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Solicitors warn against DIY estate planning

Far more people are turning to their bank manager and the internet for advice on estate planning – raising concerns from solicitors that the advice given may not be adequate.

While solicitors are still the favoured source of advice on how to manage inheritance tax (IHT) and make financial gifts, 44 per cent of people now consider their bank manager a good source of advice, according to Standard Life’s “Wills and Trusts Research report”.  Last year, 32 per cent favoured this route.

More than half – 54 per cent – of those polled said they would do the research themselves on the internet, up from 47 per cent the year before.

There has been a drop in the number of people saying they would turn to more traditional sources of advice on estate planning, with solicitors and accountants less popular than in last year’s survey.

The reason is thought to be a greater effort by bank managers to contact their customers in the wake of the credit crunch.

Banks have been stepping up their efforts to offer more services, in an attempt to repair their reputations and attract much-needed new business through their doors.

“I think this is all about marketing: the strategies that financial services companies are following in response to the economic situation,” says Julie Hutchison at Standard Life.

But solicitors say they are still in the best position to give advice on estate planning.

“Estate planning is something so serious that a specialist solicitor is the person to speak to for independent advice,” says Catherine Belton at the Law Society.

The society has also warned against using low-cost will-writing services, which it says often produce wills that are not legally binding.

Estate planning – such as making preparations for where to bequeath money – has been placed on the back burner by many wealthy families during the recession.

But with 50 per cent of the UK population not having made a will, families are being urged to take steps.

Here are our top tips for how to get started in estate planning – regardless of who you go to for advice.

1.  Make a will

Before any decisions on estate planning can be made, a will needs to be drawn up and a power of attorney appointed.  If you do nothing else, this will at least enable the estate to be divided in the manner you would like, even if it is not the most tax-efficient way.

2.  Pick a trust

Do you want your children and grandchildren to receive a lump sum at a certain age, or would you prefer to provide them with an income?

This will affect what kind of trust you choose to set up.  Be aware that if you put money into a trust, you may not be able to get it out again.

There are three main types of trust: bare, where children can get the money out at 18; interest in possession, which pays a regular income; and discretionary, where trustees have outright discretion over who gets what.

3.  Invest in alternative plans

Investment portfolios that are structured to be tax-efficient for inheritance tax purposes are a good bet for those who want to retain control of the money during their lifetime rather than lock it away in a trust, says Lee Smythe at Killik & Co.

Often these portfolios invest in Aim stocks that qualify for business property relief after two years.  Some brokers, such as Killik, offer Aim IHT portfolios.  However, Justin Urquhart Stewart at Seven Investment Management warns that the risk of Aim stocks may outweigh the benefits of any tax wrapper – as some portfolios have fallen up to 90 per cent in value.

Smythe says a lower-risk option is Octopus Investments’ IHT plan, which sets up low-risk businesses of its own rather than investing in Aim stocks.  The Secure Inheritance Tax Service also offers a guaranteed 3 per cent income a year.

4.  Consider philanthropy

Gifts to charities are tax-free when left in a will.  Wealthier families sometimes opt to set up their own philanthropic foundation, which is often done through a trust arrangement.

Research by Barclays Wealth has found that the wealthy are continuing to increase the amount they give to charity, in spite of the economic downturn.

5.  Make use of existing exemptions

There are a number of ways to give money away during your lifetime so that it will be untouched by inheritance tax.  The nil rate band below which no IHT applies is £325,000 or £650,000 for those who are married or in civil partnerships.

However, Hutchison at Standard Life warns that only £55,000 can be passed to a spouse who is not domiciled in the UK.  Wedding gifts of up to £10,000 can be made tax free.

There is also a £3,000 annual tax-free exemption for gifts.  By far the most flexible exemption is the “normal gift from income” regular gifts that are made out of surplus income.  These gifts have no upper limits, so wealthy investors taking an income from a pension could give away tens of thousands of pounds a year.

6.  Set up a family partnership

The very wealthy – those with more than £1m – could consider starting their own business, staffed with members of their own family as partners.

These family partnerships allow wealth to be passed among family members free of inheritance tax.  Shares in the business, which is constructed as a limited liability partnership, can be weighted so that parents retain control.  However, these arrangements can prove costly to run.

“Financial Times”: Nov 7/8 2009