At Menzies, we are no strangers to discussing estate planning with our clients and listening to their concerns surrounding the passing of wealth to the next generation.
When passing assets down to the next generation, no matter how big or small the amount you are passing onto beneficiaries, you are losing control over the eventual location of the asset. Then there are shifting dynamics of family life that understandably play a significant role in the decision-making process for both lifetime and will planning.
A key concern with outright gifting is the unpredictability of future events. For example, if your child gets divorced, your family wealth could be at risk of being shared with an ex-partner. When passing cash, or assets onto future generations, they could spend your money recklessly, particularly if they inherit the money too young. What if another grandchild arrives unexpectedly after you’ve already parted ways with a lump sum, or gifted a property to your other grandchildren?
Trusts are a very valuable tool in estate planning and a solution to issues like the above. Whilst there are subtle differences between different types of trusts, their benefits are similar.
The importance of control and flexibility in estate planning
A key benefit of using a trust is that it allows you to maintain a degree of control over the asset to ensure that it is managed according to your wishes. During your lifetime, you can act as trustee of the trust to establish how you would like the trust to function.
If a discretionary trust is used, trustees can decide who benefits from the trust and when. This allows flexibility whilst also protecting the assets.
Protecting family wealth from divorce
The complexities of divorce proceedings and the division of marital assets remains well-known. A trust can help you protect the line of succession should you become concerned about surrendering control over an asset to an unintended recipient.
While the courts would assess each case in isolation, assets held in trusts are legally owned by the trustees, so are typically viewed as separate from marital property.
Aligning your estate planning with your wishes
How your wealth and assets are dealt with can be outlined in a letter of wishes. So, whether your wish is to help your grandchildren purchase their first properties, or to support them with a lifetime income, a letter of wishes will enable your trustees to have a clear understanding of your intentions so that they can act accordingly.
It is often tax efficient to grow the capital of the trust whilst using trust income for your recipients’ benefit. Especially for trusts with beneficiaries who are lower rate taxpayers, such as young children. This is often seen when grandparents settle assets for their grandchildren and income is used for school or university fees.
As children grow older, you may wish to grant them access to some trust income, or trust capital. However, trustees can restrict this at their discretion to protect the assets from young or vulnerable beneficiaries, preventing them from spending the entire fund impulsively.
Financial security for a surviving partner
Using trusts in will planning can provide assurance that the wealth is protected and will be distributed to your chosen beneficiaries. On the first death of a will trust, whether discretionary or interest in possession, will mean that you are protecting your assets. This can protect assets from a forced sale to cover care expenses, or in the event of re-marriage.
It is important to remember that re-marriage automatically invalidates any existing will. So in the case of re-marriage, your widow may die in testate, in which case these rules would pass assets in favour their new spouse over your children. If a new will is written, the surviving spouse can divide assets however they decide if they have inherited the assets outright.
The best way to protect assets is to leave them to a trust in your will. This allows you to dictate the terms and ensure they pass on in line with your wishes. A will trust can still give the surviving partner a right to benefit from the assets during their lifetime, or for a set period. This can mean that they can remain in the family home, or receive investment income, while ensuring that the underlying asset ultimately passes to your chosen beneficiaries on the second death, or in the event of re-marriage.
Supporting dependent relatives
Trusts can provide peace of mind by easing concerns about the livelihood of a family member after your death. If you have a dependent family member, a trust for a vulnerable person offers a solution.
If the beneficiary meets certain conditions, such as having a disability, the trust qualifies for special tax treatments and protections, including higher capital gains allowances. This approach to family succession planning is particularly reassuring, especially if the beneficiary is likely to need additional support throughout their lifetime.
Avoid family conflicts through trusts
Family conflicts can often arise. Trusts can help avoid disputes, particularly if you are passing assets to family members. Using a trust to hold property means that you can assign a trustee who is a neutral person to facilitate the key decisions regarding the assets held by the trust.
Balancing the costs and benefits of trusts
While trusts offer significant benefits, provide security and peace of mind, trusts do have initial and ongoing costs. These include professional fees to set up and maintain the trust, as well as the 10-year anniversary inheritance tax charges. It is important to consider these factors so that you only enter into a trust arrangement where the benefits of the trust outweigh the ongoing charges and administration. Typically, this is a small price to pay for the peace of mind and added protection they offer for both you and your wider family.
Professional guidance for effective estate planning
Creating an estate plan with the guidance of a professional adviser ensures you make well-informed decisions that align with your estate goals. It also provides you with a clearer understanding of your personal financial future particularly if you do decide to make significant lifetime gifts.
At Menzies, our experienced team can help you navigate these difficult decisions and can review your overall inheritance tax position to create an overall wealth plan, as well as a plan for your will to ensure that your wealth ultimately passes on to your chosen beneficiaries in a tax efficient manner. Please reach out if you would like to have an initial conversation to see how we can help you.
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