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Careful estate planning can help not only to ensure that assets are divided in the way the benefactor wished, following their death. It also helps to reduce the chances of family strife, which can occur in cases of disputes over inheritance.  

There are many complex, interrelated issues that can arise when planning how to divest assets and protect inheritances as much as possible for future generations. Enlisting the help of solicitors or other legal professionals is essential to ensure the wishes of the deceased are carried out according to plan, to minimise taxes, and to ensure the estate is preserved for offspring and other beneficiaries.  

Thomas Noel Collister Jackson is a member of UK law firm Smart Law Solicitors LLP, which advises clients on all matters relating to estate planning. These include managing the tax burden in the most effective way and establishing trusts to protect assets for future generations. 

You can find out more about what inheritance tax is in the PDF attachment to this post. 

Minimising Inheritance Tax 

Inheritance tax laws vary depending on the jurisdiction but there are various ways in which paying too much inheritance tax can be avoided. People with assets of a reasonable value that wish to ensure their relatives – or any other beneficiaries – can make the most of them could consider making cash gifts throughout their later life, rather than waiting to leave money in a will. 

In the UK, the law grants permission for anyone to make cash gifts up to a threshold of £3,000 per year, completely tax-free for both the benefactor and the beneficiary. In this way, parts of the estate can be gifted to recipients both within and outside of the family prior to death, and these assets will not be liable for any form of tax.  

They also lower the overall value of the estate, which means less inheritance tax will be due on whatever is left. Inheritance tax does not apply on any amount of an estate that is left to a spouse or civil partner. 

The embedded infographic contains information about the UK inheritance tax bands and rates for the 2020/2021 financial year. 

Establishing Trust Funds 

One of the best-known purposes of a trust fund is to ring-fence assets for a child or young person until the day they are deemed to be financially independent. However, this is not the only reason for setting up a trust fund.  

Money in a trust is always exempt from inheritance tax. In cases where surviving family members are not in need of a lump sum of cash immediately, establishing trust funds can be a way to avoid paying inheritance tax altogether.  

Trust finds can be set up at any time and can drip-feed an inheritance to the beneficiary or beneficiaries over time, without them having to pay tax on those assets. Trust funds can also allow people to start receiving portions of their inheritance while the benefactor is still alive. 

Life Assurance 

Any pay-outs due from life assurance policies following a death are usually ring-fenced outside of the estate. This means that no inheritance tax is due on these payments and they do not count towards the value of the estate when inheritance tax is being calculated.  

In the event of death, life insurance funds are often quickly accessible to the surviving spouse, children, or other beneficiaries. This can be particularly useful in cases where probate may take some time. 

A definition of probate can be found in the short video attachment.