An estate is someone’s net worth in the eyes of the law. You need to take into consideration an individual’s assets minus any liabilities to determine their net worth.
What is surprising, when you review your estate, you are possibly worth a lot more than you originally thought.
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In order to value your estate, it is necessary to look at your assets and debts.
Estate assets would include:
This would include house, car, jewellery, art, furniture, basically any physical item that has a monetary value.
Money in a bank account or savings account, pensions, stocks & shares, investments.
Payments that might be due on the death of an individual such as “death in service” benefit, life insurance or pension.
Estate debts would include:
Any outstanding mortgage, overdrafts, car loans, personal loans, credit cards.
Any other outstanding bills such as household bill or monies owed to anyone else.
By taking away your debt from your assets, this would be the value of your estate.
Having established the contents and value of your estate, writing a Will enables you to outline exactly who you want to benefit from what you are leaving.
Whether you want to make a monetary gift or pass down a family heirloom, all this needs to be detailed in your Will.
There are different types of Wills available and many ways to set up a Will . As well as giving you peace of mind that your wishes are carried out, writing a Will makes sure you are not paying too much Inheritance Tax.
If your Estate is worth more that £325,000 when you die, HMRC may impose Inheritance Tax. By writing a Will, you might be able to reduce your Inheritance Tax bill.
The following simple steps can reduce the Inheritance Tax due on your estate:
The Inheritance Tax Threshold is currently set at £325,000 (2019/2020) and anything below this is not liable to Inheritance Tax. The standard Inheritance Tax is 40% of anything over the £325,000 threshold.
However, if you are married or in a civil partnership, you can leave your entire estate to your partner and no tax will be payable. The partner receiving the inheritance will be able to use any unused balance to their own threshold, effectively doubling their threshold.
Every year you are allowed to make gifts that are not liable to IHT. You are allowed to make gifts of £3,000 per year to individuals or any number of small gifts of £250 to different individuals. If you exceed these limits and die within 7 years of making the gift, it will be included as part of your estate.
Any assets that you give away cease to be part of your estate after 7 years from the data of the transfer. Careful consideration needs to be made when considering what should be given away. For example, if you give your home you are not able to live in it without paying the proper market rent or you are not allowed to gift an asset and still earn an income from it.
A Trust Fund can be set up by a person (known as the grantor), for the benefit of another person (known as the beneficiary). Trusts can be one of the most effective ways of protecting an asset. Once assets are placed into a Trust, they are no longer classed as yours. They are no longer considered to be part of your estate, therefore are exempt from Inheritance Tax.
If you pass away before the age of 75, benefits left in a money purchase pension can be paid as a lump sum or drawdown income to any beneficiary, with absolutely no tax to pay. Pensions are one of the most tax efficient ways to pass on your wealth.
In many cases, the demand for Inheritance Tax is made, prior to the deceased’s assets being sold. Therefore, it might be necessary for those managing your estate to have to borrow money in order to cover this bill. In some cases, it might be beneficial to consider life assurance to cover any likely Inheritance Tax bill. This could save your loved ones additional stress and anxiety at what is likely to be a difficult time.
Life assurance is often referred to as whole of life insurance, premiums continue indefinitely and a lump sum is paid out once the policyholder passes away. As long as the policy is written in Trust, the proceeds of the life assurance policy will not be included in your estate. When you die, the policy pays out to the Trust and can be used to cover all or part of the Inheritance Tax bill.