10 January 2017
Getting your affairs in order for you and your family
At the start of every year many people aim to get their affairs in order, with the creation of a will and possibly a trust being an integral part of the process. Lucy Fisher from B P Collins’ wills, trusts and probate team advises on how changes to the law could affect your existing wills and trusts and also helps you to decide what the best options are for you and your family.
What is a will?
A will allows you to pass your assets on death to your chosen beneficiaries; without a will the intestacy rules apply.
What is a trust?
A trust is a legal mechanism, which can be created during your lifetime or by your will, whereby you place assets under the control of the trustees for the benefit of a beneficiary or class of beneficiaries. It enables you to give away assets but retain some control. Trusts are widely used and come in many forms, the two most common are Interest in Possession trusts and Discretionary trusts.
In an Interest in Possession trust the beneficiary is entitled to receive the income of the trust fund, or has the right to enjoy the use of the trust assets. This type of trust is commonly used by couples who have children from previous relationships and wish to provide for the surviving partner while ring-fencing assets for their children.
In a Discretionary trust the trustees have a pool of potential beneficiaries and have absolute discretion to decide which of the beneficiaries may benefit from the trust fund, in what way and when. Usually a discretionary trust also has a letter of wishes for the trustees to consider, this gives them guidance as to how to exercise their discretion.
Trusts are becoming increasingly popular; a recent survey by Investec Wealth and Investment in January 2017 found that 30% of parents would not be prepared to provide an inheritance to their married children due to concerns over their chosen partners and their higher chance of a divorce.
Trusts offer flexibility and wealth protection, as well as more options than a simple gift. They can also be a very useful means of ring-fencing assets for children until they are older and arguably more able to deal with those assets responsibly. A trust can also fulfil specific goals like paying for a child’s education or supporting a charitable cause or perhaps bypassing a generation where a client’s children are already financially comfortable and it is considered more appropriate to direct assets to grandchildren.
What to watch out for?
Every individual has an ordinary nil rate band allowance; this is the amount they can leave on their death free of tax and is currently £325,000.
Prior to 2007, if a married couple left their estate to each other then on the second death they would have ‘lost’ one of the allowances so it became common to insert ‘nil-rate band discretionary trusts’ into the wills to overcome this.
The concept of the transferable nil rate band was introduced in October 2007. The effect is that the first spouse’s unused allowance can be claimed against the survivor's nil rate band which could be a combined tax free allowance of £650,000.
This ability to transfer the unused allowance makes matters more straightforward; however there are still advantages for such trusts, for example:
- For care fees planning, if the nil rate band passes to a trust from which the surviving spouse can benefit, then neither the income nor the capital of the trust will be taken into account by the local authority.
- To provide protection against insolvency or divorce of the intended beneficiaries.
- If there is a chance that the surviving spouse might remarry.
- To reduce the estate of the surviving spouse to below £2 million.
Residential nil rate band
In April 2017, the new residential nil rate band will be introduced subject to certain conditions. It will eventually be worth £175,000 per person in 2020. Added to the £325,000, this means a new allowance for property owners of £500,000 – or £1m for couples.
To qualify the following conditions must be met:
- The deceased must own a property (subject to downsizing provisions)
- The property must be inherited by direct descendants
- The deceased’s estate must be below £2 million in value otherwise the allowance is tapered.
On the face of it, anyone who has a discretionary trust in their will could lose the additional allowance because the potential beneficiaries are not deemed to ‘inherit’, but with the right advice this can be overcome. B P Collins have the expertise and experience to help with this.
It is worth noting that interest in possession trusts, disabled persons trusts, bereaved minor’s trusts and Age 18 – 25 trusts will qualify.
The nil rate band discretionary trusts can be useful where a combined estate is over £2 million. For example if a couple’s combined estate is worth £2.3 million, and on the first death the nil rate band is left on trust then on the second death the estate is reduced to below £2 million and the allowance would be available.
The tax treatment of trusts is complex. If for example you were creating a lifetime trust and the value of the trust fund exceeds £325,000 there could be an immediate charge to inheritance tax. There are also on-going tax implications every ten years and when funds exit the trust. While the taxation can be cumbersome, that should not be a reason to avoid trusts as the flexibility and protection that they afford can outweigh the tax implications.
The law and tax regulations are frequently changing and if you already have a will or trust created then we would advise you to review them at least every five years. If you create a will with B P Collins’ wills, trusts and probate team, we offer a complimentary review service for peace of mind.
B P Collins LLP is a member of the Law Society’s Wills and Inheritance Quality Scheme (WIQS). Our experts understand that everyone’s circumstances are different and we tailor the will to meet your needs.
The B P Collins Trust Corporation is a professional trustee service ensuring trusts are administered correctly.
For further advice about what’s best for you, please contact Lucy Fisher on 01753 278650 or email firstname.lastname@example.org.