Talking to family members about your plans may be uncomfortable, but doing so helps avoid issues and disputes later on

Attempting to plan what should happen to all your earthly assets is a complex task. Many people walk a tightropebetween making their wishes fair, tax-efficient and not so generous they risk running out of cash.

Yet taking the time to plan can significantly reduce the inheritance tax (IHT) bill your family might face – potentially saving thousands - and avoid complications or conflicts later.

Before you pass on so much as a penny, make sure you take these five expert-approved steps.

Five steps to take before you give anything away

• Work out what’s in your estate
• Decide how much to give
• Think carefully about timing
• Consider control
• Tell your family about your plans

1. Work out what’s in your estate

Your first step is to understand the value of your estate, including your home and any other properties you own, savings, investments and – from next April – pensions, offset against any debts you still owe. The earlier you do this, the more planning options you’re likely to have when it comes to deciding what to do with it.

Jacob Robinson, of Taylor Rose Solicitors, said: “Early planning gives you far greater flexibility – both in terms of the reliefs and exemptions available, and in ensuring your wishes are documented and legally effective.”

Once you understand your estate, think about what you want to achieve. For some, this might be reducing an inheritance tax bill, while others might want to ensure their wealth is passed on according to their wishes.

It’s also worth reviewing your will, checking whether lasting powers of attorney (LPAs) are in place and ensuring you have appointed executors to administer your estate.

Mr Robinson said: “An independent financial adviser or wealth planner can assist with the lifetime planning. A solicitor can assist with a will, LPAs or other legal documents and can give estate planning guidance.”

2. Decide how much to give

Once you’ve assessed your estate, it’ll be easier to work out how much you can afford to give away early and who you want to benefit.

Charlotte Ransom, of wealth management firm Netwealth, said: “Before making any gift, take an honest assessment of what you have today, what income you expect in the future and, crucially, what you think you will need to fund your own retirement.”

Gifts should never come at the expense of your own financial security.

Clare Stirzaker, chair of Remember A Charity’s Wealth Advisor Committee, added: “When it comes to the amount of money to give to loved ones, many people focus on how much they would like to leave their children or grandchildren, rather than how much they can realistically afford to part with.

“We often see people underestimate how long retirement may last and the potential impact of future care costs, healthcare expenses, as well as the impact of inflation. Before making any gifts, it’s important to be confident that your own financial security won’t be affected.”

Cash flow planning can be particularly useful. Map expected income against projected living expenses year -by-year in retirement, which can help you understand how a gift today could affect your finances years later. It can be worth speaking to a financial adviser or financial planner.

3. Think carefully about timing

The timing of a gift can be just as important as the amount you’re giving.

Ms Ransom said: “Increasingly, parents recognise that wealth can often make the biggest difference during their children’s earlier adult years rather than being inherited decades later.

“Helping someone on the property ladder or giving them greater financial security while they are building careers and families can have a far greater impact than leaving the same assets as part of an estate later in life.”

Gifts during your lifetime could also reduce a potential IHT bill.

Everyone can give away up to £3,000 each tax year using the annual gift exemption, and it won’t be subject to inheritance tax. Larger gifts will generally only be counted as outside your estate if you survive for at least seven years after making them. Starting sooner increases the likelihood of it being free from IHT.

Rhiannon Coleman, of law firm Mishcon de Reya, added: “Starting early can also be beneficial if you’re planning to pass on assets that are likely to increase in value. By gifting them sooner, any future growth may sit outside your estate, potentially reducing the inheritance tax payable when you pass.”

However, you should only give away assets you can afford to part with.

4. Consider control

Another part of IHT planning is working out how much control you want over the gifts you make.

This might be a concern if you’re giving large sums to young people who struggle with financial decisions, or if you have ideas about how you want your gift to be used. For example, cash for university tuition fees rather than blown on an expensive new car. You might also have concerns over future divorces dwindling your family wealth.

Making an outright gift is simple and effective but you lose control.

A discretionary trust, however, gives flexibility and control over the amount paid out. A bare trust is simpler but less flexible, and once beneficiaries turn 18 in England and Wales (16 in Scotland), they can have the contents of the trust.

Anthony Villis, of wealth management firm First Wealth, added that a family investment company (FIC) “lets you manage family wealth across multiple generations. The running costs mean it typically only makes sense at a certain level of wealth, but for some families, FICs are among the more effective structures I’d point people toward.”

5. Tell your family about your plans

Although discussing inheritance can feel uncomfortable, talking to your family can prevent misunderstandings or conflicts later on.

Mr Robinson said: “Inheritance planning works best when it is not done in isolation. Letting family members know what you intend and why avoids misunderstandings, manages expectations, and reduces the risk of disputes after death.

“It also allows beneficiaries to plan their own affairs accordingly. These can be difficult conversations, but they are far easier to have during a donor’s lifetime than to resolve through litigation afterwards.”

Explaining decisions, particularly if you have treated beneficiaries differently, can manage expectations.

Also inform your executors of the location of key documents, such as your will, to make it easier for them to administer your estate.

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