IHT-Solutions

Why you should make a professionally drawn Will!

A cautionary tale can be found here

In contemplation of marriage !

In contemplation of marriage (or civil partnership) is an old-fashioned phrase but actually has a good deal of relevance in modern Will-writing as more people are living in long-term relationships prior, if ever, to getting married.

In simple terms, if an unmarried couples make Wills and there is any chance that they may enter into marriage at some stage in the future, it makes very good sense to make the Wills - In contemplation of marriage.

The reason for this is that the act of marriage (civil partnership) will automatically revoke any Will previously made unless the Will has been made - in contemplation of marriage. Thus following a marriage each party can automatically become intestate and the rules of intestacy may not in many circumstances meet their requirements.

This may be particularly important in a second marriage situation where one or both parties wish to protect each other whilst still maintaining the interests of their children from their first marriage. Often such a couple may make a Will before marriage incorporating an appropriate trust type but if they later marry without making the Wills - in contemplation of marriage - their best laid plans will be lost and they will need to go to the expense of making another Will after marriage or remain intestate.

The phrase - in contemplation of marriage - is a such a very important tool in Will writers armoury and should always be considered where appropriate.

Of course, if a relationship breaks down after making a Will - in contemplation of marriage, it is equally important that a new Will is made to reflect the new circumstances of the individuals in question.

(As an aside, I once acted for a couple who planned to get married and I made Wills- in contemplation of marriage, for them. No more that 3 months later the man returned with another lady and made a further Will in contemplation of marriage, The disappointed potential bride followed shortly afterwards to amend her Will. At least everyone had been trained well in their legal duties regarding their Wills!)

Why forging a Will is not a good idea!

A morality tale from Oxford

Please do not copy this at home !

Is this the ideal modern Will !

Modern life is complex and family life can be particularly complex.

As a practitioner in my professional practice, the ideal solution for any new Will or Trust is to prepare a document which meets the requirements of the testator or settler who are leaving their assets under the Will or Trust whilst also giving as much flexibility as possible within the documents to adjust for future changes of law and circumstance.

It is with this thought in mind, that I propose what I would call “the flexible life interest with remainder to discretionary trust Will” (quite a mouthful) as the ideal modern Will for many married couples and civil partners.

The main advantages of this type of Will can be summarised as follows:-

1. The flexible life interest Will Trust which will be created in favour of the surviving spouse or partner will still benefit from the new transferable IHT nil-rate band notwithstanding the recent changes to the tax treatment of trusts.

2. The flexible life interest Trust is flexible because it allows the Trustees to grant capital as well as income to the surviving spouse or partner, if required.

3. The creation of the life interest Trust should protect the testator’s capital assets from any claims made against it by a local Council or other authority if the surviving spouse or partner needs to go into long-term nursing care.

4. The life interest Trust also creates a situation which is sometimes known as the “21st Century chastity belt”. In other words the testator’s capital can be protected so that it eventually falls into the name of the testator’s children or other named beneficiaries rather than potentially into the pockets of a new spouse or partner.

5. Once the life interest Trust is terminated, the benefits of a discretionary trust arise which again give a good deal of flexibility to the surviving children or other named beneficiaries who can all potentially benefit from the discretionary Trust as named beneficiaries and are also likely to maintain control of the Trust as named beneficiaries.

The main benefits in this regard are as follows:-

a. If any of the children as potential beneficiaries of the discretionary Trust are subject to matrimonial or insolvency proceedings, their interest as potential beneficiaries of the discretionary Trust means that the funds are protected from ex-spouses and creditors of the potential beneficiaries.

b. In some circumstances, the surviving children may already have assets of their own which already exceed the nil-rate band available to them. In these circumstances, the right to loan monies or take occasional benefits from the discretionary Trust is a particularly tax-efficient means of utilising the Trust.

c. Of course, there maybe occasions when the potential beneficiaries simply wish to receive the capital from the Trust and subject to their consent the Trustees will have the relevant powers to simply appoint capital to the relevant beneficiaries and close the Trust, if applicable.

As always, the advice of a specialist practitioners should be sought before entering into a Will of this sort. I will aim to expand upon some of the themes raised within this post in the future.

An alternative way of saving IHT via your Will

Whilst nil rate band discretionary loan trusts are often the chosen course by practitioners within Wills to save clients inheritance tax, they are not the only option. I have seen a number of married clients recently whose joint estates exceed the nil rate band (currently £285,000) but not by a substantial amount, often by about £75,000. In addition, the vast majority of their estate is tied up in their matrimonial home.

I advise that on the basis that they at least survive until the 6th April 2007 when the inheritance tax threshold is raised to £300,000, their tax liability will be approximately £25000, on the death of the survivor of them. The perceived complexity of setting up a nil rate band discretionary loan trust for the relatively small potential tax liability means that the clients are not always keen to go down the discretionary trust route.

As an alternative, I have proposed Wills in the following manner which has found favour with some clients:-

For the example the following assumptions are made.

The value of the joint married couple's estate in question is £360,000 of which the matrimonial home is valued at £300,000.

The nil rate band is also £300,000 leaving a potential liability on the second death of £24,000 (40% of £60,000.)

The solution is for the matrimonial home to be held as joint tenants in common so that each party owns a 50% share in the property each and for the Will to give a gift of a percentage of the share of the property owned by the first party to die (say 40%) to the children of the couple.

In this example, the children on the first death will own a 20% share of the whole property (40% of one-half with a value of approximately £60,000). This, therefore, reduces the value of the survivor’s estate by a sufficient sum to avoid inheritance tax whilst still enabling the survivor to remain in the matrimonial home. The share owned by the children will be too small for them to force a sale of the property without the consent of the survivor

If the survivor wishes to downsize, then the children will get their relevant cash sum out of the net sale proceeds but the survivor will still generally have sufficient assets left to live comfortably.

As the element of the property left to the children is relatively small, no real capital gains tax issues arise for the children.

Evidently, each case must be judged on its own merits and, in particular, a couple must be confident that they are comfortable with making a gift of this nature on the first death and that they otherwise have sufficient financial resources and pension income in place for the survivor.

Taking all these points into consideration, Wills of the type envisaged by this post (and indeed a Deed of Variation within two years of a first death) do offer a relatively simple inheritance tax solution for smaller, property heavy estates.