Some Strategies
The Nil Rate Band Trust
When you die, the amount of your estate over £285,000 (in the current tax year 2006/07) is taxed at 40%. Most married couples have traditionally avoided paying Inheritance Tax at first death because there is no tax on assets passing between husband and wife - a concession now also available to registered Civil Partners since 5th December 2005. However, this only postpones the eventual tax bill. When the surviving partner dies, the entire estate by then is then possibly in his/her name, so that when this estate eventually passes to the children, the NIL RATE BAND mentioned above is deducted from the total and the entire remainder is taxed.
You may instead have considered leaving your Nil Rate Band allowance (or part of it) directly to your children, or other beneficiaries, in order not to waste the exemption on first death, but been reluctant to risk your surviving partner's financial position and so ended up doing nothing.
The answer is to take specialist advice on how to set up new Wills that incorporate Nil Rate Band trusts and an IOU facility, so that the surviving partner can still access funds as required whilst preserving the original tax concession. This ensures that there are TWO allowances to be set against the eventual tax bill which, at today’s values, can save your estate up to £114,000.
Contact us now to discuss the best course of action in your individual circumstances.
Other Trusts - Since the last budget announcement in April, many forms of trust have now ceased to be as effective as before in mitigating IHT. However, there are still important options which could be considered, each having their own advantages and disadvantages for particular individuals.
Bare Trusts.
The IHT treatment of these has not been changed in the budget and these have gained favour as they still create a Potentially Exempt Transfer (PET). This means that, after a total of seven years from creation, the assets gifted into the trust are no longer part of the donor's estate and therefore not subject to IHT.
However, unless certain conditions are met, the trust may be subject to a chargeable lifetime transfer, periodic charges and exit charges. An IHT charge may never arise if the value of the trust remains below the IHT threshold throughout its lifetime, but for a considerable sum of money, the question of who gets what and when can have as much importance as the tax position.
The drawbacks are that the beneficiaries cannot be changed once established - unhelpful if the beneficiary goes "off the rails" or falls out with the settlor (donor) and they may demand their share at any time after age 18. This problem is avoided by the following 2 trusts:
Interest in Possession Trusts (or Flexible Trusts)
These are now treated as 'relevant property' and create a chargeable lifetime transfer at outset (for any amount over the IHT band). This would be a 20% charge at outset and a 6% charge every 10 years. It must have named beneficiaries and can only automatically include further offspring or remoter issue as they are born if the trust wording specifically allows for this. Beneficiaries may only be changed by the Trustees with a Power of Appointment. Income cannot be accumulated and the trust may be revoked.
Discretionary Trusts
These are also treated as 'relevant property' as above. The trustees can make distributions to any individual in the classes of beneficiaries at any time without any formalities and have full discretion to alter these. Income may be accumulated within the trust. The trust may not be revoked.
If this the above is important to you, please contact us now for further information or discussion.
Safeguarding your home
Preserving the value of the family home from hostile creditors is also important. If you should need Long Term Residential or Nursing Care, and your assets exceed £20,500, the NHS and Community Care Act 1990 allows for your home to be used by the Local Authority to meet the costs associated with providing that Care.
By changing the way in which you own your home, the possibility of a future creditor being able to make a successful claim against this valuable asset can be greatly reduced.
Options can range from a simple change to Tenants in Common to transferring your home into a full Property Trust, which also reduces the cost of Probate later.
Similar measures can also protect Equities and other assets so that your children and other beneficiaries can inherit as planned. It is important to note that, whilst pre-emptive planning is acceptable, such measures cannot be established where the motive is clearly to frustrate the attempts of legitimate creditors.
Advanced Directives - "Living Wills"
One never knows when an unfortunate accident or illness might arise.
Many people feel it’s important to ensure that their wishes about medical treatment are recorded in advance, as this would make things much easier for their next of kin in the event of an emergency.
If this is important to you, please contact us now.
An Advance Directive can be easily set up over the telephone, there are no forms to complete, you simply need to give us your full contact details and we will then send you a completed document for your signature.
