For many couples the first choice of action when writing a Will is to leave everything to each other when one of them dies. Sometimes this is not the best option!
Children by a previous relationship: I’m sure that many of you have heard horror stories. The survivor falls out with her stepchildren and rewrites the Will in her own family’s favour. Or, he remarries and unintentionally cancels his previous Will by entering in to the new marriage. Too in love to rewrite his Will, the new wife inherits all or a large part of his estate. The solution: Via a trust, leave the partner a lifetime interest only, with the children as final beneficiaries. This way a least a large percentage of the estate is protected for the children.
Wanting flexibility of distribution: Very few people can say with certainty what they will be worth when they die. Clients often want to primarily look after the surviving partner, but want flexibility to look after children and grandchildren. The Solution: Give the survivor a lifetime interest via a trust, with either the survivor or the trustees having the power to pass assets to children or grandchildren.
Wanting the maximum amount of flexibility for Inheritance Tax Planning: With wealth fluctuating and children’s wealth increasing, there is very often a need for the maximum amount of flexibility, with minimal hassle and cost when someone dies. The Solution: By leaving the survivor a lifetime interest via a trust, there is no Inheritance Tax due to the spouse exemption (married couples and civil partners only). The trust however has the power to pass assets to other people within 2 years. By using this method rather than the spouse making a gift, the spouse does not have to survive the gift by 7 years for it to be free of tax. Hence, the best distribution for tax can be made when all the facts are known.
Not trusting the partner: “If I leave everything to her, she will take some gigolo on a world cruise.” “If I leave everything to him, he will spend it all on some young floozy”. The Solution: Only leave the survivor a lifetime interest via a trust. That way the capital is protected for the children.
Wanting your children to inherit rather than the local authority: If the survivor needs to go into care, virtually all the wealth you have created is likely to be used to pay care fees. The solution: Protect half the value of the family home (which for most people is their major asset), by leaving the partner a lifetime interest, with the children as the final beneficiaries. Plus in some instances where there are other assets, leave the partner a lifetime interest in them via a trust. If the owners are in good health, it is also possible to protect all the value of the property from care fees using a lifetime trust.
Protecting the tax relief available to businesses: If a business is eligible for Business Property Relief then regardless of its value, it passes free of Inheritance Tax. If it goes to the widow and she sells it, then the proceeds of the sale are in her estate. For example, if there is £1,000,000 still in her bank account, there will be £400,000 of tax to pay when she dies. The solution: Leave the business to a trust. If the widow needs the money she can have it, or it can be given to children or grandchildren free of tax. Any money in the trust when the widow dies will still remain free of tax when she dies. So with a little bit of planning, a very large saving for the next generation can be achieved.