In my final blog on this subject we consider the benefits of trust planning through a case study scenario.
Family Situation
- Graham (63) and Sarah Peters (62) are married.
- They have two adult children; one is recently divorced and requires some minor financial support.
- The other is married but the relationship is uncertain and is independently wealthy with their own children.
- The Peters have an existing Will leaving all assets to each other absolutely and then to the children in equal shares.
- Mr Peters has had a heart attack some years ago but is in good health. Mrs Peters has previously suffered from cancer. Both are concerned about care fees and wish to leave a legacy to their children.
Financial Situation
- The primary residence is valued at £450,000 and has no mortgage.
- Each has cash savings and investments amounting to £100,000.
- They believe their pensions will provide adequate income in retirement.
Planning Opportunity
Graham discussed gifting their house to their children as a means of avoiding care fees. The adviser confirmed that such arrangements are unlikely to avoid care fee assessment from local authorities.
They require advice in terms of a protective framework for the legitimate protection of the residual estate from care fees as well as the bloodline protection for the children.
Recommended Solution – Wills Direct, Trusts Protect
The existing Wills leave their residual estate directly to each other, offering no protection from care fees (or remarriage which is not a concern). The residual estate then passes to the children and may result in two potential problems. Firstly, there is no bloodline protection of the inheritance and this is an expressed concern for Graham. Secondly, the inherited sum may be an issue for the children in future years. The inheritance may impact the children’s future tax position to the ultimate detriment of their grandchildren.
If Graham and Sarah established a Family Trust, their key concerns can be addressed. The ownership of the property is to be recast as Tenants in Common and their new integrated Wills shall direct their respective shares on a life interest to each other.
This provides protection of the respective share and cannot be subject to any third party claims. The remaining estate passes to the surviving partner.
On the death of the surviving partner, their residual estate is directed into the Family Trust. The life interest in the house also ceases and is directed to the Beneficiary Protection Trust.
The planning not only protects a half share of the major estate asset but then offers benefits for the inherited wealth.
As the inherited wealth will be directed to a family controlled discretionary trust some bloodline protection can be realised. Trusts cannot guarantee absolute protection but they will always offer more protection than absolute gifts and, with advice, higher levels of protection can be achieved.
What will be guaranteed is the Inheritance Tax (IHT) effectiveness under current statutory precedents and HMRC approved practices. The sums within the trust can be used to make absolute gifts (normally advised for minor gifts only), the sums can be invested to provide income, or loans of the trust fund can be made (recommended in many cases). Therefore, for every £100,000 directed to the trusts a potential benefit of £40,000 in next generation tax benefits may be realised.
As Graham is establishing a lifetime settlement for his children, unlike a Will Trust, it is also available for lifetime use. His children’s trust can also be used to make the intended minor gifts in a protective manner and allow some scope for protection against any new partner. The payment can be made immediately to the child. Any direct gift may accentuate the future tax position of a child to the ultimate detriment of the grandchildren but by using the Trust this can be avoided.
This planning demonstrates how legitimate care fee protection can be provided to concerned clients. Furthermore for children, bloodline protection benefits can be realised and generational erosion of wealth can be legitimately reduced by protecting against the unnecessary payment of next generation IHT.
The financial conduct authority does not regulated tax, estate and trust planning. This article is for information only and does not constitute advice or a recommendation to act.
If you wish to discuss how any of the above relates to your circumstances, please get in touch and we will be happy to assist.
Barra Gorman FPFS
Chartered Financial Planner