Mitigate Any Potential IHT Liability

Question 1

What are the generic steps for IHT planning

Answer 1

Make a will
Ensure it is kept up to date
Establish LPA
Use exemptions and reliefs
Bequeath assets assets that qualify for tax relief to beneficiaries who would otherwise be charged tax
Bequeath chargeable assets to exempt beneficiaries

Question 2

What are the requirements that must be met for a will to be valid

Answer 2

Teatstor must be over 18
Of sound mind
Under no pressure to make the will
Will must be in writing
Signed by testator
The signature must be witnessed by 2 independent witnesses
Witness must not benefit or be the spouse of testator

Question 3

Why should Kathy make her will as soon as possible

Answer 3

Under rules of intestacy, her assets go to her next of kin- her children
She will not be able to bequeat to grandchildren
Her children may not want to inherit as they may have an IHT liability of their own
Her wishes may not otherwise be carried out
To avoid time and admin associated with laws of intestacy
To minimise IHT payable on estate/ to facilitate IHT planning

Question 4

What are the duties of an executor

Answer 4

Administer deceased affairs
Obtain full details of assets/liabilities and settle debts
Complete IHT return and pay IHT
Apply and obtain probate
Distribute estate in line with will
Complete and income tax or CGT return
Prepare estate accounts

Question 5

What is meant by probate?

Answer 5

Legal and financial process of dealing with the estate of someone who has died
Proves the will is valid and confirming who has authority to administer the estate
Probate is needed in England or Wales when a person who dies with significant property in thier sole name.
If a bank or other financial institution asks for a grant of probate probate will be needed (Alan’s ISA provider)
Executor would have to apply for grant of probate before administering the estate
Grant of probate is a legal document that allows access to bank accounts etc.
It gives legal authority to a named person
Application fee will need to be paid

Question 6

What is the process of probate

Answer 6

Calculate (assets v liabilities)
Verify beneficiaries
Pay IHT
Grant of probate
Liquidate, settle, pay remaining taxes
Prepare accounts
Show and agree
Transfer

Question 7

How can a deed of variation be set up?

Answer 7

Legal document
Signed, dated and witnessed
Deed states what is being varied
Deed states who benefits
Beneficiaries must agree
Be over 18
Of sound mind
Treated as taking place on donors death
Must be affected within 2 years of Alan’s death
No consideration for money or moneys worth
Deed needs to contain statement that variation is for IHT
Money treated as never being in Kathy’s Estate

Question 8

What are the benefits and drawbacks of a deed of varation

Answer 8

Alan’s assets bypass Kathy’s estate, meaning no IHT liabilitie
And not assessed for LTC needs

Involves giving up the capital
Which could be used to suplement pension income
Costs involved in setting up might be detrimental

Question 9

How does an immediate post-death interest trust work

Answer 9

Dead of variation and will trust inserted
IPID is an interest in possession trust written into the will
Places some or all of the assets of 1st to die into IIPT with surviving partner as life tenant and any children grandchildren as remainderman
Surving partner can take income or use assets during lifetime
These would be included in Estate of survivor on death
IPDI are not relevant property trusts, so no periodic or exit charges

Question 10

How does a nil-rate band discretionary trust work

Answer 10

Deed of variation into will trust
Leaves assets up to NRB in discretionary trust
Kathy, children, and grandchildren are potential bebeficiaries along with future grandchildren
Enables partner to access during lifetime
As discretionary assets are not included in estate
Is relevant property trust but no periodic charge if it stays under £325,000
Kathy loses some or all of Alan’s NRB, but if she remarried, she could inherit full new husbands

Question 11

How does a discounted gift trust work?

Answer 11

Take out investment bond
Kathy and children trustees
Assign bond to DGT (discretionary or bare)
Calculate discount (based on income needed and underwriting)
Value for IHT is less than the amount gifted
Upto 5% tax deffered income can be taken
Can be deffered to provide more later
CLT if discretionary, no charge under NRB
PET if bare trust
Out of estate in 7 years

Question 12

What are the benefits and drawbacks of using DGT

Answer 12

Falls out of estate in 7 years
Any growth outside if estate
No immediate charge to discretionary trust if under NRB
No periodic charges if under NRB
Can act as trustee to retain control
Discount reflects good health

Income is fixed from outset
Maximum 5% income
Irrevocable
Lose access to capital
Set up costs

Question 13

How does a loan trust work?

Answer 13

Establish discretionary trust
Kathy trustee
Retain control of capital
Identify beneficiaries
Make capital loan to trustees
Repayment on demand (remains in estste)
No immediate charge to IHT (no transfer has taken place)
Growth outside of estate
Can be held in investment bond
Can take 5% withdrawls over 20 years
Without immediate charge to tax
Trust may suffer exit/periodic charge if over NRB

Question 14

Benefits of using pound cost averagung for gifting

Answer 14

Frees up lump sums for other purposes
Works with gifts out of normal expenditure
Removes funds from estate
Savings discipline
Benefit from volatility as more units bought in falling markets
Avoids market timing risk
Suitable for long-term investing
Contributions can be flexible
Enables higher risk funds to be purchased
Average cost of purchase evens out
Allows drip feeding of lump-sums

Question 15

Explain junior ISAs

Answer 15

Set up by parent (not Kathy)
One for each grandchild
Parent controls investments until child is 16
£100 parental income settlement rule does not apply to Kathy
Can contribute £9000
Loss of control for Kathy
Loss of access to capital
Children gain access at 18
No guarantee grandchildren use funds as Kathy wants

Question 16

Explain collective investments written under trust rather than junior ISAs

Answer 16

Set up collective investment and trust
Kathy trustee nominates the funds
No limit on contributions (undrf normal expenditure rule)
Trustee keeps full control
Funds paid out at trustees’ discretion
Removes from estate for IHT but discretionary trust so CLT over NRB

Question 17

Benefits of making payments into junior pension plan over ISA

Answer 17

20% tax relief on contributions up to £720 (as Kathy is non-earner)
Pension currently IHT free
Long investment horizon
Can use higher risk investments
No access till 57, so there is no squandering at 18
Continue contributing over 18
Kathy can set up and control

Question 18

Benefits of using an investment bond to gift to grandchildren

Answer 18

Wide choice of investments
Growth potential
Can match ATR
Whole segments of bond can be assigned when needed
Not a chargeable event
Tax liability passes to grandchildren
Who use own allowances
Saving 20% tax if Kathy becomes higher rate tax payer
Can be placed in trust
And not included in LTC assessment if not considered a deprivation of assets

Question 19

How can Kathy use a trust structure to help her grandchildren and reduce her IHT

Answer 19

Discretionary trust to retain control
Under NRB to avoid CLT charge
Trustee income tax 45% savings and 38.35% dividends
Have upto half CGT allowance avialable
Grandchildren may claim tax back if income is paid out.

Question 20

What are the advantages of using a discretionary trust to gift to grandchildren

Answer 20

Change beneficiaries if circumstances change
Trustees choose when assets are distributed
And how much
And to whom
May be protectected from divorce and bankruptcy

Question 21

What are the disadvantages of using a discretionary trust to gift to grandchildren

Answer 21

Trustees annual reporting requirements to HMRC for tax
Liable to periodic and exit charges of over nil-rate band
CLT if over NRB

Question 22

What are Kathy’s duties as a trustee

Answer 22

Familise with the trust deed
Ensure provisions are complied with
Exercise care
Invested according to trust provision
Act impartially
Act in the best interest of beneficiaries
Maintain accounts
Provide beneficiaries with information
Monitor investments
Hold title document of the trust property
Obtain investment advice

Question 23

What are Kathy’s specific duties with regsrd to the trust recognition service

Answer 23

Unless specifically excluded, she must register with the TRS
Within 90 days of date , triggers need to register
£5000 penalty if failure to register or not to keep up
No penalty for the fisrt offence
Unless delibrate

Question 24

Why would Kathy need to self-fund her LTC

Answer 24

In excess of upper limit £23,250
Must self fund until assets fall below this
Each £250 above above £14,250 equals £1 per week tarrif income that needs to be paid
Under £14,250 will be fully funded

Question 25

As a self funder, explain the state benefit could Kathy claim?

Answer 25

Attendance allowance
If she pays her own care
Can also claim the first 4 weeks of care home stay if local authority or NHS pay
Lower rate if care is needed during the day or night
Higher rate if need both day and night
Tax-free
Means tested

Question 26

Explain to Kathy the features of an immediate care plan

Answer 26

Type of impaired life annuity
No income tax if paid directly to care provider
If not, it is taxed in the same way as purchased life annuity
Purchased with own funds at the point of needing care
Pays out until death (even in recovery)
Indexation is available to protect against rising care costs
Can guarantee
Inflexible
Eligibility is determined by the inability to perform one or more activities of daily living
Often effected by LPA

Question 27

Explain to Kathy the features of a deffered care plan

Answer 27

Benefits paid after a few months or years
Suits people who have funds to pay for care for a while
But want protection if care continues
Kathy has significant wealth
It’s cheaper than an immediate care plan
Can be used as a backstop
ie 5 years self-fund, then kick in
Given when life expectancy is fairly low for low-cost policy
Provides peace of mind

Question 28

Explain lifetime mortage

Answer 28

Take out an interest only mortgage on home
Lump sum given or drawdown pot to simulate income
Interest can be paid or rolled up
Amount borrowed and built up interest to be paid back on death or moving to LTC facility
The compounding effect on interest can erode the value of the home quickly
Mortage can reduce RNRB on este
Mortage reduces IHT payable on estate as a loan that needs repaying
Inflexible when started

Question 29

Explain home revision plan

Answer 29

Sell part or all of home to home reversion provider
Stays in home as a tenant, either rent-free or for nominal rent.
Higher rent for larger lump sum
Lumpsum or drawdown pot
No interest payable
Provider gets thier share of house on Kathy’s death or move into care facility
No RNRB is available if the whole property is sold
IHT reduced if lump-sum spent
Inflexible once committed to

Question 30

What are the advantages of Kathy using a lifetime mortage?

Answer 30

Remains sole owner of home
Choice of lump-sum or income through drawdown
Interest roll-up means Kathy’s cash flow not affected.
Kathy can remain in home for life
Some lifetime mortgages protect a percentage of property for inheritance purposes
Money released is tax-free
Can be fixed rate to guarantee how much loan will grow over time
Some lifetime mortgages allow loan to be transfered to new property
Can have zero negative equity on interest

Question 31

What are the disadvantages of Kathy using a lifetime mortgage?

Answer 31

Rolled up interest can erode value estate
Interest grows over time and is compounded
Releasing equity could affect Kathy’s eligibility for certain means-tested state benefits depending on how they are used
Taking out a lifetime mortgage may restrict downsize or apply further equity to the house
Lifetime mortgage rates are generally higher than standard residential mortgage rates
Penalties paying mortage early
Equity release could affect children’s IHT
Set up fees, valuation fees, and legal fees

Question 32

What are the advantages of using home reversion

Answer 32

Sell only a portion of the house, preserve inheritance,
No compunding
Lump-sum or drawdown pot avialable
Retains right to live in home for life
Percentage of home sold fixed at outset
Risk of property value falling is shared with provider

Question 33

What are the disadvantages of home reversion?

Answer 33

No longer own part or all of home (Conflicts with Kathy’s sentimental attachment)
Home reversion company pays less than market value
Feeling a portion reduces inheritance for children
Once sold, it can not be reversed, and future equity can not be accessed
Money received could affect means-tested state benefits and LTC
Selling a share in property could limit Kathy’s ability to move in the future
Costs for valuation, legal, and setup.
Miss out on price increases
Permission must be sort to make alterations to house

Question 34

Why should Kathy set up LPA

Answer 34

To allow her finances and decisions on health to be handled in the event, she is unable to handle them herself

Question 35

What are the limitations for LPAs in relation to gifting and IHT

Answer 35

Attorney has limited power to make gifts other than to charity or for customary occasions therefore cannot do much IHT planning without the permission of the court of protection

Question 36

How can Kathy set up an LPA

Answer 36

Complete prescribed form
Must be signed by
Donnor
Attorney
Replacement attorneys
The certificate provider
Certificate provider confirms donnor understands effect, are doing so of own will and there is no fraud
Witnessed by one independent person
Process takes 4-10 weeks
Can be done anytime after LPA is created, even if the donor is mentally capable.
3 week period during which people can object

Question 37

Recommed and justify recomedstions you would make to Kathy for miyigsting IHT

Answer 37

Write a will
To reflect her new circumstances as a widow and wishes regarding estate

Execute deed of variation
Cresting a will trust in Alan’s will

If IPDI, Kathy as life tenant, children and grandchildren as remainderman
She has access to funds during her lifetime, children and grandchildren inherit on death
Funds in her estate on death but no periodic or exit charges
Alan’s NRB still avialable for estate

If DT, children, and grandchildren as as beneficiaries
Funds outside estate on death
No periodic or exit charge under NRB
Growth on assets outside Kathy’s estate
Alan’s NRB not available on Kathy’s death, but could inherit a new spouse full NRB

If afordable, set up regular savings plan for grandchildren
Fund from income so exempt under normal expenditure rule
Junior ISA if tax efficiency more important than control
Or OEIC/collective trust if prefer control
Gradually reduce state over time

SL WOL policy under trust of executors for sum assured on Kathy’s death
Provide any remaining IHT liability

Establish LPA
To ensure decisions can be made for her in event that she is unable to do so herself

Question 38

Detail and re amend a life policy to cover any IHT remaining on Kathy’s estate

Answer 38

whole of life
Single life, Kathy
For IHT liability
until Kathy’s Death
level term life assurance that pays out lump sum on death
index to keep up with inflation
Guaranteed premiums to remain affordable
Waiver of premiums to ensure remains paid if unable to do so
In trust with executors as trustees to avoid probate and keep out of estate
Premiums covered by annual exemption or normal expenditure
To not increase IHT
Provides peace of mind IHT liability will be covered on death

Question 39

Drawbacks of WOL for IHT

Answer 39

Might not be enough
Estate may increase quicker than inflation
Estste may decrease, leading to over-insurance
IHT still needs to be paid
Reduces disposable income in retirement
Reviewable premiums may become unaffordable

Question 40

What 8 factors would you cover at a review for Kathy’s IHT planning

Answer 40

C
Increase or decrease in size of estate
Change in health
Change in objective
New marriage or relationship
New grandchildren
Change in ATR or capacity for loss
Any change in expenditure leading to reduction in standard of living
Any gifts made
We’re DOV/trusts created
Were wills/LPA set up

L
Changes in economic conditions
Changes in legislation regarding or taxation that would affect this goal

C
Cost relating to any IHT products used
Any new and more suitable products to use