Six steps to sorting an inheritance in your family members

Half of over 50s hope to leave a financial legacy for their loved ones, new data suggests, with 11 per cent willing to sacrifice the quality of their own retirement to do so.

In a survey by life insurance firm SunLife, 27 per cent said the financial health of their children was their main money worry.

As a result, leaving an inheritance for children and grandchildren is at the top of many people’s priorities.

In fact, a third of retirees reported having already gifted a substantial amount, £15,978 on average, to the loved ones as an ‘early inheritance’.

This is in spite of their own financial concerns, with 73 per cent of over 50s saying that they are worried about the rising cost of living, and 37 per concerned that they might run out of money during their retirement.

Mark Screeton, chief executive of SunLife, said: ‘Our Life Well Spent report shows that over 50s are driven by family – 87 per cent list family as the thing that makes them the happiest.’

However, he added: ‘It can be difficult for the older generation to factor in setting aside an inheritance without making huge sacrifices in terms of their own financial wellbeing.’

This is Money takes a look at where you need to start when it comes to planning what you want to leave for your loved ones.

1. Write a will

Making a will is an essential step to make sure your financial and other wishes are respected when you die.

Without a will, your entire estate could be left to your spouse, or divided amongst your children or grandchildren if you have no surviving partner.

Setting out your wishes in a will means that your estate will be divided how you want it to be.

‘Be specific,’ Amy Nelson, head of private client at Bakerlaw Solicitors, says. ‘Consider potential scenarios, such as what happens if a beneficiary predeceases you.

‘Life circumstances change, so it’s essential to review and update your will periodically. Marriage, divorce, births, and deaths within the family may necessitate revisions to ensure your will reflects your current intentions.’

It is never too early to put your wishes down in writing, as wills can be updated at any point. It is recommended that you review your will at least every five years.

2. Establish power of attorney

It is also a good idea to establish power of attorney, so that you are prepared for a scenario in which you cannot make the necessary decisions.

‘These legal documents appoint those you trust to make financial or healthcare decisions on your behalf during your lifetime, either at your instructions or if you are unable to,’ Nelson says.

When doing so, Nelson recommends choosing people who you can trust, who understand what your wishes are and will carry out their responsibilities.

‘Discuss your preferences with your chosen attorneys and any replacement attorneys you appoint. Make sure they understand your values and priorities regarding medical care and financial matters,’ Nelson says.

Power of attorney can be set up for both your financial affairs, and your health and welfare. In many cases, it would be advisable to have both types of power of attorney in place.

When dealing with power of attorney or with your will, Nelson recommends seeking legal guidance on the matter to ensure accuracy and legality, and to make sure that your wishes are legally binding.

3. Value your assets

When writing your will, it is a good idea to make a list of items that you want to be included, and to have an idea of the rough value of your estate. 

This will ensure that you are taking into account all of the money and property that is available to you, as well as what your loved ones may have to pay in taxes. 

‘It is tempting to understate the value of high value items such as property to minimise the tax, but HMRC investigations have increased significantly over the last few years with undervaluation of property being a prime target,’ Ian Dyall, head of estate planning at Evelyn Partners told This is Money.

He says anyone planning their estate should get two independent valuations to confirm the value of their property.

The ultimate value will be calculated based on the open market at the date of death, but having a solid estimate when sorting out your affairs can help to make sure the tax bill is minimised.

When planning what to leave to your family, you should make the most of tax-free wrappers that are available in the form of gifting, trusts and private pensions where possible, as these will not generally be included in your taxable estate.

4. Mitigate inheritance tax

Once you have an idea of what you have to give away, the next step is making sure that your loved ones get as much of it as possible by reducing their inheritance tax bill down the line.

‘Mitigating inheritance tax is a balancing act between saving tax on the one side and maintaining access to the money that you’ll need to ensure you remain financially secure on the other,’ Dyall said.

‘The starting point is to look for strategies which provide a tax saving with little or no loss of access. Ensuring that your will makes the most of your nil rate band, residence nil rate band and any nil rate bands you may be able to claim from a deceased spouse would be an example of this,’ he said.

Nil rate bands are the amount you can pas on to loved ones without the need for them to pay inheritance tax.

Read our comprehensive guide to inheritance tax for more details on these thresholds.  

Money in personal pension schemes can also be passed down free of inheritance tax. At present, beneficiaries either pay no tax on inherited pensions up to the deceased’s lifetime allowance limit if the owner dies before age 75, or their normal income tax rate if they are 75 or over.

If you are able to, it may be advisable to live off other assets that you have in order to preserve this tax-free inheritance for your loved ones.

Gifting also allows you to pass on money to your children whilst you are still alive, and you have a £3,000 tax-free gift allowance each year, as well as unlimited small gifts of £250 to as many people as you like. If you live for seven years after the gift was made, it will be exempt from inheritance tax.

Dyall said: ‘There is a limit to how far you will get without looking at ways to reduce the liability that do reduce your access to existing assets, but many people are able to gift money or spend more money without sacrificing their financial security. 

‘Cashflow analysis of your future income stream and expected expenditure can help determine how much you can afford to gift or spend safely.’

Investing in life insurance could also be something to consider. Life insurance payouts are tax-free, so your loved ones won’t have to pay income tax or capital gains tax on the money they receive. 

Life insurance may be counted as part of your estate for inheritance tax purposes, but it is possible to avoid this if you have a policy ‘written in trust’ to your beneficiaries. 

There are pros and cons to this and it is worth taking advice before doing so. 

5. Should you use a trust?  

According to SunLife, many planning their inheritance have specific ideas in mind about where they want their money to go. A fifth have given money to help members of their family buy a house, while 15 per cent gave for a wedding, and 14 per cent for a holiday.

If you have specific ideas about who in your family you want to have control of your money and what it can be spent on, you may want to consider putting it in a trust. 

Dyall said: ‘Trusts can be useful if you are concerned about having some control over how the money is used, or wish to protect assets from divorce or bankruptcy of a beneficiary, but you can generally only put up to £325,000 into a trust per donor in any seven year period, otherwise there will be a 20 per cent inheritance tax charge on the excess.

‘Many people do prefer to use trusts as they can then have some control, as a trustee, over who benefits, when they benefit, how much they receive, how the money is invested and so on.’

On the other hand, outright gifts beyond your allowance could prove a useful option, as you will be alive to see how the money is used. 

Of course, going beyond your gift allowance means that your funds may be subject to tax.

6. Consider financial advice

It can be tempting to shoulder the burden of planning your estate yourself. 

After all, your aim is to leave as much of your wealth to your loved ones as you can, so it seems counter-productive to shell out on professional advice.

However, while the fees involved in financial advice might set you back somewhat, it could prove more effective in the long run. This is especially the case if you have a lot of money or assets to play with.

Professional advice can also provide as much or as little help as you require. For example, a financial adviser could simply help you to find the private pension product that best suits your needs.

On the other hand, you could engage a financial planner to create a comprehensive picture of your finances, and a roadmap tailored to your position.

The other benefit is that some of the pressure of estate planning will be taken off your hands, leaving you to make the most out of your retirement.