Articles

Published by: Rosalyn Workman

Family protection – the essential toolbox

As people are living longer, they are increasingly concerned to ensure that the assets they have accumulated over the course of their lives are dealt with as they wish when they die. In addition they also want to put arrangements in place so that, if they become unable to deal with their own affairs during their lifetime (whether through absence abroad, physical frailty or mental incapacity), the people they have chosen can ensure that things run smoothly.

Finally, many are keen to pass on assets to their families during their lifetime but worry that the assets they give away may be used unwisely or, at the very least, not as they would have chosen!

The following ‘tools’ are invaluable:

Wills

Making a Will allows you to decide how you would like your assets to be distributed on your death and to choose the people who will deal with the very significant responsibility of carrying out your wishes. You decide exactly who receives what and when. You may choose to leave cash legacies to friends, family members or charities and, in the case of younger beneficiaries, you are able to stipulate the age at which they should inherit. If you say nothing to the contrary, beneficiaries inherit at the statutory age of 18 which many people consider too young.

If any of your beneficiaries is in the midst of difficult times, you can protect the funds for their future by including trust arrangements to prevent their inheritance being unexpectedly consumed as a result of divorce or bankruptcy. If you are married, you can ensure that things are arranged tax efficiently by leaving your assets to your spouse so that your estate qualifies for full exemption from inheritance tax. Some people have even been known to get married just to achieve this end! This does not automatically happen if you die without a Will as part of your estate may then pass to your children which, quite apart from the practical implications for your spouse, could result in inheritance tax being payable immediately.

Most importantly, if you are unmarried and die without a Will, your partner will not receive any of your assets unless they own them jointly with you (in which case inheritance tax may still be a concern, depending on the amount).

In short, making a Will offers peace of mind. It allows you to provide for those you wish to benefit (and who may be financially dependent on you). If you fail to make a Will, your nearest and dearest may find themselves having to resort to Court proceedings to secure an interest in your estate.

Lasting Powers of Attorney (LPAs)

An LPA is a legal document which allows you to appoint people of your choosing to make decisions on your behalf if you lose the mental capacity to make those decisions yourself. There are two types of LPAs – those covering financial matters and those covering health and welfare decisions (including end of life decisions).

Setting up an LPA enables you to choose who you wish to make those decisions for you in the appropriate circumstances. If someone loses capacity without having put suitable arrangements in place, the only alternative is to apply to the Court of Protection for a Deputy to be appointed to deal with their affairs. This is costly, complex and time consuming and nothing can be done until the Deputy has been formally appointed by the Court. This can lead to all kinds of problems as there is no way of accessing assets in the meantime.

It is the duty of both Attorneys and Deputy to act in the best interests of the Donor. Deputies are supervised and must report to the Court of Protection annually which is another layer of complication. Whilst Attorneys are not formally supervised by the Court, any concerns about them can be reported and the Court does have the power to remove an Attorney or Deputy who has acted inappropriately.

Creating an LPA is an extremely effective way of ensuring that your affairs will continue to be dealt with if you are no longer able to deal with them personally, or (in the case of financial matters) it is convenient for one reason or another for someone else to deal with things on your behalf.

Inheritance Tax Planning

Many people are keen to pass assets on to their families during their lifetime in the hope of improving the overall inheritance tax position. There are various inheritance tax allowances which, if used effectively, can significantly reduce the value of your estate over a period of time. Larger gifts are also possible and an outright gift of cash or other assets to an adult beneficiary is the simplest way to deal with things. The value of the asset gifted is generally removed from your estate for inheritance tax purposes after seven years. It is up to the recipient to decide how to deal with the assets and the risk is obviously that they might not act as you intend. Furthermore, the assets gifted could pass to beneficiaries outside your family if the recipient then dies.

The alternative is to make gifts into trust where they will remain under the control of the Trustees (who can be the people setting up the trust) until they decide to pass assets over to a beneficiary outright.

Discretionary trusts are a particularly attractive way of starting the gifting process without necessarily losing control of the assets as such assets do not form part of a beneficiary’s estate on death and will not pass in accordance with their Will (or the Intestacy Rules). Rather, they will remain in the trust until they are distributed at the discretion of the Trustees. This is particularly good way of making provision for beneficiaries with problems – be they matrimonial, financial or medical.

Another option is a life interest trust where the income produced by the assets in the trust goes to a particular beneficiary but the capital is protected and the person setting up the trust decides where it will ultimately go. Once again, this allows people making gifts to retain control over who will ultimately receive the gifted assets.