Estate Planning for Married Couples
For any married couple there are compelling reasons for the use of trusts when it comes to considering how to effectively protect their estates.
In recent years various changes have been announced to the rules around Inheritance Tax (IHT) which suggest, in some people’s minds, that the need for Estate Planning has been alleviated or reduced. The reality is somewhat different.
First off, Estate Planning is considerably more than the simple quest to avoid Inheritance Tax. For the majority of clients’ bloodline protection and care fees planning are both more important.
Beyond this the rules around IHT, which have been tweaked in the past few years, have made some difference to the potential position for some families, but this has been largely offset by rising house prices, improved asset markets and the fact the Nil Rate Band Allowance (the ‘free’ bit, before IHT is charged) has been frozen at its current level since 2009.
Finally, it should also be remembered that IHT is most likely to be payable on the second death of a couple, which could be many decades in the future, when rules relating to estates and taxation could be very different to those today.
Estate Planning is as important today as it has ever been.
Effective Estate Planning will do three things:
- Provide protection for the surviving spouse
- Protect the estate and all assets from third party claims and social impacts, keeping wealth within the family bloodline for generations to come
- Aim to minimise the future taxes paid following the second death of the couple, especially future, second generation, Inheritance Tax
There is virtually no way of achieving these combined objectives unless a trust or trusts are used.
This is because a Will, however sensible it is to have one, is simply an instruction to distribute assets, normally at a point in time (i.e. on death). Once the assets have been distributed they are then back ‘in play’ for taxation in the hands of the beneficiaries or for third party claims.
Unlike a Will, a trust can maintain protection of assets well beyond the death of the deceased individual, in the hands of their spouse and then through the generations that follow.
Combining a solution between the Will and trusts presents a complete protection to the couple, their estate and beyond, to the estates of children and grandchildren in years to come.
Without a trust in place, assets can quickly become subject to third party claims especially after the first death. A surviving spouse could need care and be subjected to care fees assessments. By arranging a family trust solution which provides for the surviving spouse, after the first death, but through the trust, the assets can be ring fenced from local authority assessment. Likewise a spouse could remarry and then subsequently become divorced. The trust would protect the assets passed on the first death from being targeted in divorce proceedings.
Without a trust in place, on the second death, the estate would pass to beneficiaries. Those beneficiaries could become divorced or be subject to claims from third parties, for example creditors. The trust solution can protect against such claims.
In addition the beneficiaries could, in their own right, have other assets, which when added to their inheritance significantly tip them into the bands where IHT applies. In such circumstances if their inheritance was via the trust, the assets would be ring fenced from generational IHT, saving £40,000 for every £100,000 gifted, for the grandchildren.
If you establish a Family Trust solution you can potentially protect against all of these threats and your children may save considerable future taxation.
And putting such a trust solution in place is straightforward, you can get the trust framework in place now ready to receive the benefits at the relevant time appointing trustees and nominating beneficiaries.
The trustees will be guided by your letter of wishes, which although not legally binding will be persuasive. The trustees will always have the power and flexibility to ensure your money goes to your chosen parties in a manner which is both tax efficient and protected.