Category Archives: Trusts

How Pensions Have Changed

It’s just over two years since the pension reforms were introduced to give people more choice in accessing their pensions. One of the benefits it’s brought is that it is encouraging people to think more about their pensions when they’re younger.

According to research by Aegon, 15% of people have realised they need to plan more for their retirement. The number of people talking to an advisor has almost doubled in the last 12 months.

What is particularly good to hear is that since the reforms, 14% of working age people are saving more in their pension pot. As a result, there has been a big jump up since April 2015 in the average amount that people have saved, from £29,000 to £50,000.

Just as it’s important for people to seek advice on how to grow their pensions, the new freedoms mean that people should equally take advice to manage when and how much they take out at retirement.

There may be a temptation to withdraw a large sum and leave yourself with too little to enjoy in a long retirement. Before splashing out on a long, exotic holiday, it pays to take a moment to think about some of the costs you may need to prepare for now.

When planning for your future, you may need to consider funeral and possible future care costs, as well as any outstanding debts. If you have built up a large pot and plan to invest it, you will need solid financial advice to ensure you get the best return.

Figures from HMRC show that many people are taking advantage of the freedom to withdraw money from their pension pot after the age of 55. During the last year, an average of 164,000 people withdrew money each quarter. The average withdrawal per individual was nearly £9,900.

The beauty of the pension reforms is that people have more choice to decide what to do with their pension pot. There are 6 options once you get to age 55:

1. Leave the pot until a later date
2. Buy an annuity
3. Invest the pot to produce an income
4. Withdraw cash in chunks
5. Withdraw the whole pot in one go
6. A mix of the above

Many people are still following the traditional route of buying an annuity, but as the figures go to show, many are also enjoying their new-found freedom. But the choices you make at retirement may have a big implication on the inheritance tax your dependents will need to pay.

It is worth discussing this with both your financial advisor and your Will writer. It’s a complex area and in some situations, it may be advisable to set up a Trust.

For advice on planning your Will please contact legalmatters today on 01243 216900 or email us at info@legalmatters.co.uk.

The Forsyth Saga

Last Friday, news broke of the sad death of Sir Bruce Forsyth. The former Strictly Come Dancing host and all round National Treasure passed away at the age of 89, following a lengthy battle with illness. 

Reports in various national papers have since detailed the star’s alleged estate planning which, according to ‘a friend’, was done in an effort to “avoid it being gobbled up by the taxman”. By all accounts, Sir Bruce has left all of his £17million estate (didn’t he do well?) to his wife outright where it has then been widely reported that his widow Wilnelia will then “be able to transfer up to £650,000 to each relative tax free to avoid inheritance tax”.

Whilst is it true that legacies to spouses are free from inheritance tax by virtue of the spousal exemption, legalmatters shakes its head at the level of misinformation reported. Quite frankly it doesn’t even know where to start with dissecting what a flawed and short-sighted piece of alleged tax planning this represents, but here goes.

So what is the actual position (if indeed these were his wishes) and why might it be regarded as a potentially reckless and ineffective idea?

First of all, the tabloid press have been quoting the figure of £650,000 supposedly available for Wilnelia to generously distribute ‘to each relative’ once Sir Bruce’s legacy has been transferred. Each relative!?! If this was the case, then the majority of estate planners would be out of a job and considered, surplus to requirements.

It would appear that the press have confused the level of transferrable nil rate band available to the surviving spouse on death with what an individual is able to give away tax free during their lifetime. Whilst Wilnelia would indeed be able to benefit from her late husband’s inherited nil rate band of £325,000 to combine with her own on her death, her late husband’s nil rate band is not something that she would be free to make use of during her lifetime. The articles also totally disregard the newly established ‘residential nil rate band’ that this tax year alone would have increased the late entertainer’s tax free allowance by an additional £100,000 (but latterly would allow a combined nil rate band of £1,000,000 if left to lineal descendants).

Any legacy left to a spouse is free of tax by virtue of the spousal exemption. Wilnelia is, of course, free to make gifts to whoever she likes during her lifetime. As long as she were to live another 7 years following such gifts (of any monetary value) these would also be inheritance tax ‘free’. Quite honestly, she could gift the full £17 million equally amongst his 6 children (or whoever she so wishes) as soon as she had received the monies from probate, should she be so inclined, but therein lies the issue.

If indeed this is the arrangement, there is NOTHING obliging Wilnelia to carry out the ‘wishes’ of her late husband. Outright gifts by their very nature, leave the recipient free to do whatever they like with the legacy. Despite ‘wishes’ or ‘instructions’ from the deceased, there is nothing legally binding to see that these are fulfilled. The deceased is simply requesting the recipient to make distributions and is hoping that this will be carried out. Whilst this level of trust is admirable, the private client practitioner knows more than most that trusting your relatives to ‘do the right thing’ on your death is a dangerous assumption.

Let us assume that, despite having no legal obligations to do so, the recipient of the legacy has every honourable intention of making these posthumous gifts. They themselves would need to survive another 7 years which is always a risky proposition. What instead, if they were to lose mental capacity and unable to make such transfers? Michael Schumacher’s tragic accident and resultant circumstances have shown that age, wealth and level of fitness have nothing to do with a lack of mental capacity and inability to manage your own affairs. How can we be sure that Wilnelia shall live a long and untroubled life, free of illness and incapacity? Her ability to make gifts from her late husband’s fortune and to therefore share the wealth and to reduce her own liabilities to inheritance tax is dependent on her being mentally fit and well; certainly, any attorneys that she may have appointed won’t be able to undertake such tax planning ventures without court authority (another common misconception).

So what might Sir Bruce have done to make provision for his children and grandchildren (and indeed he could well have done, because we are commenting on the reporting, not on actual events)?

Lifetime gifting would have been the best starting point. If carried out wisely and cautiously, after careful advice and taking all needs of the parties into due consideration, then lifetime gifting is an excellent way of reducing your tax bill.

And what about the use of trusts? Despite trusts having their own particular tax regimes, they are immensely useful structures to protect and preserve assets against unknown circumstances. Tax shouldn’t necessarily always be the driver, particularly where significant wealth is concerned.

Finally, any charitable giving would have the double benefit of not only being exempt from IHT for the legacy itself, but it could also have reduced his IHT rate to 36% if he had left 10% or more of his total estate to charity. A Brucie bonus if you will.

For the papers to glibly report that Sir Bruce has ‘in one fell swoop’ cannily avoided inheritance tax and at the same time ensured that his wealth lands where he would wish is, in our humble opinion, grossly underestimating the risks and potential issues at hand and is in any event based on apparent mis-reporting of the facts.

Make sure that your wishes are adequately enshrined in the correct, binding, legal documents as the road to court is paved with good intentions. Nice to sue you, to sue you, nice. Speak to a member of the team at legalmatters on 01243 216900 or email us at info@legalmatters.co.uk to find out more.

Winter is coming; be prepared. The legal lessons we can learn from Game of Thrones…

As Game of Thrones season 7 is fully underway, the shenanigans of the inhabitants of Westeros are attracting viewers in record breaking numbers. Whether or not this fictional romp of dragons, zombies and war is your cup of tea, once you remove the fantasy element, you are left with the very bread and butter of a private client practitioner’s workload; family relationships, wealth and death. A tenuous link? Perhaps, but undoubtedly these universal themes are very much at the heart of both worlds.

Admittedly, the level of death is a little more frequent and varied than the average probate practitioner’s workload. Her Majesty’s Courts and Tribunal Services have a difficult enough job processing paperwork without having entire family dynasties wiped out in one fell swoop (one can only imagine the Oath drafting…)

But on a serious note, the programme highlights that death will not always present itself in the chronological order of a family tree. Even despite the wealth of information in the public domain, we are still faced with clients who do not have a Will as they believe their wealth will automatically be inherited by their children on their death. The Intestacy Rules will only go so far in handing down your estate to your lineal descendants but, of course, there is so much more to a Will then simply enshrining this course of events.

Warring offspring? Dubious marriage choices? Unruly illegitimate children? All in a day’s work in the Seven Kingdoms yet in the real world, these issues are just as much cause for concern for our clients today. If you are worried about protecting the family wealth (however big or small) correct estate planning can prepare for such eventualities and ring fence funds for your intended recipients without the worry of funds falling into the wrong hands.

Indeed, so many of the show’s main conflict points could have been easily avoided and managed had the characters’ legal affairs been put in order.

Had the ‘Mad King’ been furnished with a fully registered Lasting Power of Attorney, then his appointed attorneys could have stepped it at the first sight of faltering capacity and a much cheerier (and less bloody) outcome could have been achieved by all.

A Lannister always pays their debts, and loans and gifts are indeed an excellent form of estate planning if done in the right way. A flexible family trust is a great way of allowing for loans and repayments to be made to and from the family pot of money. Running out of blood descendants? A trust also allows for the person setting it up (the ‘settlor’) to add friends or charities into the mix.

There is certainly a stark solution for making provision for ‘blended families’ (with children born from different relationships) in a straightforward manner, without having to lose your head.

Whatever your family situation, legalmatters will find the right solution for you to ensure that your death does not leave any nasty surprises for those left behind.

An appropriate, professionally prepared and properly executed Will can provide security for your family, during an already emotional time. There is a time and a place for drama and conflict, and your death shouldn’t be one of them. Make a Will, make your wishes clear, because goodness only knows transferring the ownership of a dragon is an administrative nightmare at the best of times!

For more like this, Follow Us on Facebook, or if you have an immediate query, call us on 01243 216900 or email us at info@legalmatters.co.uk.

How Can Trusts Help With Inheritance Tax Burdens?

There are few taxes more unpopular than inheritance tax. A poll by the financial website, loveMONEY last year found that an incredible 90% of Brits believe it is unfair.

However, there are a number of perfectly legitimate ways to reduce the amount of tax your estate will have to pay. One of those is making use of a Trust.

What is a Trust?

A Trust is a legal arrangement where your assets – such as property, cash or investments – are given to trustees, who will oversee them for the benefit of a third person. For example, you might want to put some savings into a Trust which your children can then benefit from at a later date.

When you place items into a Trust, they technically no longer belong to you. As a result, when it comes to working out the inheritance tax due on your estate, they aren’t included.

Instead, the assets belong to the Trust. The trustees are charged with managing those assets in the interest of the beneficiaries you have named, until some time when those beneficiaries can take control.

The many different types of Trust

Trusts come in a variety of different forms, which will suit different circumstances.

The simplest form is a Bare Trust – this basically hands over ownership of the assets to the beneficiary immediately, so long as they are over the age of 18.

Alternatively, there is an Interest in Possession Trust. This gives the beneficiary income from the assets held within the Trust, but they don’t have a right to the assets generating that income. An example of this is that you might put shares in this form of Trust which would pay an income to your partner, but your children would get ownership of the shares themselves once your partner died.

Then there is the Discretionary Trust, which is where the trustees have responsibility for deciding how the assets within the Trust are distributed. You could therefore leave assets in the Trust for your grandchildren, with your children named as the trustees. They could then determine who gets what at a later date.

Dividing your assets

Trusts are a useful way to take control of passing on your assets to your loved ones and can serve as a complement to a comprehensive Will. Without a Will in place, you have no say on who will get your assets and could put your loved ones through further heartache after your passing.

To discuss your Will and estate planning needs today, call us on 01243 216900 or email us at info@legalmatters.co.uk.

Should I Be Trusting?

There are many positives to creating a trust. They can help you reduce your tax burden, protect your intended beneficiaries and avoid wills and probate disputes. However, there are many different types of trust; knowing the differences between them will help you establish which is right for your circumstances.

Discretionary trust

With a discretionary trust, the trustees have discretion over how to use the capital and income of the trust fund. While beneficiaries will be named in the trust deed, it is up to the trustees to decide which of the beneficiaries is to benefit.

A discretionary trust can be useful if you have a group of people that you know you wish to pass assets onto, but you don’t know which will need financial help in the future or what sort of help is required. For example, this could be your children.

Another bonus is that the assets within a discretionary trust are classed as being outside of the beneficiaries’ estates when it comes to Inheritance Tax. They’re also not counted when calculating means tested benefits.

Discretionary trusts are very flexible; you do lose control over exactly what happens to the assets you have placed within the trust. To counter this, you can appoint yourself as a trustee so you can have some influence over the decisions of the trustees.

Bare trusts

These are also known as simple trusts. Essentially, the beneficiary gains the immediate and absolute right to the assets in the trust and any income they generate. Once the trust has been set up, the beneficiaries cannot be changed.

This type of trust is generally used for transferring assets to a minor – a trustee holds the assets on trust until the beneficiary is 18.

The beneficiary will be responsible for paying Income Tax and Capital Gains Tax on the assets within the trust. However, they are viewed as ‘potentially exempt transfers’ for Inheritance Tax. In other words, so long as the person who put the assets into the trust does not die within seven years of doing so, there will be no Inheritance Tax to pay.

Parental trusts for minors

This is where a ‘relevant child’ of the settlor (the person setting up the trust) can benefit from the assets in the trust.

The child’s income from the trust is classed as being the income of the settlor when it comes to Income Tax, while Capital Gains Tax must also be paid.

Interest in possession trusts

This is where the beneficiary of a trust is entitled to the income from the trust as it arises. The trustee is duty bound to pass on all of the income received to the beneficiary.

There are two types of beneficiary within a trust like this – the income beneficiary is the one who is entitled to the income from the trust for life. However, separate beneficiaries will be detailed in the trust, and they are entitled to the capital of the trust.

An example where you might put your investments into a trust like this – your spouse could be the income beneficiary, while your children are the capital beneficiaries.

Vulnerable beneficiary

Beneficiaries may be vulnerable for two main reasons – either they are mentally or physically disabled, or they are under the age of 18 and one of their parents have died.

These may qualify for special tax treatment.

Unsure whether you would like to set up a trust? At legalmatters we are happy to talk you through things. Feel free to call us today on 01243 216900 or email us at info@legalmatters.co.uk.

Beers to Bankruptcy

Hundreds of new businesses start up every month and unfortunately hundreds of enterprises fail. Some fail because the product or service is ill conceived with no market for them and some because of poor financial management. Others fail because people’s motives and expectations in business change and it is this reason that creates a number of opportunities to slip up.

When you set up a business with a friend or associate there are exciting times ahead, the money is saved, the loan approved and you’ve just received the forms confirming your new shiny registered company name. You and your co shareholder and director celebrate and toast to the future success of your venture that you have spent much time planning and scoping out.

You have got product making skills and your co-director has great business development and inter personal skills so it’s a good match of business attributes and away you go. You get on with manufacturing, creating software and packaging knowledge whilst your other business half develops supplier pipelines, market presence and business relationships to generate orders for the product. During this set up phase the cash in your business is being used to meet your salary so you can pay your mortgage, put food on the table and pay the business overhead costs for materials, premises and the usual business rates.

It usually takes several months to get traction into a new business and start gaining the trust of your market before some cash flow starts to trickle in from orders. Your relationship with your co-director is under strain because you want to supply the product more quickly in greater volume and because the money is running out it’s getting stressful.

Fortunately the scales tip and orders start to flow in. You are busy at the ranch knocking the widgets together for suppliers and seeing some money start to come into the bank and you breath a sigh of relief because creditors are being kept at bay and the family finances are not under strain.

It’s important to have regular meetings with business partners but this often slips in these early stages. You set up a meeting with your co director about how you want to develop the business and agree on strategy for growth. To your surprise he wants to sell the business into one of your suppliers. You think that it is too soon given the orders are stacking up and that there are many other opportunities to grow independently. You fail to agree a strategy at this meeting and carry on without having agreed the way forward.

With no Shareholder Agreement in place to govern disagreements or spell out who has the right to vote on different business issues there is no recourse to address the disagreement. Unbeknown to you your co director has been talking to the businesses main supplier about his discontent about not being able to agree a business plan with you and he thinks a merger is the best way forward. He is offered a deal to join them that he cannot refuse to deliver your product in house for them with their own product developers. He jumps, taking the supplier with him and in the process the main supply line of orders. Loss of credibility to your business means the other smaller suppliers follow suit.

You are left with no business income and with the burden of pre acquired stock and product you cannot shift. You can’t afford a new business development manager because you have limited cash and now the creditors are knocking loud on the business door because they have not been paid. There is no recourse to your now ex co director because there is no service contract with him and your business and no Shareholder Agreement which would otherwise have prohibited this behaviour, put in place restrictive covenants and regulated voting rights in the business. This would at least have given you and he a reason to negotiate or point out if he carries out his threat you will be able to pursue significant damages for breach of contract or dishonest practices making him personally responsible for loss to your business and on going liabilities. An incentive for him to stay!

You skimped on important governance documents when setting up your company and just incorporated an off the shelf company. You and he thought it would be a pain and too expensive to put a Shareholder Agreement in place. Ironically the cost which you could have allocated to this was spent on the celebratory beers when you launched the business. None of the now irretrievable fall out with your business partner was envisaged in the times of friendship and optimism for the future. You have to liquidate the company and having eaten away at your own personal money after your business partner’s departure you have nothing left whilst your ‘ex’ sips from the flute of success without so much as a glance back at you.

Depressing? it’s a realistic scenario and whilst differences of opinion and disagreements cannot be avoided in business, the outcome of them can and should be managed by common sense engagement with basic business governance agreements at the outset.

If you’re in business you’re saying you are an entrepreneur so ignorance of the future is no excuse for failing to act like an entrepreneur at the outset. Protect yourself, your family, your business time and value and simply put, the avoidance of catastrophic financial and business failure need not come at a significant price. In fact fixed fees and online or telephone legal services mean the cost is known at the outset and half an hour of your time would be all it takes to complete vital paperwork. A small investment now will pay dividends.