Estate Planning Guide

Still, there are potential issues – what if the first beneficiary exhausts the fund and has insufficient assets to repay the loan causing it to be written off? This could be avoided by limiting the powers of the trustees so that they can only advance the growth to the first beneficiary with the capital being retained for the next in line, in an interest in possession trust. It is clear that having a current and properly drafted expression of wishes letter is important, particularly as a standard form provided by a pension provider may not cover these issues satisfactorily. The situation in the event of death pre and post the age of 75 is standard. If death is post 75 and payment is made to a non-individual (e.g. a trust), the lump sum death benefits are taxed at 45% rather than at the recipient’s marginal rate, although this may be off- settable and the individual beneficiary may be able to claim relief for the 45% tax. Also, the normal periodic and exit charges may apply to the trust, where the value is above the available NRB. 27 ESTATE PLANNING OPTIONS Example spousal bypass trust Spousal Bypass Trusts Spousal Bypass Trusts (SBT) ensure money stays outside the estate of the intended beneficiary, so remain available for future generations. The trust is a discretionary trust which is set up by the member/pension holder to receive pension death benefits. The trustees of the SBT will usually then distribute the funds in line with the member’s instructions. The trustees can allow the spouse access to the assets of the trust by loaning them to the beneficiary for repayment on death. In this way, the trust can be used as a ‘drawdown fund’ but on death the funds are returned to the trust to be passed on to the successor. Despite new pension freedoms, SBTs may still be useful where the original member wants to control the ongoing transfer of their pension funds, so that on each subsequent death of a beneficiary, they go to the original members line of succession, rather than these funds passing from their initial beneficiary to his or her beneficiaries. The recent legislation that confirmed payment of tax on entry to a bypass trust is reclaimable by a subsequent beneficiary of the trust, may make SBTs more attractive. Omission to act This concerns deliberate omissions to exercise a right (where the wealth of another individual is increased as a result). In some situations, this is considered by HMRC to be a transfer of value (particularly if the member is in ill health), leading to a charge to IHT. The underlying principle is that where the member is likely to survive to take their retirement benefits, then the payments are for their benefit and so are not transfers of value. It is accepted practice that contributions made more than two years prior to death are not transfers of value. HMRC have confirmed that the nomination of a dependant, nominee or successor by a pension scheme member or beneficiary will not cause them to be treated as making a transfer of value for IHT purposes on death, as long as: • The member/beneficiary does not have power under the scheme’s rules to irrevocably choose the beneficiary who should be entitled to death benefits on his/ her death and • The scheme trustee or administrator has a discretionary power to choose who should receive death benefits. Asset decumulation Given the beneficial IHT treatment of pensions and changes to legislation in 2011, IHT planning can now take the form of financing all living expenses from non-pension assets until at least age 75. These assets are ‘in the estate’ so using them up would potentially lessen any future IHT bill. This may be a sensible approach since it is now possible to: • Draw on non-pension income and capital to fund living costs until age 75 and leave pension funds untouched. Taxable assets will be diminished. The pension funds will not form part of the client’s IHT estate • Post age 75, conventional IHT planning can be used. Consideration can be given to using flexi-access drawdown to create surplus income from which exempt gifts could be made, taking advantage of the ‘normal expenditure out of’ exemption. • Any pension commencement lump sum (tax free cash) can be invested to meet the client’s post 75 needs and avoid the post 75 marginal IT rate of the recipient that would apply on death. John sets up a pilot trust He leaves a letter of wishes for the trustees in which his wife is named as a potential beneficiary of the trust John’s letter of wishes instructs the trustees that his wife can take interest free loans from the trust John dies John leaves his pension death benefits to the trust. As a discretionary trust, the trustees have discretion over the trust’s assets. John’s wife dies having repaid any loans Assets made available to son The trustees make the assets of the trust available to John’s son from his first marriage, as per his letter of wishes If gifts are made out of surplus net income and they meet the strict criteria outlined below, they will qualify as being exempt. They do not even impact on the £3,000 annual IHT exemption. Exemption Criteria: The gifts must have: The ‘normal expenditure from income’ exemption formed part of the deceased’s usual expenditure (when gifts were made, they were part of the settled pattern of expenditure adopted by the donor) been made out of income (NOT CAPITAL), and left the deceased with sufficient income to maintain their normal standard of living (Gifts out of income will not qualify for exemption if the transferor had to resort to capital to meet normal living expenses) Uncertainty over future financial needs and worry about outliving your wealth should not stop estate planning. The right BR solution can empower individuals to take action by allowing them to retain control of their money, while also fulfilling their tax-planning needs. SIMON RUTHERS, DIRECTOR, BUSINESS DEVELOPMENT, OXFORD CAPITAL