How should we prepare financially for our first baby?
Our first baby is due in a few weeks. We’ve had fun preparing the nursery and other practical things but are there any other financial issues we should think about?
Having children complicates life in many interesting ways and estate planning is no exception.
Certainly the most important starting point is to have a will drawn up. As well as mitigating inheritance tax, the main purpose of your will is to name guardians for your children so that they are taken care of in the event that both parents pass away. If you have not made your wishes clear in your will, it would be left to the court to choose someone, without any guidance from you.
You can also use your will to set up trusts to protect assets for your children and provide for them financially, choosing appropriate trustees to look after any inheritance, until your children reach an age when you feel they will be old enough to manage it wisely.
You may also wish to consider planning with ‘lifetime trusts’. Although trusts are now heavily taxed, depending on the amounts to be used, they can still be a very effective way of protecting assets for your children. For example, it would be advisable for you and your partner to have in place life insurance policies to provide the family with financial security should anything happen to either of you.
Making sure that this is written in trust will take its value out of our estate for inheritance tax purposes, potentially saving £40,000 on a £100,000 policy if your estate is worth more than £325,000. The trust could continue until a specified milestone is reached, for example, your child finishes higher education, gets married, has children or attains a certain age.
Finally, you may wish to consider putting a Lasting Power of attorney in place. This enables you to appoint a trusted person or persons to make decisions on your behalf about your health and welfare and your property and finances, in the event that you lose the capacity to do so for yourself. If an accident or sudden illness strikes, these documents will make things much easier for your family.
Even though you are young and healthy, it is right to consider worse case scenarios. The unthinkable can happen and having the right provisions in place which let your wider family know what your wishes are can spare them very difficult decisions and head off disagreements between family members. It also avoids the need for costly and time consuming legal proceedings, to unfreeze the assets of someone unable to manage their own affairs.
The article was first published by Financial Times on 25 June 2019.
For further advice, or to discuss your case, please contact Elena Tzialli.
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