Tax-efficient investments, proper diversification and all-round optimisation is – or at least should be – the name of the game in March.
Love very much means wanting to provide properly for your partner after you are gone, but the simple option of a will can mean that your children can end up the losers. Jocelyn Davis, Technical Specialist at Evelyn Partners, explains why creating a trust via a will can offer reassurance along with a host of tax benefits besides.
Couples who are married or in civil partnerships most commonly pass on their assets to each other on death via their wills. They tend to leave everything to their spouse or civil partner on the first death and then to children or others on the second. Although this is probably the simplest way of passing on assets, wealthy individuals should consider that putting them into trust may be a superior option offering a greater level of protection and control.
First, let us consider wills. Leaving money to a spouse or civil partner in this manner has the benefit of being very straightforward and allows the surviving spouse to have complete access to the funds. Since there is no Inheritance Tax (IHT) between spouses or civil partners, there is no tax liability on the first death and due to the introduction of the transferable nil rate band, the unused allowance of the first spouse to die can be then be used for the second death.
The nil rate band refers to the amount of a person’s estate which is not subject to IHT, and everyone is automatically entitled to this
The nil rate band refers to the amount of a person’s estate which is not subject to IHT, and everyone is automatically entitled to this. Since 2007, it has been possible to transfer any unused part of a nil rate band from a deceased spouse or civil partner, up to a total of one additional nil rate band, currently £325,000 (note, however, that it is not automatically applied and must be claimed via HMRC’s IHT402 form). This means that on the second death, the deceased’s estate could claim up to £650,000 of the nil rate band.
It should be clear that leaving assets directly to a spouse on first death is simple and tax-efficient, with no loss of the nil rate band. Why then should you consider a trust? In short, because this may be a better way to deal with life’s inevitable vicissitudes for after you are gone.
The surviving spouse could leave all of the assets to their new spouse, potentially excluding any children from the first marriage in a way that is surely not in line with the deceased’s intentions for their wealth
Many people are concerned about what will happen to the assets left to the surviving spouse on the first death should that surviving spouse remarry. The surviving spouse could leave all of the assets to their new spouse, potentially excluding any children from the first marriage in a way that is surely not in line with the deceased’s intentions for their wealth. Importantly, this could happen wholly inadvertently, as marriage revokes any former will and – rightly or wrongly – intestacy rules always prioritise a surviving spouse over a child. If, however, the assets are placed into a trust, the trustees can protect the assets held within it.
The issue of how to provide sensibly for spouses or civil partners after death is right up there with the most sensitive wealth management subjects. Many of us will know of situations where things have gone awry and the deceased’s wishes have not been honoured completely, particularly when remarriage is factored in.
It is very often not appreciated how important wealth managers are in helping couples and families pick through these emotional as well as financial minefields. Having an objective expert on hand is invaluable in defusing tricky issues and charting a sensible – and fair – path ahead. If you have a thorny wealth matter on your mind, I would always advise talking to one or even better two advisers, and we can assist in getting those initial conversations going fast and free.
So, how might a trust scenario work? First, let us consider interest in possession trusts. On the first death, a trust can be established under the will which will ensure that the surviving spouse has the right to any income arising from the estate and/or a right to occupy the family home. This is known as an interest in possession. The right to give the spouse capital payments can also be included. Then, on the death of the surviving spouse, the trust assets can pass to offspring from the first marriage, or any other intended beneficiaries.
If you pursue this path, the value of the assets are deemed to pass to the person with the right to income (the surviving spouse here), as the assets in the trust form part of the estate of the person with the interest in possession. The result is that there is no IHT payable on first death, due to the exemption for passing assets to spouses. This way, the transferable nil rate band can still be used on the death of the surviving spouse.
This type of trust also has the very significant benefit of protecting the capital from assessment by local authorities for long-term care purposes. Although the income can still be taken into account
This type of trust also has the very significant benefit of protecting the capital from assessment by local authorities for long-term care purposes. Although the income can still be taken into account.
Another type of trust that can be used in a Will is a discretionary trust which, as the name suggests, gives trustees discretion over which beneficiary benefits from the assets held within the vehicle and when.
Commonly a discretionary trust is established on the first death of a married couple up to the value of the available nil rate band. This ensures no IHT is payable because the value is below the nil rate band and the assets in the trust do not form part of any beneficiary’s estate. The beneficiaries under the trust could include the surviving spouse and children, and provide that assets can be passed to them as and when they are needed
Importantly, any growth in the assets held within the trust falls outside of the estate of the survivor. Therefore, if between first and second death the growth in the discretionary trust exceeds the growth in the nil rate band, less IHT should be payable on the second death.
Discretionary trusts can also be deployed to protect the assets if the surviving spouse remarries, to shelter wealth if the survivor needs to go into care, or to reduce the size of the surviving spouse’s estate to avoid their residence nil rate band being tapered down
Discretionary trusts can also be deployed to protect the assets if the surviving spouse remarries, to shelter wealth if the survivor needs to go into care, or to reduce the size of the surviving spouse’s estate to avoid their residence nil rate band being tapered down. There is also the potential to reduce the IHT liability of the next generation by creating a trust which they can access but which does not form part of their estate.
Trusts are an incredibly important part of savvy family wealth planning and a tool we make use of throughout our client base. They are not to be taken lightly, however, as they carry their own complexities.
You must bear in mind that trusts are potentially liable to tax themselves and they are very much an active strategy which may need to be administered and managed by professionals over perhaps many years. The travails of a trust very much depend on what is held within them.
Like all things in wealth management, the suitability of having a trust set up in a will depends on your individual circumstances
Like all things in wealth management, the suitability of having a trust set up in a will depends on your individual circumstances. Along with the size of the estate and the family’s unique situation, think hard about how important protection and control of the assets needs is to you and yours
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.