Few people want to think about their own death, but without some thought to what happens after you die, your friends and loved ones can be forced to spend the time they should be in mourning instead trying to work what needs to happen to your estate. Whether you have millions tied up in stocks and assets, or just own a few treasured items, you need to ensure that you have an up to date will that explains your wishes.
What Is Estate Planning?
It may seem complicated, particularly if you are reading a whole lot of legalize, but estate planning is simply what happens to your ‘stuff’ when you die or become unable to look after your own affairs. This might mean making sure that you have someone ready to look after any children you have, ensuring that your house goes to the right person or people, and that any money you have is divided up the way you want it to be. You may also decide that certain objects, such as jewelry, art, or special books, get given to certain people – these don’t have to have any monetary value, sometimes certain objects hold very sentimental value and it’s nice for those objects to be given to someone who you believe will also treasure them.
Ensuring that you have your estate sorted out legally before you are in no position to do so can mean that you don’t end up paying more in inheritance tax that you should, that there are no issues with creditors, and that you don’t end up losing your entire savings to rest home fees.
What Is Inheritance Tax?
Inheritance Tax is the percentage of money that your estate will need to pay to the government after you die. The amount is calculated by adding up the value of all of your assets, including any property, any cash or investments, as well as getting a valuation of any jewelry, household furniture, cars or other possessions that you may have.
Not all countries have an inheritance tax, but Northern Ireland is one that does, and at the moment the percentage is 40% of any value over the minimum threshold. There are different circumstances that will change what the threshold is, but worst-case scenario you are looking at your estate having to pay 40% on anything over £325,000. This means that if the entire value of your estate comes in at £500,000 your estate will have to pay £175,000 in inheritance tax. https://www.gov.uk/inheritance-tax
For most people this unfortunately means that they have to sell the family home in order to pay the Inheritance Tax, or take a loan against the house and use this amount to pay the debt. However, when you talk to a specialist about estate planning you will be able to work out ways in which you can minimize the value your estate needs to pay – which may include things like leaving a certain amount to charity, or leaving everything to your children.
Trusts in Northern Ireland
Trusts are legal entities that can be set up to manage your estate while you are alive (see here). You may have heard of charitable trusts, and a family trust is a similar idea, although obviously without the charity status.
The basic idea of a trust is that any of your assets – your house, secondary homes, investments, retirement funds etc, are not owned by you personally, but by a legal entity. This entity, the trust, is managed by trustee, and is set up by a lawyer or an accountant who specialise in trust & wills.
Although a trust can help minimise the amount of inheritance tax that your family may need to pay, the primary purpose is more to ensure that your assets are well managed before and after your death rather than to simply avoid paying tax.
Depending on how your trust has been set up you may need to pay tax on any income the tax generates each year, or pay tax on the value of assets that are transferred into the trust, this is why it is important to get the advice of a qualified estate planner who can explain the best way to manage your assets, and the best way (and time) to move assets from personal or family ownership and into a trust.