Your will - use of trusts part 2
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| This second article explains how you might use a trust in your will. The explanations given here are inevitably simplified. |
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| A reference to a child means a person under 18 years of age. A reference to a partner means a registered civil partner. |
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| Saving tax |
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| “The only certain things in life are death and taxes”, so let us make clear that there is no magic bullet to save tax. |
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| Some advisers on wills may try to persuade you to enter into one of the tax “schemes” you see advertised in the newspapers. Maybe they are paid commission when you join up. We can say that any “scheme” to save tax is risky in that: |
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- It may not succeed under today’s law;
- Even if good now, the law may be changed before you die or make another will;
- It is probably very expensive;
- If it fails, the tax may be payable by some person who least expected the bill.
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| If you are worth more than five million pounds, see a solicitor specialist and pay for a bespoke will. Yes, it will probably cost a lot of money too, but he/she may find savings in esoteric corners which we do not include. |
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| The nil rate band |
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| When you die, the first portion of your estate is free of inheritance tax. For 2009/10, that sum is £325,000. It is referred to as the nil rate band. |
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| All value above that sum will be taxed at the rate of 40%. |
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| If you have made gifts in the seven years before your death, the value is included, on a sliding scale, as if the gift had been part of your estate on death. It follows that the best way to avoid inheritance tax is to give away your estate! For simplicity, we do not refer constantly to the possibility of life time gifts having been made. We take it you will remember to add them into your own calculations. |
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| Some assets are down-valued for inheritance tax. The category includes business assets and shares in a private company. As ever, the rules are complicated. You should refer to your accountant or the HMR&C website. |
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| From October 2007, spouses and partners are treated as sharing a double helping of nil rate bands. The effect is that any part of the nil rate band that was not used when the first spouse partner dies is automatically allowable as an addition to the nil rate band of the second to die. The transfer operates even if the first to die has died before October 2007. |
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| In the estate of the second to die, any increase in the nil rate band is ignored for the purpose of determining whether the estate as a whole is subject to tax. |
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| If the nil rate band changes between the two deaths, the amount carried forward as an allowance is calculated as a percentage of the allowance and not as an absolute sum. |
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| Using a discretionary trust |
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| A nil rate band discretionary trust as used before October 2007, is ineffective to save tax. Further, it can still be useful to use a discretionary trust, as follows. |
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| Using a discretionary trust after October 2007 |
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| Here are some advantages you might like to consider: |
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- Because assets placed in trust are not owned by the surviving spouse or partner outright, they are not available to fund compulsory, means tested care fees.
- Assets left to the survivor outright could be spent or given away or taken by creditors or by a new spouse and so on, and so not be available for the intended original beneficiaries (likely to be the children of the first to die).
- The investments you place in a nil rate band trust may increase in value much faster than the nil rate allowance each year. So, by having placed then in a nil rate band trust, a greater value is free of tax than if the same investments were given to the survivor absolutely (no trust).
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| Of course, there are many possible reasons to use a discretionary trust that are unrelated to saving tax. If you want a trust anyway, the above points count as a possible bonus and the points below may be unimportant. |
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| Here are some possible disadvantages: |
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- A point often ignored by professional advisers is the cost of setting up and managing a trust. Even using a Net Lawman will template, accountants will charge for setting up the new account, book keeping and management, and correspondence each year. Only you can decide what level of cash or other benefit you need in order to justify this expense of time and money.
- The surviving spouse or partner no longer has absolute power over management of the assets in trust. He / she must obtain the approval of the trustees to any expenditure of trust money or the sale or purchase of any asset, such as the house he . She lives in.
- If you use a simple will to leave your entire estate to your spouse or partner, then 100% of your allowance could be claimed by his / her executors. If the nil rate band had risen in the meantime, then the percentage calculation system would give that second estate a double amount, tax free. However, there are likely to be few people with circumstances where this would be chosen.
- Note: The carry forward of the unused allowance to the estate of the second to die is not automatic. HMR&C will require detailed accounts of the distribution of the first estate before they will agree the concession.
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| The two year concession: covering the future unknown |
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| Governments and circumstances change. You may not remember to draw a new will each year. Your loved ones may die before you, divorce, disappear, go bankrupt. How do you cover that? Well of course, you cannot see the future, let alone change it. But there is one way you can give great flexibility to your executors and beneficiaries to divide your estate in the way that you now and they then, think best. |
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| If you place assets in a discretionary trust created by your will, your executors have two years from the date fo your death within which to allocate and transfer those assets to your beneficiaries. They can even transfer them into other trusts (but with no further two year period). |
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| Your key points are: |
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- appoint trustees who are competent and trustworthy and represent the interests of different sets of beneficiaries;
- use a will designed to give the trustees maximum freedom to manage all of your assets;
- you can use more than one trust, so use a second one, for example, to empower your guardians to look after your infant children;
- instruct your trustees carefully in a letter of intent - the more you tell them about your assets, the better they will be able to operate. Give them tips about who to trust and what deals to watch, what property to sell immediately and which of your children will best direct your company. You might tell them to spend money looking at further tax saving. Above all, tell them what you intend to give to whom. Use percentages if possible, as values change. You can be pretty sure your wishes will not be followed to the letter, but this is as near as you will get to managing your affairs from “beyond the grave”
- a word of warning: avoid pitting one beneficiary against another. You do not want your life’s work to be tied up in litigation for ten years.
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| So what will you do? |
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| Our strong recommendation, if you are happy with our “key points” above, is to use a discretionary trust and allow your trustees to do some post mortem tax planning. |
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| Related documents: power of attorney - legal wills - general power of attorney |
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