Topic 8 - Taxation & Legal Issues Flashcards
Estate Planning
First step is to create Will while minimising liability of IHT and maximising value of assets left to beneficiaries.
Also need to consider funding long-term care in a way that does not erode the value of the individual’s estate.
Most nursing home cost at least £500 per week or more.
Estate comprises all assets, i.e money in bank, investment,s property, belongings.
On death advisers will often need death certificate to deal with policies. If a copy is given this should be certified as a true copy.
Estate is administered by:
Executors - Where valid will is left or died testate. Gain grant of probate to administer estate
Administrators - Where no valid will or died intestate. Will obtain letters of administration. Or Letters of Administration Cum Testamento Annexo (with will annexed) obtained where will was left but had defect so grant of probate could not be granted.
What are the requirements of a valid will?
Failure to make a will can delay payment of estate for years when beneficiaries may need access to assets.
If they died testate, court grants probate if executors willing to act. This is signed, sealed by registrar or court and includes copy of the will.
A will must be in writing, witnessed and signed but not dated although best practice. Person making the will must be mentally capable.
In case of elderly or infirm testators, correct practice for doctor to attend execution of will and make report on the testators mental competence. In addition, good to have a solicitor experienced in these matters also present.
A will can be revoked or amended at any stage, provided that the testator is still competent, and is automatically revoked by the making of a subsequent will.
What grounds may a will be challenged?
What is normally the first step in disputing a will?
Validity of a Will can be challenged if:
- Mental capacity of testator
- Use of undue influence
- Invalid procedure being used drafting a Will
- Lack of knowledge of true content of Will
- Deliberate Fraud
- If failed to make adequate provision for surviving family members.
However an eccentric or malicious will is not invalid provided testator knew what they were doing.
To dispute will, solicitor will request Larke v Nugus statement of which contents are a useful summary of possible grounds for challenge.
When may a Statutory Will be used?
Who can make an application for a statutory Will?
Statutory wills used if:
- Someone becomes mentally incapable who hasn’t made Will
- A will was made but some doubt over whether they were mentally capable when they made it.
- Suspicion they made will under ‘Undue influence’
- Have made a will but since became mentally incapable and events happened that means original Will needs amending.
Such cases, court of protection can execute a will or codicil (legal amendement) to a will on their behalf. Person known as a patient
This is known as a statutory will. Application can be made by number of people such as:
- Attorney operating under POA
- Deputy for patient
- Someone who applied for a deputy to be appointed if appointment has not yet been made
- Soneone under intestacy provision or existing known will may become entitled to patient’s property or an interest in it.
- Someone patient might be expected to provide for if they were not mentally incapcable
- Anyone else the Official Solicitor authorises to make an application.
What are the laws of Intestacy?
Joint Assets pass to survivor.
Deceased spouse or civil partner survives and no children/grandchildren then spouse is sole beneficiary.
If children/grandchildren then spouse recieves £250k, personal chattels, and 50% of remainder. Children/grandchildren take 50% at 18.
The £250k is reviewed every 5 years and increased in line with CPI.
If no spouse but children/grandchilren, they get 100%.
If no spouse or children then deceased parents
If no parents then goes to deceased’s ‘whole blood’ brothers and sisters.
If no siblings then remoter relatives such as half brothers, gradparents, uncles and aunts etc.
If no relatives then passes to the crown.
What is a Deed of Variation?
What are the criterion for a valid deed of variation?
Sometimes those who inherits under a will want to change it.
Perhaps to make it more tax efficient or have someone else to benefit.
Criteria for a valid Deed of variation:
- Relate to a valid will, to an intestate or estate or a trust
- Signed by all parties who would have benefitted and 18 or over and of sound mind
- Executed within 2 years of death
- Not be made for any consideration
- Registered within 6 months of signing
What are two ways of owning property?
How does these affect eligibility for local authority financial assessments?
Joint Tenancy
100% of interest in each of the tenants at same time. Right of survivorship means the whole property passes to other on death.
Tenants in Common
Own fixed and distinct shares in land or proeprty so on death interest passes in line with their will or intestacy.
Consequences
Local authority will normally make no disctinction of the two when carrying out financial assessments and if spouse is living in property then this won’t be counted.
However, Local authorities, HMRC etc may be interested in way proeprty was held shortly before assessment was requested i.e from sole to joint names and ensure there has been no intentional ‘deprivation of assets’.
IHT Mitigation
Lump sum contracts
Effective for care funding planning while mitigating IHT. I.e a lump sum premium for immediate-care annuity will reduced value of estate by value of the premium.
Application of Trusts
Where product with residual value is involved i.e LTC bond, these can be written in trust. Will fall outside estate but will be treated as a PET if absolute trust or CLT if discretionary trust.
Other trusts can be used such as:
- gift and loan trusts;
- spousal by-pass trusts; and
- discounted gift trusts.
Gift & Loan Trusts
- Uses investments as way of reducing IHT liability.
- Normally makes small gift, typically annual gift exemption £3k
- Then further payment £100k but as interest free loan. As it’s a loan it is not a transfer for IHT purposes.
- Trustees use gift and loan to arrange investments bonds, usually on lives of settlor and beneficiaries but owned by trustees.
- Growth on bond outside estate. Original capital inside estate.
- Bondholders can withdraw 5% of original investment each year without triggering tax charge. So this is used to make partial loan repayment giving them annual income from intial capital.
- Must spend payments otherwise it is just sat their in their estate.
- On death, any outstanding loan forms their estate as trust needs to repay debt.
- Main benefit is estate is reduced and growth is outside of estate but still ahve access to capital through the repayments.
Spousal Bypass Trust
- Aimed at occupational schemes that pay out death-in-service benefit.
- Exempt from IHT but if paid to spouse which is normal, transfer would be exempt anyway but will form part of spouse’s estate on death.
- Therefore benefits paid into by=pass trust.
- The trust is discretionary with request spouse can benefit until their death at which point the proceeds go to the ultimate beneficiaries.
- This type of trust is set up in the individual’s lifetime as a ‘pilot trust’ with a ‘de minimis’ gift of £10 in readiness to receive the death-in-service benefit. Once in the trust, the trustees can invest the monies as they see fit in accordance with the trust deed.
Discounted Gift Trust
- Settlor makes investment into bond gifted into a trust.
- Settlor specifies income within 5% allowanced ‘retained rights’
- Life expectancy is calculated to work out expected payments until death. This is the discount and deducted from value of the gift to the trust.
- Remainder will be a PET for IHT if absolute trust or CLT if discretionary trust.
- If the settlor dies after seven years, the initial investment will be outside the estate, along with any growth of the bond, and no IHT will be payable.
- On the settlor’s death before seven years, some tax will be payable.
- Main advantage - estate is immediately reduced by discount and over time all of gift outside of estate. Retain access to capital and growth remains outside of estate.
- Disadavantage is that withdrawals are fixed. If settlor lives for 20+ years assuming 5% withdrawals then withdrawals will be chargeable event.
