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Christmas, gifting and estate planning

24 December 2018

Her process of Christmas gift buying reminds Rosie Marlow, associate consultant, Mattioli Woods of the need of clients for proper planning when it comes to gifting their wealth.

As seasonal festivities are well underway, this time of year brings with it the daunting prospect of Christmas shopping.

Have you started yours yet?

There are those keen to gloat about their organisational skills. ‘I finished mine in August’, I’ve often heard people say. Then there are others – including me – who enjoy the thrill/sheer panic of leaving it all until the very last minute. ‘I usually leave mine until 5pm on Christmas Eve, you get the best deals that way.’ That sort of thing.

First comes the ‘who-to-buy-for’ list, which can often seem endless when you have to include your cousin’s aunty-twice-removed and her dog. All because they bought you a gift last year.

Secondly, of course, is deciding ‘what gifts to buy and for whom’ which is never easy. There are always the ones you have no idea what to get and, no matter how thorough you think you are, there’s always one you forget.

Oh, and don’t forget the small matter of budgeting your monthly wage to pay for all of the gifts.

Finally, and by no means least, you’ll need to spend hours wrapping the delightful presents to ensure they are beautifully presented to your loved ones, so they know just how much thought you’ve put into it all.

So, as I mull over the thought of doing my own Christmas shopping, it got me thinking about the importance of our roles as financial planners in helping our clients prepare and strategise with their own gifting and estate planning.

1. Be prepared

Early planning is so important. Unfortunately, none of us know what’s around the corner and nor do our clients.  It’s all too easy to allow them to put off key planning such as ensuring wills are in place and up to date. So, it may be worth reminding them of how the rules intestacy could impact their beneficiaries should they fail to keep a valid will.

When it comes to other forms of protection – such as lasting powers of attorney whereby donors can nominate someone to act on their behalf to deal with financial, health and welfare affairs in the event that they become mentally incapacitated – the key is to have these provisions in place well before there is any reason to question a donor’s mental capacity to make the power of attorney decision in the first place.

Timing and preparation of the gifts to loved ones can be just as crucial.  When it comes to potentially exempt transfers (PETs) after seven years the gift becomes fully exempt of inheritance tax (IHT) and therefore, where possible, there are advantages to making the gift at the earliest opportunity.

With the hope to outlive the seven-year PET ruling – and, indeed, where death occurs between three and seven years after making the gift – the client could qualify for tapering relief of IHT due on the gift in excess of their nil rate band (NRB).

2. What to give

Each client’s circumstances are different, so it is important to obtain a full understanding of the person’s total wealth and what they want to achieve in order to build a holistic approach that has the individual’s objectives at heart.

In deciding what or how much to give, consideration should be given for the annual exemption allowance, whereby one can give away £3,000 worth of gifts each tax year and, indeed, can also carry forward any unused annual exemption from the previous tax year.

There is also the smaller gift allowance, which permits up to £250 to be gifted to as many people as desired but not in conjunction with the £3,000 mentioned above.

The value of gifting allows for assets to be removed from a person’s estate for the purposes of IHT calculations. Therefore, the impact of exemptions and allowances such as the nil rate band should be carefully considered as a well as any transferrable nil rate band from a deceased spouse on second death.

In addition, it may also be worth noting the impact of tapering the main residence nil rate band (RNRB) where estates are valued over £2million to see if there are any gift planning opportunities that can maximise the efficiency of the estate and mitigate the effects of IHT.

3. Affordability

While gifting strategies can help the client to minimise the value of an estate subject to IHT, it is just as important to consider whether this planning is affordable.  Could the client require access to these funds at a later date, perhaps?

In order for a gift to qualify as a PET, it must be outright and irrevocable, otherwise if the client retains interest in the gifted asset the value it likely to still remain within their estate and result in IHT liability.

Therefore, it is vital to ensure that a client has sufficient reserves and emergency funds to meet their ongoing and future needs.

4. How to give it

Just as with wrapping Christmas presents, we should consider ways in which the gift is presented to the beneficiary in order the ensure this meets the client’s objectives and maximises efficiency of the estate.

Gifts into discretionary trusts are often favoured for their flexible approach, which allows the trustees to manage and retain control of how assets are distributed to beneficiaries.

Indeed, settlors can nominate children or even unborn grandchildren as chosen beneficiaries.  This provides the opportunity to protect legacy wealth within the bloodline as any funds within trust remain outside of the beneficiary’s estate until distributed.

It should be noted that pension scheme assets are exempt from IHT and excluded from the estate.  Indeed, where death occurs prior to the age of 75, funds can be distributed to beneficiaries free of tax (where designated within two years of death) or subject to income tax at the beneficiary’s marginal income tax rate where death occurs post-age 75.  It provides a highly tax-efficient manner to pass funds on to beneficiaries.

Ultimately, making certain a clear strategy is in place at the earliest opportunity will help to ensure that when it comes to it, the estate can be managed swiftly and effectively to bring about a smooth transition – giving clients and their beneficiaries the satisfaction they can have confidence in us as financial planners when they really need it.

As for me, I had better get started on that Christmas shopping list…

Professional Paraplanner