Aim 4 - to mitigate IHT whilst maximising the value of the estate passed to Anna on second death Flashcards
Identify the additional information you would need to discuss with Jim and Sandra in order to advise them on mitigating IHT whilst maximising the value of the estate passed to Anna on second death
- details of all gifts made in the last 7 years
- willingness/ability to make larger gifts/PETs
- willingness to use trusts
- willingness to use their disposal income/regular gifts out of income exemption
- why is the house owned as tenants in common?
- are you prepared to give up access to capital in return for income? (DGT)
- are you willing to fund for any life cover to cover residual liability?
- budget for a suitable life policy
Detail and justify the recommendations you would make to mitigate IHT due on second death, whilst maximising the value of the estate passed to Anna
- place lump sum death benefits of existing pensions, in spousal bypass trust/discretionary trust, which allows loans to spouse, whilst remaining outside of the surviving spouse’s estate
- keep using annual gift exemptions
- make gifts out of income/normal expenditure
- make PETs/CLTs
- set up a joint life, 2nd death whole of life policy, written under discretionary trust
- this is to cover the remaining IHT liability
- policy to include indexing
- to cover increases in the estate
Explain what a discounted gift trust is and how they can invest the proceeds of their house sale to help secure an income in retirement, provide funds for their children’s university education as well as mitigate their IHT liability
- a gift is made into trust - either a discretionary trust or a bare trust
- if a bare trust is used the gift is a PET and if discretionary trust is used the gift is a CLT
- gift is discounted according to underwriting principles and the entitlement to regular payments
- the discount is an immediate reduction to the estate
- the remaining value of the gift is in their estate until 7 years have elapsed
- the trustees invest their monies in an investment bond
- Jim and Sandra have a right to an income for the rest of their lives (or until the fund runs out)
- trustees use the 5% withdrawal facility to provide them with this income
- as long as this is kept within the 5% there are no income tax consequences
- the bond is held within the trust for the ultimate benefit of the beneficiaries (this could be Anna and/or the grandchildren)
- growth on the bond therefore grows outside the estate of Jim and Sandra
- provides a secure income for life
- Jim and Sandra must appreciate that they do not have any access to the capital
State benefits of Jim and Sandra settling money into a DGT to mitigate their IHT liability
- outside estate after 7 years for IHT purposes
- immediate discount on value of gift
- both in good health so discount should be larger than if they weren’t
- they are in good health and likely to survive 7 years
- growth immediately outside estate
- provides regular income in retirement/5% withdrawal facility
- can also provide funds for university costs/satisfies objectives
- retain control as trustees
- Anna/grandchildren can inherit residual fund
Drawbacks of DGT?
- loss of capital/access
- cost/administration
- cannot vary ‘income’
Sandra and Jim do not want to lose access to capital; explain how a loan trust scheme may provide them with a long term IHT planning scheme and provide them with an ‘income’
- a loan is made to trustees
- the trustees invest in a bond
- the growth on the bond is outside of the estate
- the trustees use the 5%s to provide an income
- any outstanding loan is always in the estate
- if 5% was taken each year it would take 20 years for the full IHT effect
- Jim and Sandra can demand the loan is repaid at any time
- this may give them peace of mind that they can access their capital if necessary
Recommend and justify when Jim and Sandra should set up a life assurance policy to cover their current and future IHT liability
- WOL/joint life second death in trust
- IHT liability falls on second death
- spousal exemption on first death
- benefit outside of the estate/no probate/paid quickly
- sum assured to cover the current IHT liability
- keeps control of assets
- indexed to keep pace with rising prices of assets
- guaranteed insurability options
- increasing cover available
- no further underwriting/health may deteriorate/currently in good health
- premiums out of normal expenditure
- premiums can be guaranteed for ongoing affordability
What are the potential drawbacks of setting up a life assurance policy
- cover may not be enough
- estate may increase quicker than inflation
- estate may decrease/over insured
- IHT is still payable
- could reduced disposable income in retirement
- if reviewable premiums chosen may become unaffordable in future
Explain to Jim and Sandra the implications for their residence nil rate bands of them downsizing
- provisions allow for any RNRB to be reinstated where downsizing
- as long as other assets are closely inherited/ the downsizing addition
- the former home must have qualified for the RNRB if they’d kept it until death
- there is no automatic entitlement
- the deceased personal legal representatives need to make the claim
- the claim time limit is 2 years of the end of the month that the person dies
Recommend and justify the actions that could be taken to ensure that pension funds ultimately pass to Anna in an IHT efficient manner whilst providing each other with access
- set up a spousal bypass trust/discretionary trust
- each a trustee
- spousal bypass trust receives pension fund
- surviver has access/can take income or capital or take a loan
- loan does not have to be repaid until death
- repayment of loan reduces estate
Identify the steps that must be taken to wind up Jim and Sandra’s estate and explain how their assets will be treated IHT tax purposes on second death
- estate would be valued (on second death)
- two NRB’s available
- assets passed to spouse under will/no IHT on first death
- value all debts/liabilities/tax bill/identify all gifts in last 7 years
- send death certificate/notify all relevant parties/banks etc
- apply for probate/use transferable NRB/RNRB/IHT forms
- RNRB as home passes to Anna
- IHT must be paid before estate can be distributed
- net estate passes to Anna
- any WOL policy set up in trust not part of estate/can be used to pay IHT due
- pensions are not subject to IHT
- savings and investments liable to IHT/in estate
- state pension/defined benefit pension - stops on death with no value
