5 Errors to Avoid When Creating Your Estate Plan

This content is for information purposes only. It should not be taken as financial advice or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser or financial planner such as ours here at Shorts in Sheffield and Chesterfield.

When most people think about a financial plan, they think about pensions, investments and achieving their lifetime goals. Estate planning is often a lower priority, which is understandable. After all, no one wants to think about what will happen after they are gone.

But estate planning is an essential part of financial planning and can be approached in a positive way. Think about the legacy you can create for your children, or the impact any charitable donations may have. Focus on keeping control of your financial decisions, even when you are no longer in a position to make them.

A good estate plan ensures that more of your money goes to the right people, preferably with the minimum amount of tax.

But estate planning can be extremely complex, which is why it takes legally qualified professionals to deal with the technical aspects. However, even with legal advice, mistakes can be made when there is no over-arching strategy or when decisions are made for the wrong reasons.

A coherent estate plan, which works alongside your financial plan, will help avoid these errors.


Not Having a Will

Having a Will is the basic foundation of an estate plan. It allows you to decide how your estate should be distributed on your death.

If you die without a Will, this is known as ‘intestacy.’ The rules of intestacy vary across the UK, but aim to pass your assets to your relatives in a fixed order of priority. If you have a spouse and/or children, they will take precedence. If not, your parents, siblings or more distant relatives would receive your assets. If you do not have any family, your estate would pass to the Crown.

If most people really thought about how they would like their estate to be dealt with, the rules of intestacy are unlikely to be the ideal scenario. For example:

  • Unmarried couples cannot inherit from each other
  • Step-children cannot benefit
  • There is no scope to share your estate amongst your preferred beneficiaries (or exclude a close family member with whom you have no contact)
  • It is not possible to leave anything to carers or close friends
  • On second marriages, anything inherited by the new spouse would subsequently pass according to their Will or the rules of intestacy, potentially bypassing your children from the first marriage.

A Will offers the following benefits:

  • You can choose your own executors, i.e. the people responsible for carrying out your wishes.
  • You can distribute your estate as you wish, with any number of large bequests or smaller gifts.
  • You can appoint family members, friends, or charities to receive a portion of your estate.
  • You can set up Trusts, which can help to protect your assets if any of your beneficiaries marry, divorce, lose capacity, or declare bankruptcy.

A Will is simple and inexpensive to set up. If you are unsure about the content of your Will you can always make changes and add to it later. It is far better to have a basic Will that you can adapt than no Will at all.


Gifting Without a Plan

Making gifts during your lifetime is often an important part of financial planning. It has some significant advantages:

  • It allows you to make use of your annual gifting allowances
  • It can reduce Inheritance Tax (IHT)
  • It allows you to see your family enjoying the gift

However, any gifting should be undertaken as part of a comprehensive plan, particularly when the main purpose is to reduce IHT. Gifts are treated as follows for IHT purposes:

  • Gifts of up to £3,000 per donor, per year are immediately exempt from your estate. This allowance can be carried forward by up to one tax year.
  • Other exemptions include gifts for weddings, birthdays and Christmas, as well as any regular, affordable gifts from surplus income.
  • Larger gifts remain in your estate for seven years, potentially becoming taxable if you die within that period. Taper relief is available to reduce the tax on gifts of over £325,000.

The following are some typical pitfalls of gifting for estate planning purposes:

  • Giving away too much, too early, endangering your own financial security
  • Gifting assets that you continue to have use of, for example, the family home. This is considered to be a ‘gift with reservation’ and is ineffective for IHT purposes unless you pay a market rent.
  • Deliberately depriving yourself of assets to qualify for assistance with care fees. You would be treated as if you still owned the asset.
  • Not keeping track of substantial gifts, as they may need to be added back into your estate later on.


Misinterpretation of Trust Rules

Trusts are an extremely useful tool for estate planning. They can allow you to:

  • Move wealth outside your estate and reduce IHT.
  • Appoint Trustees to manage the assets and distribute money to the beneficiaries as required.
  • Keep a degree of control over the Trust funds rather than making an outright gift.
  • Protect assets by ensuring that the money is only used for the intended purposes.
  • Specify that life policies or death benefits are paid into Trust, bypassing probate and avoiding IHT.

While there are various different Trust structures, the main types fall into two categories:

  • A Bare Trust is effectively an outright gift for one or more specific beneficiaries, usually giving them full control when they reach age 18.
  • A Discretionary Trust gives the Trustees control of who benefits, when, and for what purpose. Beneficiaries are usually appointed from within a ‘class,’ for example, your children or grandchildren.

However, Trusts are complex and getting it wrong can have major consequences, both personal and financial. For example:

  • A Bare Trust is irrevocable, and risks passing money on to someone who is not capable of managing it.
  • While Discretionary Trusts are much more flexible, they also pay a higher rate of tax than individuals and do not have a tax-free allowance. Income and capital gains are more costly within a discretionary trust.
  • Placing more than £325,000 into a Discretionary Trust is immediately subject to IHT at a rate of 20%. A further 20% is payable if you die within seven years.
  • If you do die within seven years, any Trusts created within the previous seven years will also be added back into your estate calculation.
  • Discretionary Trusts are also subject to IHT charges every ten years, or whenever money exits the Trust.
  • Trustees are obligated to manage the money prudently and separately from their own interests. It’s important to choose the right Trustee and where appropriate, that they seek advice. Remember that this will usually incur costs that must be paid from the Trust’s funds.

The decisions around a Trust fall into the following main categories:

  • Type of Trust
  • Flexibility vs tax-efficiency
  • The parties involved – Trustees, Beneficiaries and professional advisers
  • Amount
  • Timing
  • Tax Wrappers
  • Investment Strategy

A strong estate plan can help you balance these decisions and make the right choices.


Letting Tax Dictate Your Investment Strategy

Saving tax is a consequence of good financial planning. It should never be the end goal. Assuming your objective is to save IHT, there is usually a reason beyond this, for example:

  • Preserving wealth for your family or causes that are important to you
  • Keeping control of the money you have worked hard for
  • Balancing a comfortable retirement estate planning

The following investments qualify for Business Relief, and are not subject to IHT if you hold them for a minimum of two years:

  • Enterprise Investment Schemes (EIS)
  • Alternative Investment Market Stocks (AIM)
  • Unquoted Shares, subject to a minimum holding of 5% of the company

However, these are high risk investments which may not be easily sold. They have their place as part of a diverse portfolio and comprehensive tax-planning strategy, but they are not suitable for everyone. Making high risk investments with the sole purpose of avoiding IHT can result in losses which outweigh any IHT saving.



If any of the subject matter in this article concerns your own financial plan, then our team would love the chance to have a conversation with you to see how we can help. Book a free call with a member of our team today, without obligation. We look forward to speaking with you.