Protecting you, your family and your wealth
It is in these unprecedented times that we are forced to question our own mortality and to question what would happen to our families and belongings if we were no longer around. Because of this it is important to look at how we manage our assets, and more importantly how we protect them.
It is estimated that around 30% of people in the UK have life insurance in place, though the vast majority may not have any kind of protection in place at all. And for those who do have policies in place, most people will not have looked at the small print around what is actually covered. If you do not have any protection in place (or are looking to amend/upgrade your existing cover), now is the perfect time to consider what needs you have and what you could do to mitigate problems in the future. Insurance providers are currently reviewing their terms and conditions for COVID-19, so it is important to be mindful that any new policies may not cover the current outbreak – with that being said, there is never a bad time to start looking at protecting yourself and your family.
Sharing your wealth
The Bank of Mum and Dad and its closely connected relative; the bank of Grandma and Grandpa remain reliable sources of cash loans and gifts and are often the lender of choice. But giving away and loaning money does need careful thought and without the correct planning, can have dire consequences on a person's inheritance tax bill and could also result in that money being squandered or lost. For example, what about if the money was spent unwisely or what would happen in the event of a divorce or a failing business? What if the donor's own financial circumstances changed and they find themselves in need of the money?
Careful planning is needed as to when and how much to gift. Gifting money is more that just a tax planning tool, passing on your wealth is part of your overall wealth planning strategy. Remember, once you have given that gift, it has gone. You cannot access it again nor have any control over where it ultimately goes.
An outright cash gift may therefore not be the best option and there are more effective options available. Trusts continue to provide practical solutions to problems in ordinary people’s lives as opposed to giving the beneficiary an outright gift.
Not only can a Trust ringfence and protect assets for beneficiaries, they can also be used as a vehicle to loan money to beneficiaries, rather than making outright gifts. The loan remains an asset of the Trust and provides a layer of asset protection in the event of divorce, or bankruptcy. The loan is a formal agreement and may remain outstanding for the duration of the beneficiary's lifetime and will be a debt against their estate, payable upon their death.
Protecting your estate
Arguably one of the best ways to protect yourself is also to protect your estate, enabling you to leave a lasting legacy for future generations. Without a solid estate plan in place, you may be leaving your loved ones with difficulties. But luckily, there are some very easy ways to ensure you are prepared – First and foremost, write a Will! The pandemic has forced many people to consider their own mortality, as seen by figures for remote Will writing services increasing by 267% in 2020, well above the normal average. Next, consider a Lasting Power of Attorney – what happens if you lose capacity to make decisions? Taking reputable financial advice is also suggested for those who have Inheritance Tax (IHT) concerns and larger, more expensive assets. There is a plethora of ways that you can reduce IHT liabilities such as gifting and investing in exempt assets – however, guidance is more often than not required to ensure you stay within the rules and regulations.
Diversifying your Portfolio
The investment principle of diversification is also an important tool which can be used as a means to protect your wealth. As noted by Warren Buffett: ‘Diversification is protection against ignorance’.
Diversification allows you to manage risk and reduce volatility of your overall portfolio. Markets rarely remain static, and it is virtually impossible to find the ‘perfect time’ to invest. While you can reduce risk associated with individual stocks and shares, it is much harder to do so with wider market shocks (as seen with the drop back in March 2020) so the key is to diversify with different asset classes such as equities, fixed income and alternative assets which should each react differently to changes in market conditions. Ultimately, you are looking to balance risk against returns, to find a space where you are comfortable with your investments and can still achieve sustainable growth.