Estate Planning Case Study
A long standing client Mark, who is an IT consultant, recently recommended Bluebond service to his parents after a number of attempts to encourage him to do so.
Mark’s father, Andrew, is a retired accountant and about to turn 80 and so Mark was convinced that his Dad, being the careful type, had already sorted out his inheritance tax planning a long time ago, as he was very good with his money. Basically I could tell that Mark just did not want to ask the question because he did not want to be seen as trying to tell his parents what to do with their money.
On estimating Andrew and his wife Pauline’s potential IHT liability at around £400,000, I asked Mark if he was willing to risk £400,000 between himself and his brother Robert, without just asking his dad.
Eventually Mark did find a way to ask his Dad and he admitted huge surprise. It turned out that other than just making out simple wills, his parents had done no IHT planning or estate planning on a joint estate worth around £1.6 million including their home. In fact it seemed to have been weighing on Andrew’s mind for a few years but he had never known who to approach, and he didn’t think anything could be done anyway.
On discussion with Andrew and Pauline, it seemed their house was worth around £800,000 and they had cash and other investments including a wide range of shares that he had owned for years. Andrews’s pension was more than enough for them both to live on without any income from the investments.
What Andrew and Pauline wanted to achieve:
- If Andrew died first, that Pauline would have sufficient income to live on comfortably despite the pension being cut in half
- Ensure they paid as little IHT as possible
- Keep the money in the family if either of their sons got divorced
- Set up a fund to pay for their 4 grandchildren’s university education and also leave them some of their estate on their deaths
- They were happy to gift £300,000 to their children now, but did not want to simply fund their lifestyles
- Reduce the risk of their investment portfolio
What we recommended and the benefits:
We set up 4 lifetime discretionary trusts to spread the value of their assets (to reduce ongoing income tax) on death of both of them. I explained that on both their eventual deaths the estate would be distributed evenly across the 4 trusts with loans made to the children repayable on death or on demand of the trustees. This protects the money if either son predeceases their spouse or gets divorced or bankrupt.
The wills also allocated a percentage of their estate to a separate trust with their grandchildren, but not the children, as beneficiaries. Andrew and Pauline wanted their grandchildren to get some money directly from them.
We sold some of the investments and moved the money into offshore bonds in 3 other trusts: £100,000 into a Capital retention plan and £325,000 into two fixed income plans which paid an income of £12,000 per year back to Andrew and Pauline.
Using the personal annual £3000 a year exemption and the gifts out of normal income rules we used some of the pension income to gift £15,000 a year into a separate fund for the grandchildren’s education in their joint names. This would stop on Andrew’s death as Pauline could decide on her income stream at that time. Obviously this regular gift also reduced the estate value over the years or at least stopped it growing.
£300,000 was withdrawn from the house as an equity release and gifted to two of the lifetime trusts which then immediately loaned £150,000 to each of the children. They then each used this money to pay down their mortgages. There was a difference in the equity release mortgage rate and children’s rate of around 3% per year but this was more than nullified by the children contributing £6000 net per year each into their pensions and reclaiming higher rate tax on the contributions. This meant Andrew and Pauline did not simply improve their children’s lifestyles but ensured they save for the future.
Placing all the investments into lower risk funds and absolute return funds also ensured Andrew and Pauline did not have to worry about their investments going forward.
A small whole of life policy took care of the IHT liability on the investments that could not be gifted into trust.
We set up a regular fee to see Andrew and Pauline every two years to keep checks on the income streams and estate values.
The planning was complicated and took a few meetings between myself and Andrew and Pauline, with the children sitting in one of the meetings once decisions had been made. The children were also appointed as trustees and understood what was happening with the estate.
Result – the entire estate protected for the family bloodline and no IHT to pay. All parties were delighted.
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