yourself open to accusations from excluded beneficiaries after your death of either signing the will under ‘duress’ or that you were not of ‘sound mind’.
Wills may also appear to have been changed or tampered with, and the temptation to add DIY codicils (updates or amendments) should be avoided. already the mark of a paperclip on a Will could rule to it being invalidated at a future date as this could imply that a codicil has been removed – i.e. the will has been tampered with.
There can also be difficulties over the wording of clauses in your Will if you do not have it professionally drafted, with any ambiguities being argued over by possible beneficiaries who may stand to gain more either way from how the wording is interpreted.
Many a court case has resulted from trying to put right issues surrounding the execution of
Wills and a lot of these grow out of how it was drafted and also signed and witnessed. Of course, court costs will eat into the value of any inheritance received by your beneficiaries and such matters can take years to resolve.