All you need to know about estate planning

Families are becoming increasingly complex entities, often shaped by divorces, remarriages and children from previous relationships. This can make estate planning tricky if an individual has strong feelings about those they would like to inherit their assets and those they wouldn't.

Research sponsored by wealth management firm Investec Wealth & Investment found, astonishingly, that 30 per cent of parents are unwilling to provide financial help or an inheritance to their married children because they fear a permanent marital split could result in assets leaving the immediate family.

The research, based on a sample of 1,060 parents surveyed by Consumer Intelligence, also showed that 42 per cent of parents have limited confidence in their children's partners' abilities to manage their financial affairs.


So if you want to keep your assets away from a wayward daughter-in-law or your step-children, how can you do this? Trusts represent one of the best ways to protect your assets.

'Trusts are not a one-size-fits-all solution, but they are incredibly useful for protecting and giving you control over your assets,' says Sally Ashford, a partner at law firm Charles Russell Speechlys.

They allow an individual (or couple), known as the 'settlor', to put money into a trust and appoint trustees to control how money is distributed. The settlor can decide which children or step-children (beneficiaries) should receive assets, and the amounts to be given.

Trusts can also be useful for inheritance tax (IHT) planning, because assets placed in trust are viewed as being outside of your estate, provided you survive another seven years.

However, you can only place money up to the value of the nil-rate band - £325,000 for an individual or £650,000 for a couple - in a trust every seven years. Anything in excess of that amount may attract an immediate tax charge of 20 per cent.

Trusts allow people to use their nil-rate band but also to ringfence assets they want to gift, says Robert Goldschmidt at Cumberland Place Financial Management.

This means someone can trigger the seven-year period that needs to pass before the asset becomes exempt from IHT (by placing it in a trust), but can retain it within the trust if necessary at the point they planned to make the gift, as the trust can defer the transfer.

'They can position the money in a trust early on but retain control over when they give that money to their children,' Goldschmidt says.

If a couple both have children from previous marriages and a set of children with each other, trusts can be used to specify which assets are passed on to each set of children.

Fiona Middlemiss, a financial adviser at Alan Steel Asset Management, suggests setting up three separate trusts, each with their own instructions.

'I would favour separate trusts, rather than one big trust, with instructions divided up three ways. This is because people's lives are often very different. You can be dealing with three different families, with different numbers of children doing different things,' she says.


The two most common types of trust used are interest-in-possession trusts and discretionary trusts.

Interest-in-possession trusts, also known as life-interest trusts, provide beneficiaries with an immediate right to income from the trust as it arises. The capital in the trust can subsequently be passed on to different beneficiaries.

For example, a surviving spouse could be granted the income on death of her husband, but the capital could go to specified children on her death. This could prevent the capital going to the partner of the surviving spouse if she remarried, or to the survivor's children from an earlier marriage.

The income received is taxed at the beneficiary's personal income tax rate. Capital gains tax (CGT) is also levied on any gains realised within the trust, although annual allowances can be used to offset gains.

Discretionary trusts provide greater control by allowing trustees to make decisions (hopefully in line with the settlor's wishes) about what gets paid to each beneficiary, how often payments are made and the imposition of conditions on beneficiaries.

Trustees are responsible for paying tax on income received by discretionary trusts at the top rate of 45 per cent, alongside any CGT. If the beneficiary receiving the income is a basic-rate taxpayer, they can claim a tax credit.

Cash, investments and property can be placed in both types of trust. 'Periodic' IHT charges are incurred every 10 years and when assets are transferred out.

While trusts offer control over the distribution of assets, Peter Brennan, a chartered financial planner at EQ, says it is important to consider the tax implications and reporting requirements they entail.

He says: 'All trusts require annual tax returns, and some might need audited accounts, depending on the complexities. So while a trust is an efficient way to control money, you need to realise that setting up a trust entails obligations that may affect your children.'

Likewise, there are costs in the form of financial planning, accounting and legal fees. These will vary, depending on the complexity of the trust and whether it holds investments that will continue to be managed.

Middlemiss suggests it is only cost-effective to set up a trust with £300,000 or more of assets. Much depends on the type of trust and its complexity.

Gary Heynes, who heads a tax advisory team at RSM UK, estimates that legal fees can amount to £700 to set up a straightforward trust deed.


Wills remain the bedrock of estate planning for most families. If a parent has specific intentions about who they want to leave their money to, Middlemiss says it is crucial that they find an experienced lawyer who can write the will in a clear way to avoid misinterpretations.

Brennan says a couple can make mutual wills to ensure their wills are not changed after one of them dies. A husband and wife can set up mutual wills together and become each other's executors.

After the first death, the survivor's will is 'locked', meaning a widow or widower can't be forced to make changes to their will.

It is important to note, however, that wills can be contested (see box). Spouses and descendants who are excluded can make claims if they can show they don't have enough money to live on.

Ashford advises anyone considering excluding a close family member from their will to think carefully, as they may invite a claim.

Middlemiss encourages clients with wealthy parents to sign pre-nuptial agreements before they marry, even if they don't have much personal wealth at that point.

She says: 'If you do it properly, it [outlines expectations] if the parties separate. It is not necessarily binding, and both parties need to have independent advice and understand what they are entering into.'

A pre-nuptial agreement can also be used as a pre-condition for a child to receive gifts from their parents if the parents have concerns about the child's partner.

This is something Ashford has put in place, alongside co-habitation agreements between couples, that can make sense if one set of parents has helped to buy a property.

Let properties or share portfolios can be placed into company structures. This may make sense for higher-rate taxpayers who aren't reliant on the income generated by their assets and want to pass them on to the next generation.

Heynes points out that a person can stipulate how they want income distributed via the company's articles of association. For example, they can specify that shares may only be held by blood relations.

The person could be appointed a director of the company and decide when dividends are paid out. Shares could be allotted to adult children or a trust.

Unlike assets in a trust, however, assets in a company are not protected if an adult child divorces. The shares are protected from being passed on to the spouse, but their value will be considered as part of the settlement.

Haynes suggests that in some cases this option is only cost-efficient if assets of more than £500,000 are placed in the company.

The many estate planning strategies have advantages and disadvantages, and those considering their options should consult family members who'll be affected before taking action.


Heather Ilott's legal challenge

Wills can be contested by descendants or a spouse if they can show they don't have enough money to live on.

Heather Ilott challenged her mother Melita Jackson's will in the English courts in a legal battle that spanned more 10 years. Ilott, an only child, was left nothing in her mother's will when her mother died in 2004. Ilott fell out with her mother at the age of 17, and the two were never reconciled.

When Jackson died she made no provision for her daughter, who was by then a mother of five claiming state benefits. Most of Jackson's £486,000 estate was left to charities, including the Royal Society for the Prevention of Cruelty to Animals.

In 2007 a County Court awarded Ilott £50,000. However, she challenged this award, and in 2015 the Court of Appeal ruled that Ilott should receive £164,000 after she made an application under the Inheritance (Provision for Family and Dependants) Act of 1975.

This allows children of a deceased parent to apply for an order if a will does not make reasonable provision for their maintenance.

This didn't end the protracted legal dispute, however. In December 2016, the three charities who were originally left £486,000 took their case to the Supreme Court.

They asked for clarity about the scope of a court's power to interfere with a person's testamentary wishes and on Wednesday (15 March) the Supreme Court decided to overturn the appeal and said the entire six-figure sum should be left to the charities.

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