Ellisha Harding, Menzies
As trusted advisors, we are involved in discussions with our clients in relation to their Estate planning and hear first-hand the concerns of passing wealth onto the next generation.
Whether gifting a large or small amount, the same factors come into play. We don’t have a crystal ball and don’t know what will happen in our own lives, or those of our chosen beneficiaries. When gifting outright, you are losing control over the eventual location of the asset.
There are a lot of variables and possible outcomes, these concerns and ever-changing family dynamics understandably play a large role in the decision-making process for both lifetime and Will planning.
One key issue in outright gifting, is the unpredictability of life. What if later down the line, your child gets divorced, leaving the family wealth open to be passed to an ex-partner? What if your grandson on reaching 18 spends all his money on a trip to Vegas? What if a family member gets into debt or develops a gambling problem? What if you unexpectedly get another grandchild, after already parting ways with a lump sum or asset to your other grandchildren?
A solution to these issues is the use of Trusts. Trusts are a very valuable tool in Estate planning. Whilst there are slight differences between different types of trusts, they largely have similar benefits.
Control & Flexibility
The first key benefit of using a trust is that you can effectively retain a degree of control over the asset to ensure this is dealt with in accordance with your wishes. In your lifetime you can act as trustee of the trust to set a precedent showing how you would like the trust to operate. If a discretionary trust is used, trustees can decide who benefits and when, this allows flexibility whilst also protecting the assets.
Protection from Divorce
Despite declining divorce rates, the difficulty of divorce proceedings and the division of marital assets is widely known. If you are concerned about relinquishing control over an asset as it may not end up in the hands of those you wish, a trust may help protect the line of succession. Although the courts would look at each case in isolation, the assets are legally owned by the trustees so are generally considered separate from marital property.
Achieving Your Wishes
You may wish for your wealth to ultimately help your grandchildren purchase their first properties, or for them to have an income for life, this can be set out in a letter of wishes so that your trustees have a clear understanding of your intentions and can enact these on your behalf.
It is often tax efficient, particularly for trusts with beneficiaries who are lower rate tax payers, including young children, to grow the capital of the trust whilst using trust income for their benefit. We often see this where grandparents settle assets for their grandchildren and income is used for school or university costs.
When they grow older, you may want to start giving access to some trust income, however trustees can restrict this at their discretion. This protects assets from young or vulnerable beneficiaries as they do not have access to the whole fund so cannot spend this on a whim.
Supporting Surviving Partner
Use of trusts in Will planning can give reassurance that the wealth is protected and will end up in the hands of your ultimate chosen beneficiaries. On first death leaving assets to a Will Trust, whether discretionary or interest in possession, will mean that you are protecting your assets. This can protect assets from an enforced sale to cover care fees, or in the event of re-marriage.It is often forgotten that re-marriage automatically invalidates any existing Will. Your widow may die in testate in which case assets will favour their new spouse over their children. If a new Will is written, the surviving spouse can divide assets however they decide at that time if they have inherited assets outright.
The way to protect assets is to ensure your assets are left to a trust in your Will. This can dictate the terms, however generally speaking these trusts may give the surviving partner a right to benefit from the assets in their lifetime, or for a set period. This can mean that they can remain in the family home, or receive investment income, for example, whilst ensuring the underlying asset ultimately passes to your chosen beneficiaries on second death, or in the event of re-marriage.
Providing Funds for a Dependant Relative
Trusts can provide peace of mind by reducing concerns about the livelihood of a family member after your passing. If you have a dependent family member who might struggle without assistance, a Trust for a Vulnerable Person offers a solution. If the beneficiary meets certain conditions, such as being a child or having a disability, the trust qualifies for special tax treatments and protections, including higher capital gains allowances. This type of family succession planning is particularly reassuring, especially if the beneficiary is likely to need additional support throughout their lifetime.
Avoid Potential Conflicts
Trusts can help avoid conflict, particularly if you are passing an asset to family members. You never know when a disagreement may arise. Using a trust to hold property means that you can appoint a trustee who is a neutral person to make the key decisions in relation to the asset held by the trust.
Other Factors
Whilst proving extremely beneficial and giving added security and peace of mind, trusts do have initial and ongoing costs. This includes the professional fees to setup and maintain the trust, as well as the 10-year anniversary inheritance tax charges. This should be carefully considered so that you only enter into a trust arrangement where the benefits outweigh the ongoing charges and administration. Typically, this is a small cost to pay for the peace of mind and added protection they offer for your wealth.
Next Steps
Creating an estate plan with the guidance of a professional adviser ensures you make well-informed decisions that align with your Estate goals. It also helps you to better understand your personal financial future, particularly if you do decide to make large lifetime gifts.
At Menzies, our experienced team can help you navigate these difficult decisions and can review your overall inheritance tax position to create an overall wealth plan, as well as a plan for your Will to ensure that your wealth ultimately passes on to your chosen beneficiaries in a tax efficient manner. Please reach out if you would like to have an initial conversation to see how we can help you.
留言