Case Study #4

Widowed person with current assets of around £2 million

Clients Situation

Mrs James was in her late 70s and had been fully retired over 18 years. Her husband had died leaving everything to her and she enquired about protecting her estate in case one of her children got divorced and also against inheritance tax.

  • Mrs James had a pension income of just over £24,000 a year including money from her late husband’s final salary pension and also her own pension and her state pension. She was only spending around £1500 a month and so had enough income without depending on her investments and savings.
  • She had around £6000 a year excess income.
  • Their main residence was valued at around £1.3million in which she wanted to remain long term with no plans to sell unless she went into care.  She had an investment portfolio of around £430,000 which was mainly ISAs and around £80K in cash.
  • Her total current Estate (excluding pension which are already in trust) was £1,810,000 on which her current IHT liability was £324,000.
  • Mrs James had two married sons and and 3 young (under 16) grandchildren who she wanted to help to pay towards university education.
  • Her main concern in this case was around inheritance tax and if one of their children got divorced.
  • She was adding to her capital annually and the value of her assets was growing. It was projected that her IHT problem could in fact easily double (probably more) by the time she died as she was in good health.
  • She did not want to simply give money to her sons as she were concerned about divorce of one of her children, and she would need capital in the event she needed long term care. However, she was keen to eliminate any IHT for their children and put some money aside for her Grandchildren's university education.

The main problems the client would face if she took no action

The main problems the client would face if she took no action

  • Her main concern in this case was around inheritance tax and if one of their children got divorced.
  • She was adding to her capital annually and the value of her assets was growing. It was projected that her IHT problem could in fact easily double (probably more) by the time she died as she was in good health.
  • She did not want to simply give money to her sons as she were concerned about divorce of one of her children, and she would need capital in the event she needed long term care. However, she was keen to eliminate any IHT for their children and put some money aside for her Grandchildren's university education.

·        The recommended Solutions

  • Bluebond worked with Mrs James and her two sons to determine and agree an overall long term strategy and recommended other professional firms to carry out some of the detailed work and put some of the plans into place.
  • Bluebond firstly recommended a Deed of variation on her late husbands Will to pass £325,000 of his share of their home to a trust and the rest to her. We also recommended she consider four additional trusts be set up to pass money on her death and also place all of her investments into trust and other accounts for her grandchildren.
  • The recommended Trust company and Lawyers set up Deed of variation, new Wills and separate Trusts for the clients to protect all the assets in the event of divorce of any of their children or grandchildren.
  • Mrs James was introduced to a recommended firm of Independent Financial Advisers who, over a series of steps, agreed and set up the following plans :
  • Life insurance was recommended but the family felt this was too expensive to fund monthly and they felt Mrs James would life over 7 years.
  • Investment of £325,000 into an offshore bond held subject to a Reversionary Trust. This money would provide security she ever needed long term care.
  • Investment of £100,000 into low risk investments held in her grandchildren’s names to fund their university education.
  • She also made an additional gift of £500,000 to her two sons. They got this investment money from an equity release of the main residence and also mortgaging a BTL property.
Benefits of 4 Trusts for Estate Planning
Benefit of Reversionary Trusts
Benefits of Gift into Bonds for her Grandchildren
Benefitsof the Equity release and the gift of the £500K to her sons as a Potentiallyexempt transfer

Benefits of solutions used

Benefits of solutions used

Benefits of 4 Trusts for Estate Planning
Benefit of Reversionary Trusts
Benefits of Gift into Bonds for her Grandchildren
Benefitsof the Equity release and the gift of the £500K to her sons as a Potentiallyexempt transfer

Summary

The plan is quite complex due to the size of the estate. However by dealing with in in stages together with the client’s sons meant the clients were able to achieve all their objects of eliminating their IHT liability, not funding their sons lifestyle to too high a degree and protecting the whole estate and keep the money in the family bloodline. They also had unexpected benefits of saving a lot of income tax.

Summary

She used £325,000 of her late husband’s allowance and now only had an allowance of £675,000 but her Estate had also dropped to £1.485,000

The gifts of£325,000 into trust, £100,000 into offshore bond in her grandchildren’s names, and £500,000 to her two sons reduced Mrs James Estate down to £560,000 after 7years. This means her estate without any growth would be £115,000 below her allowances. Therefore, her home could still grow over time and so the IHT billwas likely to be very low or non-existent on her death.

Her sons used the£250,000 each to pay down their own mortgages which helped them over the coming years to save more into their own pensions.

Her sons did not have to use their own income or capital to fund their children’s university education.

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