If you do not have a Will, you have no say over what happens to your assets when you die and this can cause difficulties for those you care about most.
Because of this, everyone should have a Will; this is particularly true if you own property, are married, have entered a civil partnership or have a long-term partner. It also applies if you have children or other dependants, or if you wish to leave something to someone who is not a close family member.
Our customers have told us that once they had made their Will, they felt a huge sense of relief. They realised that, in doing so, they have legally recorded how they wanted their assets divided after their death, thus providing their family with the security they deserve.
It is a common belief that, if you are married or in a civil partnership, your spouse or civil partner will automatically inherit everything you own when you die. In fact, the law sets out rules that determine how your assets are to be divided if you should die without leaving a Will.
The rules are intended to be fair, but they may not suit you. For example, if your spouse or civil partner and children survive you, your assets will be divided among them in fixed proportions that may not suit your family.
Equally, the rules make no provision for a partner if you are not married or in a civil partnership, even if you have lived together for many years. It is possible to write your own Will, but it is a good idea to seek professional advice.
Your Will is important, and professional advice will ensure that your Will complies with all the legal requirements. A professional service also ensures that your instructions are clear and will be followed after your death, and that you have taken advantage of any tax reliefs available to you.
Lasting Power of Attorney
A Lasting Power of Attorney (LPA) allows your loved ones to take care of you and your finances if you become unable to do so yourself.
There are two types of LPA:
“Property and Financial Affairs” LPA allows your loved ones to deal with paying your bills, buying and selling your property and managing your bank accounts and investments.
“Health and Welfare” LPA covers decisions about health and care and even deciding where you are to live. This can only be used if someone is incapable of dealing with such matters themselves. An LPA ensures that, should you be unable to manage your own affairs, the people you have appointed can manage your financial life on your behalf. This can save a great deal of money and distress, and will ensure that, as a vulnerable person, your affairs will be handled correctly and quickly.
According to the Alzheimer’s Society, more than 1 million people in the UK will have dementia by 2025. More than 1 in 5 people over 85 already suffer from this, with rates significantly higher amongst women than men.
Accidents, strokes, brain injuries and Parkinson’s disease can also affect someone’s ability to make their own decisions. Handling your financial affairs can become virtually impossible, which is why charities who care for the elderly recommend everyone plans ahead. This could have the dual benefit of saving a great deal of money and easing the burden on their relatives.
Risks of not having an LPA
If you lose mental capacity without an LPA in place, your family must apply to the Court of Protection to have a deputy appointed to deal with everyday financial matters. This is a slow and very expensive process, costing thousands of Pounds. If you have to use a lawyer it could cost a lot more. If you already have an LPA in place, this will not be necessary.
Joint bank, building society and business accounts can be severely restricted if ONE of the account holders loses mental capacity and there is no registered LPA in place.
“If one joint account holder loses mental capacity, banks and building societies can decide whether or not to temporarily restrict the use of the account to essential transactions only”
British Bank Association
The restricting of a joint account has severe implications as the joint owner cannot freely withdraw what is their own money without an order from the Court of Protection. This could be devastating, especially if the joint owner has their only form of income, such as their pension, paid into this joint account.
Our partners* can help you reduce tax and maximise the wealth you pass on to your children and loved ones.
There are several ways in which we can assist you, including:
- Helping you to write a Will.
- Exploring exemptions that could help to reduce your tax liability.
- Gifts – if you can afford to give away some of the assets you own, it may be possible to reduce the size of your estate.
- Life Assurance – although it will not reduce the tax liability, the proceeds could be used to help pay the bill upon death.
- Trusts – if structured carefully, a Trust could help to reduce or possibly even eliminate your IHT liability.
These issues can be an extremely complex – let our experts* help you find the right solutions for your needs.
Who Inherits Your Wealth? What is a Protective Property Trust?
Do you want your home and wealth to go to your children and other loved ones? Have you ever considered what the effect might be on your savings and investments, or even your home, if you ever needed residential care later in life?
Most people assume that their assets will pass on to their children or other relatives in due course, yet this may not always be the case unless careful arrangements have been made to protect these assets from being taken to pay care home fees.
Thanks to advances in medical science and a general improvement in health and fitness, everybody is living longer, though not necessarily able to take care of themselves. Figures show that 1 in 2 women and 1 in 3 men will require long-term residential care at some point in their lives.
Currently, anyone with assets in excess of £23,250* (this includes the family home) may not be eligible for any state help with their residential care fees. The result is that anyone who owns their own home is unlikely to receive any assistance, and in fact that home will most likely have to be sold to fund the care.
Average residential care fees are in excess of £700 per week, with many homes in the South East costing nearer £1,000 per week, so it is clear how quickly the value of an estate can be eroded. 22,000 homes were sold in 2010 to fund care (60 a day).Source: National Assistance (Sums for Personal Requirements and Assessment of Resources) Regulations (Amended 2011) (England).
There is a way, however, that this situation can be challenged. A Protective Property Trust (PPT) can be established which will help to protect your estate from being taken to pay for care home fees.
The Property Trust can only be created whilst both partners remain alive. Normally with couples the property is divided 50/50, though these percentages can be different. Upon the first death, their share of the property is placed into the Trust to be administered by the Trustees.
The Will also specifies who is to be the ultimate beneficiary of this share in the property and this would normally be the surviving children of the deceased. The surviving partner, under the terms of the Trust, has the right to remain living in the property for the rest of their life. On the death of the second partner the Trust comes to an end and the property passes absolutely to the beneficiaries. The surviving partner does not own the deceased’s share of the property.
If the surviving partner chooses to sell and move to another property, the proceeds from the sale can be used to purchase the second property and the terms of the Trust remain over the second property. If there is any excess capital following a sale then the money is invested and the surviving partner can take the interest that is generated as an income.
The deceased’s share in the property is fully protected for the beneficiaries, so even if the surviving partner remarries, the children’s inheritance is protected. This last point can be of particular interest to couples who have come together and have children from different partners. A PPT can help each person in a relationship ensure that their children inherit their share of the property, while giving their surviving partner the ability to live in the property for the rest of their life.
With family investment companies becoming increasingly popular, family trusts on the other hand are falling out of favour, with figures from HMRC showing that numbers have nosedived over the last 10 years.
This decline has mainly been driven by government policies, specifically Gordon Brown’s announcement in 2006 that all lifetime settlement, with a few exemptions, would be subject to a 20% initial inheritance tax charge if the amount transferred into a trust, exceeded the individual’s available nil rate band (£325,000).
But although the tax rates have changed, don’t be too quick to dismiss a family trust in favour of a family investment company. There are pros and cons which need to be assessed before you make your decision.
Benefits of family companies
In simple terms, if you set up a family company, you put cash or assets into that company, create different types of shares in your company and give the shares that hold the capital value of the assets to your children.
To enable you to keep control over the assets in the company, you can be named as a director and be a preferential shareholder, so you have all the voting rights but no rights to the capital.
If you adopt that approach, as long as you keep no beneficial interest in the company, then after seven years, the value of the money or property transferred will fall outside of your estate for inheritance tax purposes.
There are also tax advantages, including relief for interest paid on mortgages. Furthermore, profit from your investments will be subject to the lower corporation tax rather than the higher rate income tax.
Importantly, transferring cash into a family company is not subject to the initial inheritance tax charge of 20% if it exceeds the available nil rate of £325,000. Therefore it is an appealing option for people if they want to transfer funds in excess of £325,000 to their children, whilst maintaining control of them.
Disadvantages of family companies
An important factor to consider is that the government is not afraid to change tax law. This may seem like an area bound by strict rules, but it is reviewed and changed frequently. If the government starts to shine a spotlight on family companies, this could lead to another shakeup. If the law is changed, and changed retrospectively, this would catch many people out.
To minimise the impact of this potential risk, make sure you review the structure of your family company regularly with your lawyer to keep up to date with any legal changes. Another issue often overlooked is the high cost of setting up a family company. Lawyers, including corporate solicitors as well as accountants will need to be involved and this can lead to lots of initial charges.
Bear in mind, that if you’re putting a property into the company rather than cash, this could result in capital gains tax and there is potential stamp duty to consider. If you’re planning on regularly distributing the income of the company this would have a negative tax implication. The only way to get money out is through dividends, this would lead to you paying both corporation and income tax which together would be higher than if the asset was held directly.
How do I know what’s right for me?
Family companies work best for those with a substantial amount of money to invest (£1m plus) and who are willing to keep it in the company to grow, rather than take it out on a regular basis. They’re also a good option for those who want to avoid a large inheritance tax charge and retain control over their assets, especially if their children are younger.
As an alternative, family trusts provide an accepted and arguably safer structure, which doesn’t have the same initial charges to establish.
In some cases, it’s also worth considering an outright gift. Although this offers no control or protection over your assets, it may be appropriate for those seeking a simpler way to pass their wealth onto older and responsible children although possible inheritance and capital gain tax should be considered.
Ultimately, the decision should be based on your individual circumstances and advice from a lawyer and accountant. Take time to assess your options and don’t be too swayed by the growing popularity of family companies. They have their benefits but there are risks too, so weigh up both the pros and cons before you pursue.
Everybody wants to protect their assets for the benefit of their loved ones. People are motivated to provide for their children throughout their lives and want what is best for them. Many people will draft a Will hoping to ensure that the assets that they have worked hard to acquire during their lifetime, are passed on to their children and chosen beneficiaries after their death.
However, a Will can only dispose of the assets that you own at the date of your death and if the value of these is eroded during your lifetime, there will be little if anything left for your beneficiaries to inherit.
Lifetime Living Trusts are specifically designed to protect your assets for you during your lifetime. They give you the peace of mind that your estate can be passed on securely and intact to your spouse, your children and their bloodline, or other named beneficiaries, after your death.
During your lifetime
Once the Trust has been created, you can use it to ‘ring-fence’ your assets. Most people will protect their home and their savings, leaving capital in their bank or other savings accounts for ongoing living expenses. Income from savings protected within the Trust can be paid directly into your bank account to supplement income from earnings or pensions.
Just like a safety deposit box, assets can be added and removed from the Trust during your lifetime. If you have large expenses that cannot be met out of normal income, like a new car, holiday, or house repairs, the appropriate sum can be transferred to your bank account from the Trust.
You are named as the ‘Principal Beneficiary’ of the Trust and retain full control of the assets within the Trust while you are alive and have mental capacity. You are free to move home, or release equity from the Trust at any time.
As the Principal Beneficiary of the Trust, you have a guaranteed right of occupation in the property for the remainder of your life. The Trustees, usually your children, cannot evict you under any circumstances.
You can direct the Trustees to sell the property and to buy a new property of your choice. If the new property you are acquiring is more expensive, the Trustees can only be required to buy the new property if the additional capital required is paid into the Trust by you. The Trust is equally applicable to married couples and to single people.
If you lose mental capacity
If you lose mental capacity, the law states that you are no longer allowed to manage your own affairs. Assets held within the Trust will then be managed by your Trustees on your behalf. Your Trustees can effectively ‘stand in your shoes’ to make decisions on your behalf but these must be for your benefit.
They are able to add or remove assets or use the income from the Trust to help you and improve the quality of your life. Assets held outside the Trust will fall under the control of the courts. Creating a Lasting Power of Attorney will enable the people you choose to manage the assets that you own outside of the Trust.
After your death
After your death, the Trust continues to work to protect your assets for your beneficiaries. The Trust can continue to hold the assets safely within it or pay them out to the specified beneficiaries.
The Trust is extremely flexible after your death and has the potential to continue protecting your family for 125 years from the date it was created. That means that all of the benefits described in this document can not only protect you and your children but can also protect your grandchildren and great-grandchildren.
There are other forms of trusts available, the above is a snapshot of the kind of trusts we advise on. Please contact us if you are interested in protecting your family’s future as one of the other trusts that are available may be better suited to your situation.
