Case Study 1 – no will at all
Daphne dies without leaving a will. She has an estate worth £1m. She is married with children – she never bothered making a will, because she believed all her estate would pass to her husband Dennis. That belief is incorrect. Dennis will be entitled to a £250k legacy, Daphne’s personal belongings, and half the remainder of her estate.
The other half of her estate is held on trusts imposed by Parliament, which attempt to balance the interests of Dennis and the children – but it’s a “one size fits all” approach, and quite often it doesn’t work very well. Difficulties can arise, for example, if Dennis needed access to the capital value of the half of the estate held in trust.
Write a will – do not rely on the “intestacy rules” (the rules which apply if you don’t leave a will). Those rules are necessarily designed to deal with the average case, and may not be suitable for your particular family circumstances.
Case Study 2 – Trusts can be very useful
Rachel has been married twice – to Alan, with whom she has 3 children. She divorced Alan some years ago. She has now married Roger. They are in their 60s.
Rachel has an estate of some £900,000, comprising the marital home and a substantial share portfolio. She wants to make provision for Roger, but she also wants to make substantial provision for the 3 children. She is worried about the impact care fees may have on her children’s inheritance.
Make a will which includes a trust. The trust could be structured so that Roger has the right to live in the marital home, and receives the dividends from the share portfolio.
It could also include provisions so that Roger can access the capital value of trust property, if the trustees think that is appropriate. However, the value of the trust’s capital is protected, and will (after Roger’s death) pass to Rachel’s children. The trust’s capital cannot be taken into account by a Local Authority when assessing Roger’s ability to pay for the costs of residential care, should he need it in the future.
Case Study 3 – no power of attorney? No power to do anything…
Stephen is a widower in his 70s. He is generally in good health, but is forgetful from time to time, and finds it less easy than he did to deal with his financial affairs. His two children, Sally and Jim, help him out with his financial affairs – he signs cheques for bills etc, and they send them. They also use his debit card to withdraw cash for him. Ultimately, Stephen becomes unable to give instructions, and Sally and Jim talk to the bank to see if the informal arrangement that they have used for years can be continued. The bank refuses, and stops all transactions on Stephen’s account. In order to continue helping their father, Sally and Jim will need to make an application to the Court of Protection to be appointed as his deputies. The application takes almost a year to deal with, and costs several thousand pounds in legal fees.
Execute a lasting power of attorney. Unfortunately in Stephen’s case, it’s too late to implement it. Stephen should have executed a “lasting power of attorney” before he lost mental capacity, appointing Sally and Jim as his attorneys. If he had done that, then Sally and Jim would have power to continue to help Stephen with his financial affairs even after he has lost mental capacity. The costs of this process are a fraction of the costs involved if it becomes necessary to involve the Court of Protection.
Case study 4: a secure way to make lifetime gifts to young adults
Barry and Marlene have for many years run a successful joinery business. They have amassed considerable cash reserves. Their son Manu is in his early twenties, and is a puppeteer in London. He has found a property he wishes to buy, to live in with his girlfriend Katie. He talks often about asking Katie to marry him – Barry and Marlene have grave doubts about Katie, who they regard as flighty.
Barry and Marlene want to help with a deposit for the property. They are mindful that, if they just buy the property in their names, that will mean any capital gain realised on a subsequent sale of the property will be charged to capital gains tax, even though Manu will use the property as his sole residence.
Because of that, they want Manu to purchase the property, with help from them. However, they worry that, if they make a large cash gift to Manu, and he subsequently marries and then divorces Katie, part of the gift they make to Manu may end up in Katie’s hands.
Barry and Marlene should establish a discretionary trust and make a gift to that trust. They can be the trustees, along with Manu if they wish. They could make a gift of up to £650,000 in this way, without triggering a tax charge. The trust can then buy a proportion of the London property on Manu’s behalf, or lend him the money to do so. Provided the trust is structured correctly, any subsequent sale of the property will be exempt from capital gains tax. The property held by the trustees is not Manu’s property, which will provide significant protection in the event that things go wrong between Manu and Katie in the future.
Case Study 5 – protecting the family home from lifetime costs
Dan’s estate is worth £800,000. A substantial majority of the value is represented by the 16th century Manor House where he lives. He is a widower, and has 3 children and 6 grandchildren. The grandchildren love coming to the Manor House, and Dan is very keen to ensure that he is not forced to sell the Manor House during his lifetime to pay for residential care. The Manor House is a unique property and he wants to be able to pass the asset itself to one or more of the grandchildren.
Dan should consider giving the Manor House to a family trust, and/or give shares in it to his children or grandchildren. The terms of the trust or any co-ownership would need careful consideration, to make sure Dan has appropriate rights to occupy the Manor House for as long as he wants. This type of structure can be highly effective in mitigating the impact of later life costs, but the wider context and terms of any proposed family arrangement need to be carefully considered.