How To Deal With Taxes When Planning Your Estate

You have covered almost everything but taxes seem to frighten you - what to do?

Essentially, estate planning involves writing down what you want to happen with your estate after your death. This is normally done using wills, trusts, different directives and specific appellatives on your bank accounts.

Talking about this topic and planning things that will happen after you die can be emotionally very stressful and many people are hesitant to even start. On the other hand, estate planning administers such complexity, that people usually feel intimidated to make such important decisions and start the process before they’re even ready.

Meaningful Deed

However, if you’ve understood the importance of such an action, you already have a plan or you started to make one.

Without planning your estate, you basically leave others to decide what to do with it, as the worst scenario could be that the state disposes your estate. According to the U.S. federal estate tax laws, for example, during the transfer of estate of the deceased person, certain taxes are being required and they are not small ones. The state can take 45-55% based on estate size and inheritance tax, in the UK being around 40%.

In this light, the meaningful action which secures that your estate and wealth stay in the family, is to plan your estate and secure what’s yours.

Introducing Taxes

In the UK, you don’t have to pay inheritance tax if:

the value of your estate is below the £325,000 threshold
you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

But, if your value is above threshold, the 40% tax is awaiting you only for the amount above it.

In addition to that, if you haven’t planned and left your estate in trusted and wanted hands, there is a huge chance that you won’t skip the probate process where your estate assets are collected and distributed based on your intentions as set in your will or other estate planning documents. That process has some administrative fees and costs associated with it and on top of that, appear estate taxes.

Good news is that if you plan ahead, you can reduce or even avoid these taxes and your family would bypass all this arduousness.

The Plan B

If you are a homeowner older than 55, there is an option to release money from the main residence estate/home with equity release which allows you to take smaller sums from the value of the house you live in. Essentially, you can use that value for many purposes - to adapt your home, pay off debts or provide financial help to your family - and ultimately reduce the value of the property, while you are still benefiting from the full value of the property by continuing to live in it.

Due to inflation, living longer and rising costs of care for older people, many find themselves short of capital or income in their retirement years and in need of plan B like this.

Reducing The Numbers

There are many ways to, at least, reduce tax levels or even escape them:

Create a will - who should receive what and how much from the division of your assets when you die, based on your documented wishes.
If you are married, use both estate tax exemptions and leave everything to your partner - this allows a surviving spouse to use a deceased spouse’s unused estate tax exclusion or increase the tax allowance for the surviving partner.
Remove assets from your estate before you die - either by giving or gifting them away. A certain annual amount of money that you can give to your children or gift as a charity, can lower your estate tax significantly. This solution makes sense for those with enough wealth to ensure they don't run out of it in the course of their lives.
Use Trusts - to make gifts while you are still alive, and depending on the type of Trust used, you can continue to benefit from your assets while still alive, but effectively keep them in the safe hands of Trust.
Leave the house to the children
Buy life insurance - which is an inexpensive way to pay estate taxes and/or replace charitable gifts plus - death benefits wouldn’t be included in your estate.

Remove Your Worries From Your Plan

As noted, there are many ways to secure your estate, you just need to start thinking and making your plan, even if you are a young couple, even if you do not have family but want someone to inherit and have your estate. It is never too late to start with it and with knowing you don’t have to do it alone because there are many professional advisors - there is no place for hesitation - take care of your loved ones before it’s too late.