Protecting client assets from IHT

Helen Morrissey looks at why many people don’t consider estate planning and asks what advisers can do to tackle this lack of awareness

Estate planning is a vital, if often overlooked, part of retirement planning. Putting a thorough estate planning strategy in place is key to ensuring a client's wishes as to how their estate is apportioned on death are carried out.

The use of trusts and the gifting of assets can also save an estate a huge amount of money which would otherwise have to be paid out in inheritance tax (IHT).

But according to the Standard Life Wills and Trusts Report 2011, 51% of participants had not made a will. The common reason given for not having one in place was that they hadn't got round to it yet. Those that had done so tended to do so at a relatively late age. According to the research, 77% of people aged 65 and over had a will in place, while only 62% of those aged 45-54 had done so.

However, delaying making estate planning provision can have serious consequences. Assets given away, for instance, via trust require the giver to survive for seven years after the trust is established for the money to leave their estate.

If the person establishing the trust is elderly, they may not survive the required seven years and so, despite their plans, their estate may still face a huge inheritance tax bill.

So why are people putting off such an important part of their financial planning? What can advisers do to raise awareness of the importance of estate planning? Why don't people make estate planning provision?

Causes for concern
There are several reasons why people don't put the necessary estate planning measures in place.

These can include an unwillingness to think about the future or a genuine lack of awareness about the need to plan. The establishment of the transferable nil-rate band, whereby a spouse inherits their partner's full nil-rate band allowance when they die (giving them a nil-rate band of £650,000), is one reason why people may not feel the need to put more detailed plans in place.

But the fact the band has been frozen until 2015 means we could see an increasing number of estates become liable for IHT in future.

Mark Green, Legal & General's head of tax and estate planning, believes advisers should ensure their clients are made fully aware of the implications of not having adequate estate planning in place.

He says: "The first thing to consider is the impact of no estate planning at all. Making a will is often the very first step that people take in their estate planning strategy.

"If people don't have a will in place, then the law of intestacy will ¬apply when they die - this can cause problems in that the estate could be apportioned in a way that the deceased may not have wished for."

Standard Life's senior technical consultant Dave Downie agrees, saying the will "is the bedrock of estate planning that everything else should be built around."
He points to common misconceptions people hold about intestacy laws that can cause them problems. For instance, many believe common law partners will benefit in the same way as married couples do.

As a result, necessary plans may not be put in place which can lead to a nasty shock. Downie advocates a well-drafted will to avert such a situation.
Carla Brown, senior solicitor at Moore Blatch, advises making clients aware of the need to plan as soon as possible, while highlighting the range of options available to them.

"We encourage people to be as aware of their situation as early as possible. This could be in the form of gifting - either outright gifts or into trust," she says.
"However, the issue here is that the client needs to survive seven years after the gift is made for it to pass out of their estate. lternatively, you can write insurance policies into trust. That way, it takes only two years for the assets to pass out of the giver's estate. There are also other investments that can help with IHT. People need to take a holistic approach."

Client worries

But Brown adds clients can be wary of gifting money away as they are concerned they may not have enough money to cover their future needs. She says: "The client's attitude is very important. They need to be prepared to pay the fees to get the appropriate advice.

"People can feel apprehensive about giving away their assets. For instance, they need to know they will have enough in their estate to pay for long-term care if they need it."

However, Intelligent Pensions' managing director Steve Patterson believes client concerns can be allayed by taking a more holistic view of their assets - most notably, their pension.

"We need to realise the importance of the relationship between pensions and estate planning," he says."Most IHT can be saved by taking advantage of lifetime gifting. But the practical difficulty here is establishing how much a person can afford to give away.

"This is where the benefits of a pension can come into play as if the client has an annuity - this provides an income that cannot be outlived - and as long as it is inflation-linked, it will go some way towards protecting against rises in the cost of living.

"Knowing that you will receive a certain level of income for the rest of your life can enable the client to facilitate more aggressive lifetime gifting. However, right now many advisers don't see pensions in terms of estate planning."

Another common issue clients face when it comes to estate planning is who they should go to. While advisers play an important role in highlighting the need for estate planning, the actual drafting of wills and establishment of trusts is work for a solicitor.

According to the Standard Life report, 54% would turn to a solicitor for help with their estate planning, while 41% would go to their financial adviser. But worryingly, 48% said they would do their own research on the internet.

"Clients need to understand the implications of the things they do without advice," says Matt Adams, financial adviser at Newell Palmer Financial Planning. "People try and do a lot on their own and can get themselves tied up into knots. There are many different things that can trip people up."
It would seem that the best way forward is for advisers to build strong relationships with appropriate professionals such as solicitors. The adviser can then refer their clients to a solicitor or accountant as needed.

"Advisers should be putting a note in their clients' files to have a chat with them about their estate planning once they hit age 55 or 60," says Green.

"It's also not something that is done once. This needs to be done on an ongoing basis to meet clients' changing circumstances. Perhaps they can look to run client seminars as it gives clients a good ¬opportunity to meet like-minded people and see what their plans are.

"Advisers should also look to forge closer links with professionals, such as solicitors and accountants, and help clients make their plans."

Patterson agrees that building strong networks is the best way forward, though it will entail the adviser reorganising their business model. He says: "Even a well-qualified adviser can find it difficult to bring everything together and this can be helped by collaborating with other specialists.

"But it will entail advisers to organise their business in such a way that they have a network of specialists - like a wheel with spokes with the adviser and their client at the centre. Commercially, it's a very clever way of doing things. You can't be all things to all men - you need to work to their strengths and weaknesses."

So, advisers undoubtedly have an important role to play in getting clients to think about their estate planning needs. However, such a process can be daunting for clients who remain unsure of the best place to go to set their plans in motion.
By establishing strong business relationships with well-qualified solicitors, advisers can go a long way towards pointing their clients in the right direction to getting the advice they need.