In my article about Inheritance Tax and the Nil Rate Band we talked about how NRB (nil rate band) and RNRB (residence nil rate band) affect how much tax the government requires after your estate is totalled.
I suspect that for most people, NRB and RNRB may not present an immediate risk, however, what happens to your wealth after you pass? What are your family dynamics like? How will this affect what kind of will you should have?
There is an increase in:
- people trying to avoid increasing levels of taxation
- levels of unmarried couples living together (cohabiting)
- adoptions, care fees, expats, foreign owned property etc.
We now have to ask ourselves whether a basic will is really sufficient or do we need to implement a simple strategy that offers full flexibility when you pass?
Often, if you have a home that has value in it which you want to protect after you have passed, then a discretionary trust within your will can be a great option. You should only ever take out a trust after receiving some bespoke advice, but in essence, the protections of a discretionary trust really can make a difference between your beneficiaries losing the money or it being kept safe for generations to come.
A normal will leaves whatever you have left to people in the same way as when you buy someone a present. Under common law, a gift given to someone becomes their property and is now part of their estate. So if you have a will or are thinking of getting one, then great!
However, there are a few risks that we must think about when leaving gifts to a beneficiary:
- If someone you have left a gift to is on means tested benefits, could their benefits now be lost as they have come into money?
- If they are getting divorced, could half or more of the money be lost to their now ex-spouse as part of a divorce settlement?
- Could the inheritance you leave them, push them over the NRB meaning that another 40% IHT charge will have to be paid when they die?
- If you leave everything to your spouse/partner and they remarry, on their death everything you left your spouse/partner could now go to the new spouse and your children could miss out on everything. We call this sideways disinheritance.
- What if a beneficiary enters care and the money is taken from them to pay for their care fees?
- What if a beneficiary comes bankrupt and the inheritance is taken by creditors?
Risks and beneficiaries
There are so many risks that you may not have been aware of, but a discretionary trust can offer protection against all of the above. The only difference is that instead of leaving it to an individual on death, it goes to trustees who manage the asset for a list of potential beneficiaries. Now, because they are just potential beneficiaries and not absolute beneficiaries, it does not form part of their official estate so a degree of protection against all of the above comes into play.
Gone are the days of trusts being just for the wealthy. Many of us are now property owners, with tens of thousands or hundreds of thousands of pounds in equity ready to be passed on to our loved ones. Why wouldn’t you want to protect your hard earned asset from the threats above?
While there are some people who are happy to face that threat or find it easier to not think about it, if you are going to the effort of getting a will, do ask your chosen professional about discretionary trusts and whether one is suitable for your needs. I work with Bequest and we believe that it shouldn’t cost an arm and a leg to secure your loved ones future. So if you need some advice or help, feel free to email me at email@example.com.
James Pearson - Estate Planning Director - JPEP