Why Set up a Lifetime Trust?
This blog explains why it is so beneficial to have a Lifetime Trust instead of a Will Trust.
Why do Solicitors Usually recommend a Will Trust?
Usually, a Will Trust is set up and created by a Will and is usually a Discretionary Trust. The benefit of this is that it means the person’s entire assets fall into the Trust as opposed to going directly to their beneficiaries on death. The Trust will typically last 125 years from inception. Here, the Trust can make loans from the Trust to the beneficiary. This will protect the assets, for example, in the event that your child gets divorced.
What is the Difference Between Will Trusts and Lifetime Trusts?
Both types of Trusts are Discretionary Trusts. However, the main difference is that a Will Trust is set up on death and the Settlement (items that go into the Trust) are the assets that are left on death. By contrast, Lifetime Trusts are set up during lifetime, and the Settlement occurs immediately. The Settlement can be as little as £10, and the rest of the assets pass into the Trust upon death.
A Lifetime Trust allows you to gift assets during your lifetime. Rather than giving money directly to your children, which contains the risk of losing half the money in a divorce scenario, the Trust will lend the money to your children which means that the assets are protected.
Downsizing Your Home
You could decide to downsize your house so that you would have money in your late seventies to gift out to your children. Here, with a Lifetime Trust, if you were to live for seven years after making a gift into Trust, you could then use your nil-rate band allowance more than once.
Lifetime Trusts also have another advantage which is particularly useful for the wealthy. Imagine that your spouse has already died and you are suddenly taken very ill. As the Trust already exists, you can gift some money into the Trust immediately. If, as a result of this, the estate value drops below £2 million, that means that the residential nil-rate band is fully available. This would up to £140,000 in Inheritance Tax. So although that death bed gift would fail as gift into a Trust for Inheritance Tax purposes, it would still reinstate the residential nil-rate band, thus saving Inheritance tax.
The main advantage of using a Lifetime Trust is that it uses the existing rules. This means that you know and understand what the rules are when you place your £10 in. This also means that if you create a Trust during your lifetime, you have a much higher level of certainty on the rules applied than one created upon your death which could be 20 years later (allowing time for the rules to change).
Like all matters related to Estate Planning and Inheritance Tax, experienced advice is essential.
Call us if you require any help.
How Does the 7 Year Inheritance Tax Rule Work?
This blog explains some of the complicated rules around Inheritance Tax, including Taper Relief and the seven-year rule. It’s very important that you understand these rules and how they work because if you get them wrong, it could cost you a lot of money.
The Seven Year Rule
This rule only applies to gifts that are made in excess of £3000. If the gifts that you make exceed £3000 in any given year, then it will become a Potentially Exempt Transfer (PET) or a Chargeable Lifetime Transfer (CLT). PETs apply to direct gifts to people that exceed £3000 whereas CLTs are gifts into Trusts.
Potentially Exempt Transfers
PETs have no limit. If you wanted to give away £10 million, you could, and if you live for seven years after this, then this will fall outside of your estate. However, you need to be careful. If you gift large amounts to your children directly and they go bankrupt or get divorced, you would have no control over the gifted money, and as a result, it could leave the family bloodline.
Chargeable Lifetime Transfers.
CLTs are gifts into Trust, and they too have no limit. Yet, if you gift more than the Nil Rate Band (currently £325,000) then the excess will be charged at 20% immediately.
If you make a gift into a PET, then Taper Relief might apply. Taper Relief is a tax reducer. It doesn’t reduce the amount of capital transfer for Inheritance Tax, it reduces the tax payable. It is important to know that Taper Relief only applies to the excess of gifts which exceed over £325,000. For example, if you gift £525,000, then Taper Relief would only apply to the excess £200,000.
The below ‘Taper Relief: Sliding Scales’ is a handy diagram showing the differing tax rates that apply. For example, the diagram illustrates how Taper Relief only starts after three years. You can use the diagram to see how the amount of excess that you’re gifting corresponds to the Taper Relief rules.
|TAPER RELIEF : SLIDING SCALES|
|Time between date of |
gift and date of donor’s
|Taper relief applied to tax due||Effective rate on gift|
|0 to 3 Years||0%||40%|
|3 to 4 Years||20%||32%|
|4 to 5 Years||40%||24%|
|5 to 6 Years||60%||16%|
|6 to 7 Years||80%||8%|
The Seven Year Rule and Fourteen Year Rule in More Detail
Let’s say that you make a PET in year one and you lived over seven years. Here, the money would be out of your estate after the seven years, and you would pay no tax. Now imagine you make another gift in year six and you lived for over seven years after that. Even though the two gifts overlap, there would be no issue as each PET is accounted for individually for tax purposes.
However, the rules are different for CLTs. If you made a CLT in year one and lived past the seven-year mark, again, there would be no issue as the money would be out of your estate. However, if you were to make another CLT in year 6 and then only lived another 6 years then the second gift would be a failed CLT and, as the CLTs overlapped, the money would be dragged back into your estate. You would, however, still get Taper Relief (depending on how many years you lived).
Therefore, after you have made a gift into a Trust, do not make any other giftsover £3000 in the seven years that follow.
Like all matters related to Estate Planning and Inheritance Tax, experienced advice is essential.
Call us if you require any help.
What is probate?
Everything a person owns; their possessions, money and property make up their estate. When this person dies, the estate must be distributed according to their Will, if it exists. Applying for the legal right to perform the distribution is called probate.
Probate is granted to the person(s) named the executor (s) in the Will, with authority from the court. An executor is a person the deceased wished to deal with the administration of their estate after their death. It is the executor’s responsibility to:
- determine what property and other assets you owned, as well as your liabilities
- arrange for current valuations of your personal possessions, property, investments, any pension or insurance entitlements due and also any debts and bills
- arrange for the payment of your funeral
- establish Income Tax, Capital Gains Tax and Inheritance Tax liabilities and complete the necessary tax returns to submit to the Revenue
- complete and submit the necessary Probate Registry forms
- arrange the clearance and sale of any property
- collect assets and pay any debts
- arrange for the distribution of legacies and gifts to your beneficiaries
- compile detailed accounts to give to the main beneficiaries
- in the case of minor children being beneficiaries, then your executor may act as Trustee for ongoing trusts, to hold their monies until they reach 18.
In Scotland, probate is known as Confirmation, however the process remains similar.
This guide aims to provide a basic understanding of what happens and what needs to be done if you are named an executor.
Do you need probate?
This depends on the deceased’s circumstances, but many people do not. Relevant factors include:
- Whether any accounts or properties are jointly owned – if they are, then it usually just passes onto the surviving co-owner
- The value of the estate – some institutions may let estates valued at less than £5000 pass on without sight of a Grant of Probate, however it is worth checking with the provider
If there is a property which is NOT jointly owned, then probate is always required.
HMRC will be able to advise on whether Probate is necessary
Who should apply, and for what?
Not everyone can apply for the legal right to handle the estate. The process depends on whether a certified Will has been produced, and if that Will names an executor to deal with the contents. The executor could be anyone over the age of 18 and is often a family member or a firm of Solicitors. It is not uncommon for an executor to be a beneficiary.
There are three options depending on the situation:
- If a Will exists AND names a competent executor, then that person must get a court-ordered ‘Grant of Probate’.*
- If there is no Will, then they must apply for a ‘Letter of Administration’.
- Only the Spouse (even if separated), civil partner or child may apply.
- In this case, the rules of intestacy apply.
- Sometimes a Will either does not deal with the full estate or name an executor. There may also be reasons such as health or mental competency that mean the named executor is unable to act. In a case like this administration is required again.
*The named executor is not obliged to act – it is possible to renounce the role or reserve power for future use, often when the situation is easier to manage (such as if the executor is abroad).
So long as you are able to apply and unless the estate is very complex, probate is absolutely a process which can be done alone. People waste large amounts of money getting solicitors to do it for them. It does take time and effort, but many people find it a welcome distraction from the situation that they find themselves in.
How long does it take?
It normally takes between one and two months to file for, and then receive a Grant of Probate. After this, it can take significantly longer to perform the actual distribution, particularly if the estate is large or complex. The main piece of advice we can give while applying is to be organised and prepared. So long as you keep good records at each stage, it will be an easy experience.
We can prepare the necessary paper within five working days of receiving the full information from the executor or Administrator. We are also able to obtain the grant in as few as ten working days.
You have been named executor, what should you do?
1.Register the death and find the Will
This needs to be done within five days of death and is usually performed by a family member. Locate your nearest registry office online and phone ahead in case you require an appointment.
- You will need the correct documentation of a medical cause of death certificate and then other documentation such as a birth certificate.
It is wise to buy several copies (we suggest at least 5) of the death certificate as they are useful later and increase in price based on time after death. Initially, it costs between £8-12 per copy based on which one of the home nations the death occurs in. (£11 in England)
- The certificates are needed for the assets such as bank or credit card accounts.
The location of the Will should have been made known by the deceased before death, e.g. with a solicitor or at their house.
- If there is no Will, then the deceased has died ‘interstate’. At this point, certain rules apply.
2. Report the death
Using the death certificates, report the death to any of the asset holders such as banks or building societies.
This can often be done in one go using the Death notification service. You do not have to create an account, though it is advised as they can provide updates on the progress of the application.
- Institutions are usually notified by 4 PM the next working day if you submit before 12 noon.
3. The funeral
Family members normally arrange this.
The Will may have set aside money to provide for the event, but if not, then the family and/or executor may find themselves paying BEFORE they are able to retrieve any assets.
4. Perform a valuation of all the assets and assess finances
This can be done alone, but some areas may require professional services based on the items that are being valued.
- Examples could include art or jewellery.
- Houses can be valued by the executor, but if the price begins to stray close to the Inheritance Tax (IHT) threshold of £325,000 then it is better to have it done professionally.
You will need to contact a variety of institutions such as:
- Banks for accounts and cash assets. Make sure that details of all accounts, investments and ISAs are included. Check whether the accounts are joint or single as this will affect the valuation.
- Lenders in relation to mortgages, loans, or credit cards
- Pension providers
- Various government offices to check for outstanding tax payments (council, income ect…) which will have to be settled BEFORE anyone named can receive anything from the Will.
The institutions may require a death certificate to stop any payments and you should also check that any protection or insurance policies do not lapse after death.
When it comes to life insurance, you should also check for any policies that you can start the process of claiming on at this point.
- Sensible management would have put these into Trust. If so, then they can be accessed without probate. Bluebond specialises in dealing with estate planning via the use of trusts.
- If it has not been put into Trust then the policy forms part of the estate and must be included in the valuation.
5. Obtain the Grant of Probate (or Administration) and pay Inheritance Tax
Inheritance Tax forms 205 or 400 (IHT205/400)
Watch our video on Inheritance Tax to see how we can help!
Before you submit a Grant of Probate application, forms must be submitted to see if the deceased is liable to pay Inheritance Tax.
- If there is any tax to pay, there is a 6-month window from the point of death to in which to pay.
- A Grant of Probate will not be given if the tax is not paid.
There is a £325,000 allowance which is tax-exempt, alongside a possible further £175,000 allowance depending on the individual’s circumstances. Using the previously performed valuation, one of two forms needs to be filled out based on whether the estate falls above or below the taxable boundary:
- Use form IHT205 if the valuation indicated an estate of LESS THAN £325,000
- If it is valued at greater than the threshold then you must instead fill out form IHT400
Either form can be filled out on paper or online and should list:
- All valued assets
- Any gifts made by the deceased less than 7 years before their death (after 7 years these gifts become tax exempt)
Fill out the form EVEN IF THERE IS NO TAX TO PAY.
IHT must be paid in advance. This is easy if there is enough money in the deceased’s bank accounts – all the banks need is an IH423 form. It gets more complex if items such as property must be sold.
- Often the executors may have to initially pay out of their own pocket or get a loan before they can recoup the money from the estate
Once any IHT issues have been sorted, the executor (s) must complete a Probate Application form (PA1P) which can be downloaded and submitted online. (Google: ‘apply for probate’ and select the first .gov option)
- The executor will need an original copy, no photocopies, of the Will.
- If multiple versions exist then only the most recent may be used, but previous versions should not be destroyed at least until probate is granted.
- If there is more than one executor, then the group must work out who applies. Up to 4 executors can be named on an application.
- For further help, the government operates a helpline on 0300 123 1072.
The process costs £155 with a solicitor, or £215 if applying by oneself, regardless of the size of the estate.
- The fee is waived below £5,000
- At least 5 extra copies should be ordered for £1.50 each, as they are vital to the process
The application will only be successful if the relevant Inheritance Tax forms have been submitted (see below) and any resulting tax is paid. Once successful, a notice should be placed in The Gazette to encourage other creditors to come forward, otherwise the beneficiaries may be liable.
In total, the following must be submitted to the Probate Registry/HMRC:
- PA1P form
- IHT205 or 400 form
- An official death certificate
- The original Will and three copies
- The fee
6. Pay of any debts
If the deceased had any other debts besides IHT, then these must be paid off before the remaining estate can be distributed.
- Only the estate is liable for these debts, not the family.
- There is a complex order in which they must be paid which becomes relevant if the estate is not large enough to cover everything.
A notice should be placed in The Gazette to encourage other creditors to come forward, otherwise, the beneficiaries may be liable.
- At least two months must pass before the estate is distributed before this rule takes effect
Debts in a joint name become the responsibility of the survivor of the pair.
7.Distribute the contents of the estate in accordance the Will
So long as you know the value of the remaining assets, they can now be divided in accordance with the Will.
Probate – the process of applying for the right to deal with someone’s estate after they die.
Executor – someone who is able to apply for probate, as they are named executor in the Will.
Estate – all a person’s available possessions and assets (money, property ect..)
Beneficiary – a party (e.g. a relative) who will gain assets from the Will
Grant of Probate – the legal authority granted by a court, allowing an executor to settle and distribute the estate in accordance with the Will
Grant of Letters of Administration – the path taken by a relation if there is no Will, or it is incomplete
Death certificate – a signed and certified document proving the death of an individual
The Gazeette – the Government website of the official public record for announcing deaths
IHT – Inheritance Tax
PA1P – the form that must be filled out in order to apply for probate, along with the associated fee
IHT400 – the online form for declaring assets to HMRC to see if there is any IHT due
IHT423 – the form that can be sent to institutions such as banks to authorise payment to creditors and HMRC out of the deceased’s accounts
Why you should use a Family Investment Company to avoid Inheritance Tax on Large Estates
This article explains all the benefits that accompany using Family Investment Companies (FICs). An FIC may be a beneficial solution to your Inheritance Tax problem if your estate exceeds £2million in value.
What is an FIC?
An FIC is a company with bespoke Articles of Association and multiple share classes. They are usually limited, but can be unlimited if it is only investments that are held in the company and not property. FICs are set up by tax specialist tax consultants together with lawyers. They are most often used by people who have large property portfolios.
How Does the Process Work?
Usually, a registered partnership is set up between spouses (rather than you filing your tax returns individually). After three years, the partnership is incorporated, and properties are placed into the company using Incorporation Relief to avoid Capital Gains Tax (CGT). This method is also useful for clients withlarge investment portfolios with potential large CGT issues. Here, shares are gifted as fast as possible into the company to avoid CGT.
How is an FIC Set up?
The people gifting the money into the company will generally have A-class shares. When they gift the money into the company, it is offset on the balance sheet as a Director’s loan. The people setting it up become Directors and retain control. The Director’s loan is then repaid over the years income tax free as it is classed as a return of capital. It is the normal income from property portfolio thatrepays the Director’s loan. Corporation Tax is payable on profit, but at 19% it is lower than Income Tax.
Usually, when you reach the age of around 75-78, a Director’s loan is given up asa Potentially Exempt Transfer (PET) and therefore avoids Inheritance Tax if it survives the seven-year period. Corporation Tax is payable – but only at 19%. As it is a company, Section 24 on Buy To Let properties does not apply, and as a result, all interest is offset against profits (not just the 20%). You can also get paid an income as Directors.
You would only own the A shares. Usually, your children would have the B and C shares which would also grow in value in line with the company’s property or share portfolio. This stops the Inheritance Tax from getting worse.
Despite having shares, your children would not be Directors so you continue to control the company until old age. Here, there is an added benefit that only direct descendants can own shares which provides protection (for example, if one of your children was to get divorced).
FICs are particularly beneficial for people whose estates exceed £2million (or people with assets that exceed £1 million excluding their main residence). They are a good way of potentially eliminating Inheritance Tax on large estates. However, there is the risk of future attacks by changes to legislation HMRC,meaning that you should not solely rely on this mechanism. FICs should always be set up alongside Trusts as retrospective changes to Trust legislation is very unlikely.
What are the Main Benefits of FICs?
- You can avoid CGT normally payable on passing a property portfolio into a company if done correctly.
- It can generate very low levels of Income Tax.
- It avoids Inheritance Tax on very large assets.
- It retains complete control on assets and income streams.
What are the Negatives of This Strategy?
- FICs do have the potential to be attacked in the future by HMRC. This is the main negative of using FICs.
- If your income is based upon property income, then this can be inflexible.
- You will have Accountancy fees that you need to manage annually.
It is very wise to not rely only on FICs. You should always consider the use of maximum investment into Trusts as well. Alternatively, you could invest some money into Business Relief plans.
You should always place the maximum amount possible into Trusts because this provides huge backup assets should you need them (for example if you went intocare). Also, this may be necessary if you find yourself giving away your property portfolio given that your main income from an FIC stops at age 78.
However, this can sometimes be a difficult concept for property landlords who feel comfortable having all their money in property. Your return may be lower, but it will have a higher level of certainty as you avoid IHT and you have capital/income back up.
FICs are good for people with large estates as there are few other options. It alsooffers protection as large gifts to children could be lost in scenarios such as divorce. However, to give yourself the highest level of protection, you should always use maximum investments into Trust. Together, this means that you get certainty on IHT avoidance.
Like all matters related to Estate Planning and Inheritance Tax, experienced advice is essential.
Call us if you require any help.
How to Use a Flexible Reversionary Trust to Avoid Inheritance Tax
This blog is all about how a Flexible Trust can be a really useful tool.
There are many different types of trusts, such as Discretionary Trusts or Immediate Post Death Interest Trusts, which all have different benefits. However, for the vast majority of people who are looking to place assets out of their estate for inheritance tax reasons, using a Flexible Reversionary Trust is one of the best methods to accomplish their inheritance tax aims.
You will find that many advisers recommend a Loan Trust which effectively takes the growth of the investment outside of the estate. The “loan” continues to stay in your estate until you die which means the capital remains in your estate for IHT purposes which is not what most people want. You can always get your Capital investment money back which gives some degree of flexibility.
Discounted Gift Trusts
Using a Discounted Gift Trust places the money outside of your estate with a discount on the amount of tax that is payable should you die within 7 years. You can also place more than £325,000 into an offshore or onshore bond held subject to this type of trust without triggering immediately a tax of 20%. This is often referred to as a Fixed Income Plan (a mix of a bond and a trust). However, this form of trust is very inflexible as you can’t alter the terms of it. Once you put the money in, you get a fixed income stream whether you need it or not. Also, it cannot be altered at any time until the settlor dies.
Flexible Reversionary Trusts
As this is a type of Discretionary Trust, the trustees have a right to adjust how the money goes to the beneficiaries in the long term when the settlor dies. This is a single settlor trust (only one person puts the money in) and the maximum is limited to the current Nil Rate Band (NRB) of £325,000 per person ( otherwise 20% tax would be payable on any excess over the NRB) If you were to put the amount of money in the trust and do nothing with it, after seven years then the whole amount of money would be outside of the estate. Every single year, you would get an entitlement to reversion of capital + growth (1/7) back to the settlor. For example, if you were to put £210,000 into a trust, you would be entitled to receive £30,000 + growth back each year. The flexibility comes from the fact that you can decide to accept the reversion or not. Moreover, if you needed a larger amount of money, it would also be possible to stack one reversion on top of another. For example, in one year, you could take out £60,000.
When the money reverts back, it has two elements: the original capital and the growth. The original capital is tax free whereas the growth is subject to income tax at your highest marginal rate. For most people, this form of trust is better than a Loan Trust as all of the money is out of the estate after seven years. It is also better than a Discounted Gift Trust because you don’t have a fixed level of income.
- A Flexible Reversionary Trust is highly flexible.
- The return of the capital from a Flexible Trust would be 14.28% compared to 5% for other trusts. Essentially this means you can withdraw a bigger lump sum out should you need it.
- Being able to get all your money back over a period of 7 years means that you can hold less assets as you can get your money back quickly. This help reduce your estate for inheritance tax.
- If you are in a couple, you can each have a Flexible Trust. If one person in the couple were to die, then (as they are single settlor trusts) the spouse would be the beneficiary of the trust. and would be entitled to all the assets not just 1/7 as required.
- You can have your cake and eat it because the trust is flexible as well as the money being completely outside of your estate. The only drawback is that you can’t have all your money back within one year.
- This form of trust suits almost everyone.
Like all matters related to Estate Planning and Inheritance Tax, experienced advice is essential.
Call us if you require any help and speak to our Inheritance Tax expert now.
What is an Inheritance Tax Trust?
In this blog, I will be explaining what a trust is, how to set up a trust, and how they function in general.
What is a Trust?
A trust is a separate legal entity. This means that it exists separately in English law in the same way that each person is treated separately for tax purposes. A trust functions to ensure that you, or someone you choose, can retain control of your assets.
There are many different types of trusts: you can write trusts into your will or you can create lifetime trusts which are set up during someone’s lifetime.
A good analogy is viewing a trust as a strongbox which is made by lawyers, with more complex and better strongboxes requiring better lawyers. A person called the settlor puts the assets into the box. These assets can then be ‘locked away’ until they are used for the benefit of the beneficiaries. However, the trustees keep the keys and have control of the assets.
How do you Create a Trust?
A trust must be written out properly which is why good lawyers are essential. Here, Bluebond uses some of the best lawyers in the country to ensure this occurs.
There are four main parts to a trust:
- The settlor – This is the person who often has an inheritance tax problem places the assets into a trust to remove them from his/her estate. This can happen during the settlor’s lifetime or upon their death (depending on the type of trust).
- The trustees – These are the people who control the trust and usually happen to be the settlors and their adult children.
- The beneficiaries – The beneficiaries are the people who benefit from the trust assets and the income that they generate. They are usually the adult children and grandchildren.
- The settlement – This is the amount placed into the trust which can range from as little as £10 to much larger amounts. Placing the £10 into the trust ensure it exists immediately and is called a lifetime pilot trust.
Will Trusts and Lifetime Trusts
Assets that are gifted are better protected when gifted into a trust than when given directly to people, for example, to children. If you set up a trust within your Will, the settlement will not take place until you die as only then will they trust come into existence and the assets go into the trust. For this reason, we prefer lifetime trusts where the assets are gifted during the lifetime, even though Will Trusts can be cheaper to set up. In addition, lifetime trusts can be especially useful for people with big inheritance tax problems.
Trusts Compared to Limited Companies
A trust can also be thought of as similar to a limited company where the trust settlors are equivalent to the people who set the company, the trustees are equivalent to the directors of the company, and the beneficiaries equivalent to the company shareholders. Also, like trusts, limited companies are taxed differently to individuals in the UK.
Complex Rules on Tax
Trusts have complex rules, especially on tax. There are initial charges when money is put in and a limit of £325,000 currently in 2020 to the amount that can go in without an immediate tax charge of 20%. Moreover, every 10 years there can be an income tax charge on the trustees called a ‘periodic charge.’ The capital gains tax charge will also be different. Essentially, the tax rules are different around trusts than they are for people or companies.
Always get good advice from an experienced practitioner before setting up a trust. There are many different types of trusts to suit different people and their needs. For example, a flexible reversionary trust enables you to put money in and then get it back over a period of time should you wish to. If you do not want it back, it stays in the trust and after 7 years it is outside of your estate.
Personally, I believe that lifetime trusts are the best option when compared to Will trusts
Call us if you require any help.
Watch the video or Continue reading.
What is Estate Planning?
Estate Planning is putting in place Wills and Lifetime Trusts to ensure your desired outcome, regarding who benefits from your estate, is achieved. Essentially, this means that the right people get the right money at the right time. It is all about ‘bloodline protection’ as most people want their children and then grandchildren to inherit their money once they die.
There are usually five problems that Estate Planning seeks to address.
- Divorce – Once you leave your money to your children, they could then find themselves getting a divorce. This risks half of your money going to your child’s ex-partner. Given how high the UK divorce rate is, it’s vitally important to protect your money from this scenario.
- Bankruptcy – 80% of small businesses become bankrupt in the first five years. If this were to happen to your daughter or her husband, without careful protection, all the assets that you had left to your daughter could be lost to her creditors or her husband’s creditors.
- Remarriage – Let’s say that upon your death all your assets are left to your married daughter. If she then dies and her widowed husband remarries someone who did not raise your grandchildren, it is highly possible that your grandchildren (against your intentions) could find themselves cut out of the money that you wanted to be left to them.
- Inheriting Early – If a couple were to die early, then their children would inherit at age 18. This means that your grandchildren could find themselves in charge of a large amount of money when they are perhaps not emotionally mature enough to manage it responsibly.
- The 64% Tax – If you don’t deal correctly with your Inheritance Tax problem then on your death you will need to pay a 40% Inheritance Tax charge, with the remainder, in all probability, passing to your children. If they also have an Inheritance Tax problem, then on their death there will be another 40% tax charge on the same money, so in total, this money which goes to your grandchildren will have suffered a 64% tax charge.
So, how do you protect against these problems? There are various solutions which help to protect your assets.
In an ideal world, the best thing to do would be to set up a lifetime trust (a trust established during your lifetime rather than being set up in your will to take effect at your death). In fact, you can set up multiple trusts on different days, rather than each trust being simultaneously created on the same day, that is the day you die. This gives you more flexibility.
Wills, Trusts and Trustees
It is sensible to have both a will and discretionary lifetime trust. When considering who to appoint as trustees, generally speaking, these should be the settlors (the person whose estate is being dealt with) and their adult children as this will reduce costs (you won’t be paying professional trustees). It is also recommended that you appoint one other person who is not a beneficiary of the trust to act as a trustee in the event of a disagreement between your adult children over how the trust should be managed.
How Does All This Work?
How does the solution of setting up wills and lifetime trusts together protect your assets against the five problems listed above? In a normal situation where you don’t have lifetime trusts your Wills might state that you leave your estate to your partner and then, when you are both dead, the Estate gets divided equally between your children. After this, you would hope that the money would travel down the family bloodline, however this might not happen.
Consider the following scenario, Steve and Ann are married and have three adult children: John, Dave and Jane. Now consider each of the five problems in turn and how setting up wills in conjunction with life time trusts can resolve these problems.
By setting up lifetime trusts in conjunction with a will, the desired beneficiaries receive their inheritance in their individual trusts rather than their partners having equal control over the assets. These trusts still lend the money to the adult children’s partners so that they still have the money. This means that they can lend the money interest-free, but it remains recallable on demand by the trustees (who are the adult children and also are the beneficiaries).
Imagine John is married to Mary and then they get divorced. In this case, the trustees recall the loan to John. This prevents Mary from receiving any of the loaned money.
The day after John’s divorce has settled, his other siblings, being the trustees, can give him back the money as a loan (as a part of the loan mechanism).
Imagine again that John and Mary are married. Let’s say that John dies before Mary and, in a few years’ time, Mary marries her golf instructor, Andy. Andy outlives Mary and, as a result, the money that came to Mary through John passes to Andy and, from here to his beneficiaries rather than John and Mary’s children, that is, Steve and Ann’s grandchildren.
In the event of bankruptcy, the creditors cannot get the money because it does not belong to John, it belongs to the trust.
Say John and Mary were to die early, leaving behind their young son. At age 18 he would be able to inherit his parent’s money However, if the money is in a trust, the trustees will decide how much money to give to the grandchild and when to give him the money.
Unfortunately, you cannot avoid paying the initial 40% tax because when the money went into the trust on your death. If it exceeds the allowances then the tax must be paid. However, the money would be protected from your children’s next 40% tax, and any tax the grandchildren would have faced.
Ultimately, this method of Estate Planning can save thousands for a family. Through operating a loan mechanism, the assets are protected from the risks of divorce, remarriage, bankruptcy, early inheritance, and a 64% tax.
Like all matters related to Estate Planning and Inheritance Tax, experienced advice is essential.
Call us if you to book a free consultation to discuss your Inheritance Tax and Estate Planning Issues.
How to Make 10 Years’ Salary in 10 Hours When Aged Between 30 to 40.
This blog focuses on clients’ children and how they can make 10 years’ salary in just 10 hours by resolving their parents Inheritance Tax problem. Normally, it takes around 10 hours of client time to deal with their Inheritance Tax and in general the savings are usually significant compared to the time spent.
For those who would prefer watching a video, click this link below to access it.
Inheritance Tax growth over time
A key problem is that the amount of Inheritance Tax payable will grow over time. If your parents are aged 55 to 60 currently and have an estate valued at around £1 million, then any growth on this estate will incur a 40% Inheritance Tax charge. In fact, we have calculated that after approximately 15 years, this tax will double and after 25 years, it will triple. By the time your parents have reached age 80-85, they will be paying triple the amount of Inheritance Tax than they are faced with now.
Whose problem is this?
Essentially, this is not really your parent’s problem as they will be going into retirement with their pensions and any remaining assets. However, if they don’t deal with their Inheritance Tax issue, the cost will be on you, their beneficiary, who will have to write out a very large cheque to HMRC.
I have found that over the years I seem to have a disproportionate number of Asian clients which I attribute to a difference in cultural attitudes. I have found that Asian people seem much more inclined to talk to their parents about money issues, whereas British people can be more reticent about family finances. However, I think that it is important to remember that most parents would want to retain money within the family.
Without going into depth, estate protection concerns retaining wealth within the family bloodline and ensures that one generation can offer support to future ones, for example by providing for the cost of the children’s future education.
For example, a key problem faced in many families is divorce. Undoubtably, divorce can reduce the money that your parents left you. Let us say that your parents leave you a million pounds and you get divorced. Here, you risk losing 50% of the money. Another relevant problem is bankruptcy. If your business goes bankrupt, you then face losing all your inherited money. Here, by using trusts as part of the estate planning process, you can protect these assets and keep them within the family.
Often you can save more money through Estate Planning than you can through using your Inheritance Tax allowances. This is because, if your children get divorced, 50% of their asset base could leave the family. If they become bankrupt, 100% of their asset base could leave the family. These amounts could be more than the 40% tax saving allowance on the first £1million of your estate value.
It is very common for people to delay tackling the problem. This is often linked to the complexity of the process: in many firms, clients may have to see lawyers, accountants and a separate firm of financial advisors. Bluebond, as a specialist firm, unites all three areas together (tax, legal and financial advice) which makes solving the problem much easier for the clients.
Why you should deal with IHT early
Given the uncertainty of life, the earlier that an Inheritance Tax problem is sorted out, the more options you have left and the less risk is associated in solving the problem. This is why I have some clients who are dealing with their Inheritance Tax aged only 55, even though they may live for another 30 years. Moreover, the bigger the size of the estate, the earlier you should act.
What can you do?
Essentially, the person that is affected most by a lack of action is you. However, there is no such thing as an estate that is too big where the issue cannot be solved. It can be done. Making sure that there is time, meaning everything is done properly, is essential. Talk to your parents about the estate. Consider that the estate planning is important because often you can save more through correct planning than through Inheritance Tax savings on the first £1 million. And, most importantly, deal with the problem early and do not become fazed by possible complexity. Afterall, you are going to pay the tax unless you take the necessary precautions.
How you can save money using 2 Insurances
This article explores how you can save thousands by simply having two whole life insurance plans rather than one.
When a person takes out life insurance for inheritance tax purposes, the default mechanism is a “Joint Life Second Death Whole of Life” plan.
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Joint Life Second Death Whole of Life Insurance
A Joint Life Second Death Whole Life Insurance policy is set up to pay on second death because inheritance tax is payable when the second person dies. So, this is not like purchasing a term life insurance policy for a set time period like a term life policy to cover your mortgage.
Joint Life Insurance is usually set up in such a way that it pays off when the first person dies during the life of the policy. It does work to settle the Inheritance tax as it ensures the money is available to pay the tax when the second insured person dies. However, you will find that these plans are quite expensive.
Once we came across a client who was paying about £600 per month into a Standard type whole of life policy while he was 52. Going at this rate for another 35 years or so could have cost him £252,000 over 35 years.
There are much better mechanisms available for you, such as using two plans, rather than one where you can save money.
The two types of plan are standard plans and maximum plans.
Standard Plan or Balanced Plan
A standard plan may be used to insure your retained assets, such as your main residence. Your home is not generally given away as you probably intend to remain living in it. If you did try and give it away while continuing living in it, this would cause tax problems for your children.
Other retained assets could be your car, furniture, some antiques, or any other asset you want to retain.
There are other assets, such as emergency funds. If your income stream matched or exceeded your expenditure, you would still need to keep a certain amount of money that you could get access to as your emergency fund.
Now the calculation for this type of cover must be done properly. You’ve got to look at those assets both for their current worth and how much it will likely grow over 20 – 30 years. Therefore, you’ve got to have an increasing value insurance plan in which the amount of coverage increases over time. Therefore, the premium will also increase over time. This requires a comprehensive calculation to get correct.
The other type of plan is called a Maximum plan which is set up differently to a standard or a balanced plan. The main reason to set up this plan is to cover your temporary assets. Assets that you intend to give away either directly or into trust such as shares, funds, property, etc.
If your income matches your expenditure, and if you’ve maintained a reasonable emergency fund, you may be able to start giving away some of your assets. Now, this could be done by directly giving them away to your children or else indirectly to trust, etc. Both methods allow you to take them out of your estate over time. This may take you anything from five years to 15 years to twenty years, and therefore you have to set up a maximum plan to cover you in case you both die during that period.
Let’s see how these two types of plans work for you. First, let’s have a look at the difference between a Standard Plan and a Maximum Plan.
Standard/ Balanced Plan
The premium of a standard plan consists of three key elements,
- Charges (Depends on the company)
- Life Cover
Let’s say you’re trying to insure yourself and your retained assets will be worth a couple of million in 20 years of the time when you die. So you need to start with around £500,000 of cover. So, your properties and other assets are starting at £500,000, but it’s going to grow, and therefore you need an increasing cover over time. Your premium will also increase over time.
So, as you’ve got this life cover, what happens with the investment? Over time the investment will grow with the stock market. Let’s say it rounds up to about £800,000 depending on health and so many other things. The company would expect that investment to meet the value of the cover. The value of the plan will pay the expected IHT liability on the second death.
So, what happens if you both die early?
If you die early, your children will get the value of your investment at that point, and they will also get the top up with the amount of insurance. Therefore, whatever the value is at that particular time hopefully covers your inheritance tax liability for those assets.
This is expensive because of the investment element. Imagine that you’re trying to save up £500,000 over 20 years. You will have to put over £1000 pounds or £2000 pounds a month, depending on the figures. Therefore, these policies are expensive and that’s why you need to implement this system of two plans.
A Maximum plan consists of two key elements with Life Cover being nearly the whole value of the plan with a smaller portion of charges. The costly investment element has taken out.
Your cover will increase over time, your premium will also increase over time, but now you’ve got no investment. What happens here is the increasing premium goes up annually and every ten years it takes a massive jump.
Over time this monthly premium could double or triple and then in another ten years, it could quadruple again which leads to the point that it becomes unsustainable. Because in 20 years you will be paying about £10,000 pounds a month. However, you’ve covered yourself during a particular period by giving yourself time to gift away the assets from your estate in other methods such as putting them into trust, downsizing your property & give away some of the excess capital, etc.
Therefore, this maximum plan gives you time but at a much lower cost. Let’s just say that you are 60 years of age and, you may be paying £800 a month with a standard plan whereas you may only be paying £80 a month with a maximum plan. That’s is a huge difference.
Once you have given assets away and the 7-year rule has been applied, you can reduce or stop your maximum plan
Therefore, that timescale and this methodology save a considerable amount of money.
The other thing that you’ve got to watch out for is the charges. If your adviser takes a commission on a plan, that commission could be thousands of pounds, which we don’t think is quite right as it will raise your monthly premiums considerably. So instead we charge a fee based on the plan, the risks, and the liability of advice. This is a flat fee with a very small additional cost depending on whether it’s a £2 million policy or a £1 million policy.
Generally, the savings, because you pay an upfront fee, is huge. Sometimes we’ve saved clients between £10,000 – £15,000 in terms of differences in the premiums over the terms of the policy.
Setting up these two types of plans together makes sense since most people want to retain some assets.
The differences in the cost per month are huge and with the second plan in place, it gives you time and the ability to give away your assets in a different format.
Lastly, like all inheritance tax advice experienced advice is essential. Please call us for a free consultation if you need and help.
As a bonus, book a free Zoom call consultation with Charles de Lastic, MD of Bluebond Tax Planning today.
How to save Inheritance Tax on your main property
This article explores how you can save money for Inheritance Tax purposes, on your main property assuming that you intend to be living in this residence until you die. Those who would prefer to read the information can follow on article below which has been written based on this video content.