What is Critical Event Protection and is it relevant to me?
If you are a member of a Death in Service Scheme, if you have a separate Critical Illness and Life Insurance Policy or even if you have a Pension Plan, you should look at Critical Event Protection.
What are these schemes and policies for?
Death in service schemes are often part of your employers’ group policy scheme which provides a lump sum for family or to cover the death of a shareholder in a business.
Critical illness policies produce an income supplement in the event of a critical illness and on death there is usually a lump sum paid.
Life insurance policies may make provision to cover inheritance tax, provide a lump sum for family or to cover the death of a shareholder in a business.
An occupational or self-invested pension plan may have a lump sum which will be paid on death.
What happens to these assets when I die and why would I need Critical Event Protection?
These valuable assets usually only pass to your next of kin if you’ve nominated them. If you haven’t, they go into your estate and may then become subject to Inheritance Tax at 40%. In this way, sometimes funds are wasted or end up with people you don’t even know yet, for example if your current partner or next of kin starts a new relationship.
How can I protect these assets for my dependents?
Using a trust preserves the use of these funds for your dependents, avoids direct ownership, can avoid the need to incur estate administration costs and may save inheritance tax. A trust protects and ringfences these lump sum proceeds and means a quick claim by the trustees upon your death can make the funds available in a protected trust environment to meet family costs.
At legalmatters, we have put together a simple solution, which will enable you to deal with these valuable assets, called Critical Event Protection.
A trust is a legally binding arrangement where an individual or group (settlor) delegates the management of money or assets to another person or an organisation (the trustees), who in turn passes them to a person/people (beneficiaries). Here’s more information on trusts, why people set them up and the sort of trust funds available in the UK…
When people set up a trust
The money or assets involved in a trust are usually designated to support a person who can’t manage money, such as a child or a person with limited mental capacity or a learning disability.
A trust may also be used in reverse. This is when your own money is used to look after you if you’re unable to look after yourself due to an illness or disability.
The costs of setting up a trust
As trusts can be complex, they should really be set up with professional help to avoid any costly mistakes. Usually, setting up a trust costs around £1,000, but if you’re setting up a trust for a disabled child there are a number of charities, such as Mencap, offering contribution schemes to assist with the financial aspect.
Reasons for setting up a trust
There are a number of different reasons why families, groups and organisations may set up a trust, some of which include:
- Protect those who are unable to control their spending
- Protect family assets and keep them in the family
- Safeguard assets against bankruptcy
- If the beneficiary is a child or someone with a learning disability (including adults)
- A company distributing pensions over the duration of an individual’s employment.
There are many different types of trusts, although bare or absolute trusts are the most popular type of trust that people can set up in the UK. The settlor transfers money or assets to the trust for the trustees to look after and, when the beneficiary turns 18 years old, they receive all the assets and money from the trust.
An interest in possession trust involves the trustees transferring all trust capital to the beneficiary for a fixed period of time – usually for the rest of their life. The beneficiary is then known as a ‘life tenant’ and the trust is known as a ‘life interest trust.’ The interest in possession will end when the life tenant dies and the ‘capital beneficiaries’ (usually the children when the income beneficiary spouse dies) inherit the capital of the trust.
To find out more about Trusts, and help in deciding which is best for your own circumstances, give us a ring on 01243 216900 or e-mail us at email@example.com.
A Trust can be used to help manage your assets, to protect your legacy, and look after those you care about. And today, while the tax advantages of a Trust have been reduced, they are becoming increasingly popular.
What is a Trust?
Trusts are used to hold and manage money or other assets on behalf of its beneficiaries. There are various types of Trusts and many different reasons for using them. For example:
- To provide a secure way of holding money for children who are too young to handle a large inheritance
- To pass on assets when you are still alive
- To protect vulnerable or disabled people who are incapable of looking after their own affairs
- To minimise estate and inheritance tax (IHT) liabilities
- To create a contingency fund to look after you during your lifetime (e.g. should you become unable to take care of yourself due to mental or physical health).
Once assets are placed in a Trust, they are no longer owned by the person who set it up. Therefore, they are protected from claims from creditors, family disagreements, financial setbacks, lawsuits etc.
Who is involved?
There are three main parties involved in a Trust:
- The settlor. The person(s) who puts assets into a Trust.
- The beneficiary. The person(s), organisation or anything else (e.g. a pet) that benefits from the Trust
- The trustee. The person(s) who manages the Trust
Beneficiaries and trustees are appointed by the settlor. While in most cases these parties are all different, in some circumstances the settlor or trustee may also be a beneficiary.
Who can be a trustee?
A trustee can be a person the settlor knows and trusts. For example, a friend or family member. The trustee can also be an entity such as a solicitor’s firm. A Trust must always have at least one trustee. Multiple trustees can be appointed – this is recommended in case something happens to an individual trustee. Ideally, you should have at least two trustees, but no more than three or four.
The role of a trustee is to:
- Deal with assets according to the settlor’s wishes
- Manage the Trust on a day-to-day basis
- Pay any tax due (from the Trust)
- Decide how to invest or use the Trust’s assets.
What are the rules?
When you create a Trust, you establish the rules by which the trustee must manage it. However, the legal wording needs to be exact, so you should ask a qualified professional to set it up for you.
To find out more about Trusts and what they can do for you, speak to one of our team at legalmatters on 01243 216900 or email us at firstname.lastname@example.org for further details.
Some recent research indicated a rise in families using discretionary trusts instead of pre-nuptial agreements to protect family assets.
Typically, people think of pre-nuptial agreements as the standard approach for couples to take when considering marriage. They are designed to separate personal property and wealth accumulated prior to marriage and safeguard it in the event of a divorce.
However, although a court will take a prenup into consideration if a couple are divorcing, they are not legally binding in the UK.
Whilst courts tend to uphold them, there are many factors which can result in them not being upheld, perhaps if the court deems the agreement unfair, if the couple did not receive independent advice, for instance.
Equally, prenups still hold a certain stigma and couples and families can often feel uncomfortable discussing them.
On the other hand, discretionary trusts are viewed more as a planning tool and allow parents to protect family wealth and assets against a future divorce.
Typically, in this type of trust, the parents will set themselves up as trustees. As well as having full control over the assets, they can also decide who can benefit from the trust whilst maintaining discretion to make payments or transfer assets from the trust if they wish.
Each parent can put up to £325,000 into a discretionary trust during their lifetime. (This figure may be reduced if other gifts have been made). As long as the value of the gifts made and the value being put into the trust do not exceed £325,000 in the last seven years there will be no immediate inheritance tax to pay either. If the parents live for another seven years, these assets will not form part of the estate for inheritance tax purposes.
In light of these factors, discretionary trusts are certainly something that families should consider. Not only can it protect family wealth in the event of a divorce later on, it can also help to reduce a future inheritance tax bill.
Whilst they are complex, setting up a trust can be straightforward if you received the right advice. As well as minimising tax responsibilities a trust can also help to protect your assets in the future.
To find out how you could benefit from a prenup or a trust, give us a call at legalmatters on 01243 216900 or email us at email@example.com for further details.
Many grandparents are intending to gift their grandchildren financially, with recent research from Saga suggesting that more than £37bn has passed from grandparents to their grandchildren.
Part of this is down to the fact that older people are worried about their grandchildren’s future. The increase in cost of houses, cars and the day to day necessities mean they’re likely to suffer financially and be much worse off than those of generations gone by.
So how could you go about helping out your younger relatives?
Skipping a generation
According to the research, around 14% of parents are skipping a generation and are instead looking to leave assets to their grandchildren.
Making use of a gift allowance
In certain scenarios, grandparents are choosing to give money without causing a tax event such as a £3,000 annual gift allowance. This can cover financial gifts which can be passed over each year, free of Inheritance Tax. Additionally, grandparents can also give away up to £250 to any number of people each year.
Putting it in a trust
With a discretionary trust, it is up to the trustees to determine how and when any potential beneficiaries may be able to access the cash. You can appoint yourself as the trustee, so that you have final say over where the money goes, or you can go for an independent trustee. What’s more, the money within the trust is classed as separate from your estate, so it’s free of Inheritance Tax.
There are also bare trusts, which mean the grandchildren would be completely entitled to whatever is in the trust once they reach 18. Unlike the discretionary trust, the beneficiaries are fixed, so once the trust is declared it is not possible to add (or remove) beneficiaries.
It’s important that you consider where and to whom you want your assets to go to – a comprehensive will is the only place where you can formally set this out.
Don’t keep putting it off. Speak to legalmatters today to make sure that your final wishes are carried out. Call us on 01243 216900 or email us at firstname.lastname@example.org.
There are some fairly obvious legal words used when writing a Will but here’s a definition of some of those which might otherwise be misunderstood.
Administrator (sometimes administratix for a woman) – the person appointed by law to settle the affairs of someone who dies without a Will, so usually their next of kin.
Beneficiaries – this is anyone – a person, organisation or charity – left an inheritance (legacy, gift, trust) in a Will, or if there is no Will, under the intestacy rules.
Substitutional beneficiary – if a beneficiary dies before the person making the Will, a substitutional beneficiary will receive a gift in their place.
Bereaved – those surviving the deceased.
Crown or Treasury – this refers to the Government. If you don’t have a Will and have no next of kin, the Crown receives your estate.
Deceased – the person who has died.
Dependents – anyone who is cared for by the person making the Will. It normally includes children, spouse or elderly/sick relatives.
Executor (sometimes executrix for a woman) – the person or people you choose to make sure the instructions in your Will are carried out. You can choose a family member, a friend or a probate professional. An executor may also be a beneficiary of the Will.
Guardian – someone named in a Will who is appointed to take parental responsibility for any children aged under 18 at the time of the person making the Will’s death. They are known as a testamentary guardian.
Issue – this refers to a person’s lineal descendants. So their children, grandchildren and great-grandchildren. It does not include step-children.
Personal Representative – a general term for anyone in charge of administering a deceased person’s estate. It could refer to an executor or administrator of the Will.
Power of Attorney – a Power of Attorney may be given by executors and administrators to probate professionals to allow them to sort the Will without having to ask the executors to sign everything.
Trustee – a person or a Trust corporation (such as a bank) appointed to administer any Trusts created by a Will or arising under the rules of intestacy (so when there is no Will).
Testator (sometimes testatrix for a woman) – the person making the Will.
Child of the testator – in law this refers to children of the testator and includes legitimate, illegitimate, adopted and some surrogate children, but not automatically step-children.
Wards of Court – orphaned children with no appointed guardians are made wards of court. The court then decides what happens to them.
Witness – you must have two witnesses to see you sign your Will. You must watch them sign it and they must also watch each other sign it. You can’t choose a beneficiary (or their spouse) to witness your Will.
It’s important to be clear when drawing up legal documents. Legalmatters can help, we’re always happy to discuss your needs or answer your questions. Call us today on 01243 216900 or email us at email@example.com for further details.
Whenever Brits are polled on their most hated tax, without fail, one tax in particular always finishes top – inheritance tax. As a nation, we want to leave as much as we can after death to our loved ones and the thought of the taxman taking a slice evidently gets our goat.
Here are some simple and efficient ways to reduce your inheritance tax liability and to ensure you leave as little as possible to the taxman.
Making a Will
Did you know that failing to write a Will generally means you will end up paying more inheritance tax? Without a Will in place, your estate will be doled out according to the rules of intestacy, and chances are the taxman will help himself to a healthy chunk of it.
Did you also know that one simple way to reduce your inheritance tax via your Will is to leave some to charity, as these gifts are free of tax?
Understand the thresholds
Inheritance tax is charged on estates once they pass £325,000 in value, at a rate of 40% on everything above that value. However, couples are able to pass their allowance over in full to their partner – in other words, couples have a £650,000 allowance overall. If their combined estate ends up being worth less than that, there will be no tax to pay.
There is also a new additional element to bear in mind here. The ‘main residence’ allowance allows you to pass on your family home to a direct descendent, with an additional tax-free allowance included. For this year it stands at £100,000 and will increase each year until 2020/21 when it hits £175,000. As this allowance applies per person, it will mean a total tax-free allowance of £1 million for couples.
Even if you give something away, the taxman will still class it as being part of your estate if you die within seven years of making the gift. It’s a way of preventing people from handing over their home on their deathbed and avoiding the duty. Live longer than seven years and there’s no tax to pay.
However, there are certain gift allowances anyway which are free of tax. Everyone has a £3,000 limit each year, and what’s more this limit carries over to the following year if you don’t use it, to a maximum of £6,000.
On top of that you can give away £250 to each of any number of people every year, while further allowances are in place for wedding gifts to family members, friends and even political parties.
Write your life insurance policy in Trust
Lastly, it’s a good idea to write your life insurance policy in Trust, as this essentially separates it from the rest of your estate.
Usually your life insurance payout will be added to the value of your estate before it is paid out to your loved ones, meaning they have to wait a while in order to receive anything and then may have to pay tax on that payout too.
But writing it in Trust means it is viewed as being outside of your estate, ensuring that your loved ones get every penny and likely get the money quicker to boot.
If you need some help in making the most of your allowances, writing a Will, setting up Lasting Powers of Attorney or Trusts, then speak to a member of the team at legalmatters on 01243 216900 or email us at firstname.lastname@example.org to find out more.
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 email@example.com.
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 firstname.lastname@example.org to find out more.
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!