Estate planning can seem daunting, particularly if you are a high net worth individual. Taking the time to review your affairs is essential. Here are four top tips to take you from a standing start, to getting your family's affairs in order.
1. Stop to think about the extent of your wealth
We know clients spend their life working hard to earn a good salary or grow a business. The day-to-day pressures of work often get in the way of looking at your own assets. Others may inherit assets following a bereavement, at a time when it can be difficult to focus on the financial value of your inheritance. Whatever the source of your wealth, taking a minute to consider the extent of your assets, and the consequences of that for you and your family, is the first step.
2. Sort out the basics – for you and your family
Start with the basics. Everyone should put a will and power of attorney (POA) in place. This ensures that you and your family are looked after if you lose capacity or die. A will dictates who your assets pass to on your death, but it also let lets you nominate guardians for your children, if you die before they turn 16. If your children are a bit older, then you should think about encouraging them to look at their own affairs. They should get wills and POAs in place too. You may also want to think about protecting family wealth from relationship breakdown. This may apply to you, but it could also apply to your children's relationships. It is sensible to think about pre-nuptial or cohabitation agreements.
3. Think about estate planning
There are two key elements of estate planning: the tax efficient transfer of wealth; and asset protection.
(a) Tax planning
If you are a high net worth individual, IHT is likely to be payable on your death (or on the second death, in the case of spouses or civil partners). Generally IHT is paid at a rate of 40% on your capital assets, with a tax free threshold of only £650k for a married couple if their assets exceed £2.35m.
Speaking to specialists can help mitigate this tax. Most IHT mitigation strategies involve giving away assets. If you live for 7 years after making a gift, it falls out of your estate for IHT purposes. You may not want to give substantial assets to young children. This is where asset protection becomes important. There are various ways to effectively transfer your wealth to your children, or to younger generations, while you retain control over the assets.
A common example is a trust, where you appoint yourself and a spouse as trustees, and manage the gifted asset for the benefit of the beneficiary (often the children or grandchildren). However, gifts to trust are limited to £325,000 per person, otherwise there will be an immediate IHT charge. For high net worth individuals, this is often not a considerable portion of their estate.
(b) High net worth vehicles: FICs; FLPs; and Charities
There are many alternative options: from simple things like life assurance; through to utilising structures like Family Investment Companies (FICs) and Family Limited Partnerships (FLPs). A FIC operates like a "freezer scheme" which freezes the value of assets in your estate, and successfully gets any growth in value out of your estate. It can also offer significant income tax benefits. A FLP operates more like a traditional gift, but it is not limited in value like gifts to trust. With a FLP, you give assets to the partnership, in which your chosen beneficiaries are partners, but you retain control over the assets via the "general" partner.
If your wealth is such that you would like to benefit those beyond your own family and friends, then you may want to look at setting up a charity. Any gifts to charity (created by you or otherwise) are exempt from IHT. This allows you to use your wealth for specific charitable purposes, and effectively redirect assets which could be liable for 40% tax if they were not passed to charity.
4. Take advice from an expert & ensure a bespoke experience
Estate planning options are wide ranging and can be complex. There is no "one size fits all" approach – a good strategy for one client may be a poor strategy for another client. Taking advice from experts, who are experienced in working with high net worth clients, is the best way to understand the best options available to you. We understand that service excellence is paramount and offer a bespoke and dedicated partner-led service for high net worth individuals. If you would like to discuss the options for your family or your clients, get in touch with your usual Brodies contact.