Estate planning generally focuses on passing and distributing wealth to the next generation effectively. Unfortunately one of the few certainties in life is that we will all pass at some stage. While it can seem somewhat morbid to plan for this eventuality, and can appear crass to focus on the financial, rather than human and emotional implications, engaging in some estate planning can deliver significant benefits to your estate and ultimately your beneficiaries, by providing opportunities to deliver stronger investment outcomes, and often by reducing taxes.
The first question we ask our clients when we start our advisory process is “Do you have a will?”. A will is a legal document that sets out how your assets should be distributed after you pass, and allows you to name someone to oversee that this is done efficiently and potentially to manage assets on behalf of some or all of the beneficiaries (e.g. if you have dependents). While not necessarily anyone’s favourite thing to do, preparing a will can help with the process of setting investment goals and objectives and developing a plan / strategy for your savings and investments.
Establish a Trust
For high-net-worth individuals, and people with minor children, establishing a trust can be a useful step in protecting your wealth and passing it to future generations. A trust provides you with a number of benefits, including a means of passing your wealth to your children and other beneficiaries in a tax efficient manner, and an ability to invest assets with the objectives of the ultimate beneficiaries in mind. Trusts usually avoid probate, which means beneficiaries may gain access to the assets quicker than they might if only a will was in place.
Discretionary trusts in particular can play a useful role in succession planning. Careful consideration and flexibility are required when providing for young and adolescent children, beneficiaries with special needs or other vulnerabilities, and for situations where subsequent relationships may arise.
Implementing Your Plan
Having a comprehensive estate plan can provide certainty and peace of mind for your family. For many people an estate plan can form part of a well-constructed financial plan. However, when putting an estate plan in place, it is important to achieve a balance between your financial needs today, your goals in retirement and your legacy goals. This can mean potentially adjusting your investing goals, time horizon and asset allocation.
With every plan, the first step is to set out your specific goals for your legacy. This will give your estate plan direction, but it can also affect the investment strategy you’ll need to implement. Begin the process by thinking about your beneficiaries. If you are a parent, you are most likely going to prioritise your children.
Next, consider what you intend to do and for whom, specifically. If you want to pass money or assets to your children, specify exactly how much for each, or who receives which asset or the percentages into which assets should be disbursed.
Setting specific goals is important for your legacy planning because your beneficiaries and your intentions help determine your portfolio’s investment time horizon and optimal asset allocation—essential investing decisions. When positioning your portfolio, it is important to understand the sources of wealth that make up your investment portfolio, what happens to them in the event of death and the tax implications for each asset or investment type on death for the beneficiary. Your assets may include:
- Family home
- Investment properties
- Private investments
- Pensions benefits from current and past employments
- Business or company shareholdings
Planning should also make space for proceeds from any life assurance policies that will become payable in the event of your death.
Your Time Horizons
Your investment time horizon is the length of time that assets are likely to remain invested, before they are encashed to meet a need. This may be to either support your financial needs and objectives – possibly in retirement, or being utilised earlier for another purpose, such as being sold for the proceeds to be passed to beneficiaries of your estate. With retirement planning, typically your time horizon is based on your estimated life expectancy and the life expectancy of your spouse.
For estate planning your time horizon can be much longer, if you wish to pass on money and assets to your children and potentially grandchildren after you are gone. After considering your own needs, your investment strategy can focus on your beneficiaries’ investment time horizons. If you plan to leave money to younger beneficiaries such as your grandchildren, their investment time horizon likely extends decades beyond your own.
Your Asset Allocation and Withdrawal Strategy
At Acuvest we believe that the allocation made to each asset class i.e. shares, bonds, property etc. is the key driver of your portfolio performance and that investment risk is rewarded over the long term. When you have a long-term time horizon, this gives you an ability to withstand a certain amount of shorter-term volatility that arises during periods of market uncertainty. This is in the knowledge that you plan to hold those assets until the volatility has passed and they have hopefully more than recovered their fair value.
Your investment strategy needs to be positioned so that it balances your need for income in retirement with your longer-term legacy plans. Over-exposure to safer assets can lead to an erosion of the real value of your assets over time, potentially causing you to fall short of your longer-term legacy goals.
Your withdrawal strategy in retirement needs to be carefully planned and incorporate scenarios when markets rise and fall. The sources of income from your portfolio and the tax impact are key considerations. For example, in retirement it is likely that you will be required to draw down 4% or more of your retirement fund each year, but this amount will be subject to income tax, USC and potentially PRSI. Your retirement fund should be aligned to both your income needs and your legacy goals. Therefore, the mix of investment vehicles and assets needs to be determined to achieve both objectives.
Putting estate plans together can be tricky no matter what the circumstances are, and it can get very complicated if you have a high net worth. Taxes, trusts, legal structures and investment planning need careful consideration and advice should be sought from experts in these areas. At Acuvest, we regularly work with our clients’ other professional advisors to ensure their legacy objectives are met.