Estate Planning: Rules, Risks and no Rush
With contributions from experts in the Estate Planning sector based in London, Citywealth talks about how clients are managing and ensuring the succession of their digital and non-digital assets.
When dealing with estate planning, rules and risks involved need to be assessed in order to make sure your will takes into account and efficiently manages all your assets and wishes. Planning long in advance is key to avoid predictable mistakes and make informative decisions so that future generations can concretely be aware and prepared for every possible scenario.
With contributions from experts in the Estate Planning sector based in London, Citywealth talks about how the present circumstances are impacting estate planning and how clients are managing and ensuring the succession of their digital and non-digital assets, giving useful advice to ultra-high-net-worth and high-net-worth individuals.
Citywealth wants to thank for their comments: Matt Braithwaite, Partner at Wedlake Bell LLP, Mark Pearce, Private Wealth Consultant at Gateley Legal and Alessandro Belluzzo, Trust Estate Practitioner, Barrister and Founding Partner at Belluzzo International Partners.
Understanding and controlling your assets
When individuals deal with estate planning, they must consider different aspects to ensure a smooth process. It is essential to be aware of all the crucial information regarding the assets, how to properly manage them liaising with the appointed trustees. To this regard, Mark Pearce adds that “there are three key areas to consider. The first of these is control, who will control the assets either via testamentary documentation or lifetime structuring. It is critical that the client trusts their executors/trustees to enact their wishes. This is particularly relevant when dealing with specialised assets, such as art or digital assets, where we would generally advise that a trustee has at least some knowledge of that sector. The second issue to consider is an understanding of all the assets you own. This may sound obvious, but many clients do not know what assets and liabilities they may have. For example, there may be pensions or share schemes that they do not fully understand and need to be factored into any planning. Finally, clients should consider succession. Who should inherit their assets, in what way and at what age? This is very subjective and ranges from clients being happy to give all assets to an 18-year-old to clients who wish for a protective mechanism, such as a trust, to be in place indefinitely. There is a myriad of factors to take into account when considering succession, including physical and mental health, marital status, business dealings etc., which is why every client situation is unique.”
Knowing exactly what clients want to get out of their assets, making sure their passions have a say in the whole operation, is of extreme importance, according to Alessandro Belluzzo. He states that “when it comes to estate planning, it is fundamental to have a clear picture of your assets and what you want to do with them. Bear in mind what your passions are so that they can have an impact on your estate planning as you know exactly what your objectives are.”
Communication with clients to produce an up-to-date will which includes all the assets owned, this has been highlighted by Matt Braithwaite, who invites to “ask clients to take a step back and consider what the wealth means to them, how they have accumulated it and what they wish to achieve with it, rather than considering the granular detail of any planning at the outset or making broad assumptions. For instance, do they want to focus on the succession to their children/the next generation or prefer to opt for philanthropic endeavours? Maybe a combination of the two? Once this has been established, it then becomes necessary to understand the nature of the assets the client has, how they are currently owned and how they would pass in the event of their demise, and whether this is consistent with their aims. A good starting point is to have an up-to-date will in place and then consider any further lifetime planning steps a client wishes to take to implement their estate planning. Whilst thinking about wills, I always encourage clients to think about that other ‘what if’ scenario being incapacity and putting Lasting Powers of Attorney in place, and, where appropriate, making a Living Will.”
NFTs: ensuring the succession of digital assets
Digital assets in general, and NFTs in particular, are of great interest for ultra-high-net-worth and high-net-worth individuals, but problems could arise when it comes to succession. Too often future generations encounter difficulties when trying to access the digital assets they have inherited. The causes for this can be various. “Estate planning with digital assets, which include NFTs, is a complex and fast-evolving area; – comments Mark – in addition to the usual factors, handing over control of digital assets is high risk in that, usually, there is no third-party authorisation required before action is taken (i.e., once you hand control of your wallet to an individual they can act with absolute authority on that wallet). This is particularly relevant when you are looking at estate planning after death and clients want to make provision in their will but not hand over immediate control of a wallet. One option we have seen is sealed envelopes being held in a lawyer’s safe or seed phases being split with each party being given, let’s say, half the seed phases so they would have to work together to access the wallet.”
Include clear instructions to manage digital assets is vital to guide future generations. Alessandro mentions: “We as a company have established digital-impact solutions: we suggest putting on every will instruction on how to deal with digital assets, especially for future generations. It is important to allow future generations to fully understand what they are getting, how to deal with it and that can only be achieved giving clients the right tool.” Matt too insists on the importance of instruction, in fact he reveals that, when assisting clients with the succession of their NFTs and digital assets, he always makes sure to “raise awareness in the instruction phase, letting clients know that some digital assets can be passed down while others are not transferable; gather instructions on digital assets; include express wording in wills, providing executors with powers to deal with digital assets; recommend practical steps to take, such as drawing up a digital asset map.”
Estate planning and the cost-of-living crisis
The cost-of-living crisis is having an impact not only on everyday life, but also on estate planning. “I think that the cost-of-living crisis is definitely something that families are taking into consideration right now; – confirms Alessandro – They are planning in advance and are deciding to invest in different assets, and this results in having an effective plan on hand to overcome the cost-of-living crisis. The world has changed a lot, not only because of inflation, but also considering Covid. People have decided to purchase a house they would not have thought about before or have invested in new assets. In the last two years I have seen people investing in vineyard estate and even farms. Thinking about future generations has become a priority.”
Mark distinguishes between ultra-high-net-worth individuals and clients whose wealth is not so broad. “For very wealthy clients, the change to cost of living is negligible and does not really impact their estate planning. For clients who are not stratospherically wealthy, the cost-of-living crisis is delaying or deferring lifetime planning. This is similar to what we saw after the financial crisis where clients were reluctant to make gifts of assets in the event that they may need them personally. The worst case scenario situation is where clients have gifted assets and then ask for them to be returned. This can undo lifetime planning and have tax consequences.”
“HNW and UHNW clients are concerned about the ‘optics’ of being wealthy in a socio-economic climate where the cost-of-living crisis is biting the most at the lower end of the wealth spectrum. This wealth divide has been further exacerbated as a consequence of the Covid pandemic, where the financial impact bit the most, often to the expenses of key workers; – points out Matt, who describes what his clients want to achieve at present – My clients have been concerned to ensure a more even distribution of wealth for the benefit of their family members, but they also want to make sure that a portion of their wealth is structured for the wider benefit of their local communities and charities, either directly giving to such entities or setting up their own philanthropic entities to carry out their objectives in their names.”
‘Do not do’ list: common mistakes to avoid
When approaching estate planning, individuals often make common mistakes. According to Alessandro, “sometimes clients think there is only one solution or one instrument. It is important that they consider every solution and instrument according to their objectives. Sometimes clients think it is enough to just adopt one single tool to deal with everything, but that is not always the correct approach. For instance, you cannot have just one trustee to manage your entire wealth, it is preferable to have two, one for your business and the other one for family assets, or you can opt for a Private Trust Company, but keep in mind that separation is necessary. Objectives and rules when dealing with business and family assets are different.”
“The most common mistake, I would say, is to consider estate planning a one-off exercise, – says Mark – People’s financial positions and family status change on a regular basis and estate planning should be reviewed as such. It is always sensible for clients to have an annual ‘health check’ with their lawyers, even if they do not think anything has changed. Even if the client situation has not changed, the legal position may have.”
Alessandro adds that: “Before making important decisions, you need a clear asset map, you should plan for the risks involved, create rules to manage the family wealth and stick to them. A clear understanding of the assets and rules is essential.”
Mark talks about ‘family tensions’ and what to do to deal with this isssue. “It may sound callous, but another mistake clients often make is to assume that families will get on harmoniously after their death. While this is always the hope, experience shows that families can fall out particularly when large sums of money are involved and having professional advisors on hand to assist can often alleviate family tensions. For example, it is usually our advice to have a professional executor or trustee except in the most straightforward of cases, even if that is just a bridging mechanism for the family takeover as the responsible parties.”
Matt specifies that common mistakes are “to not consider the tax consequences of lifetime gifting/structuring, particularly triggering capital gains tax charges on the transfer of assets; to assume that wills also cover mental incapacity (to this regard, it is necessary to make separate LPAs and ensure them are registered with the Office of the Public Guardian to enable attorneys to use them as/when required); to have a single will, even in the case of clients with assets in multi jurisdictions, as this may appear the simple option, but can present difficulties in the long run when it comes to the administration of their estate; to not take into consideration the importance of domicile (domicile is important for more than just UK tax purposes as it informs which law can effectively devolve a client’s worldwide assets. It is possible that a client can be UK domiciled for tax purposes (deemed) but non-domiciled for succession purposes. It is therefore necessary for domicile to be checked as part of an estate planning exercise); to depict a will as ‘simple’ (a client’s perception of a simple will is often counter to what an advisor would consider as simple, and it is important to address these misconceptions from the outset).”
Crucial advice: our experts always tell their clients to…
… be honest. Many clients are honest and that makes life more straightforward. However, there is a significant minority of clients who may be embarrassed or try and hide information which not only makes estate planning more difficult, but also can undo planning that is undertaken. For example, undeclared shareholdings may impact the right to tax reliefs undertaken or family members not initially considered in the planning may suddenly be entitled to assets. In my experience, lawyers have probably heard that particular client’s situation before and should not be judgemental. – Mark Pearce
… plan in advance, when you are not under pressure, so that you can make estate-planning decisions tailored to your needs with no rush. Your mind must be free, open to consider all the available options and ready to choose the most suitable one for you and your family. – Alessandro Belluzzo
… review their pension and life assurance provision at the same time as making wills to ensure all facets of their financial plan are ‘joined up’;
utilise IHT reliefs and allowances wherever possible, including annual allowances and planning around making gifts, which can be treated as normal expenditure out of income for IHT purposes;
speak to a financial advisor/wealth planner who can provide assistance through financial modelling to help decide how much clients can give away during lifetime and give them the confidence to do so;
talk to the next gen (where appropriate) to put them on notice of the estate plan to avoid any nasty surprises in the future and avoid the future fragmentation of wealth. In addition, where appropriate, involve the beneficiaries to develop their knowledge and understanding of the wealth so that they are ready and capable of receiving the wealth in the future;
not think that there is a ‘right time’ to work on an estate plan as no time might feel like the right time, but situations can be managed to ensure, for example, that control can be maintained over assets for the benefit of children;
never assume that a trust is about avoiding tax; trusts have been around for centuries and remain an effective estate planning tool to enable clients to plan their affairs for future generations;
keep their estate plans, particularly their wills, under review to adapt in the event of a change of family or financial circumstances. Flexibility for younger clients is often king and it often appeals to clients to incorporate a discretionary trust into their wills to ensure there is a structure in place to ‘flex’ in the future, depending on the wants and needs of the next gen, which it is hard to gauge when they are young at the time the wills are written;
carefully consider the individuals involved in the estate plan; better to look within generations or down generations than up. – Matt Braithwaite