Income Withdrawal and Powers of Attorney

The recent stockmarket volatility after the referendum has focused the importance of active management of investments and pension funds to maximise returns and prevent losses.

Annuities rates are now very low and the trend is downwards. This means that many more retirees are creating Income Withdrawal accounts with their pension funds.

However in order to manage your investments and pension income it is a good idea to have good brains at work and that is not possible if you have lost mental capacity in retirement. Unlikely as you may think now, do you know that you will never be affected by stroke or dementia?

To avoid the problem you should consider setting up a Lasting Power of Attorney now for your property and affairs if you haven’t already done so. You can appoint in the document a person (known as an attorney) to act for you, and you can choose someone with investment expertise or your trusted adviser. Or more simply when you draw up the document you can express your wish that with regard to any Income Withdrawal accounts that your chosen attorneys review your pension fund each year with your financial adviser.

How do we know this is a problem?

Because we have seen situations occuring where there is no Lasting Power of Attorney in place. The alternative which is an application to the Court of Protection is expensive and time consuming and you will not get a chance to choose the attorneys who act for you. We would recommend you take control and act now.

Executors – Who to choose?

Solicitors tend to make strong arguments to have professional executors so the Will is executed professionally. On the other hand Will writers tend to allow the client to choose family members as executors and only choose professionals if no one comes to mind.

So who’s right?

Well I would argue that both are right. The Will writers focus on reducing costs to the testator. Professional executors can be expensive charging a percentage of the estate, bank trust companies often charge in this way. Solicitors, once named in the Will as executors are reluctant to step down after the testator’s death if requested to do so by the beneficiaries. Some even charge a fee for doing so or simply refuse to be removed. But why would you want to remove them? Solicitors often charge on an hourly basis for this work and it is deducted from the testator’s estate, so beneficiaries if they have the time and inclination to act themselves may request this. If the estate is not being dealt with promptly this can be the source of disputes hence a request to remove solicitors as executors.

On the positive side professional executors can avoid the following problems

  • Dispute between lay executors delaying matters potentially creating a stalemate or worse still a family rift
  • Executors not fully understanding their responsibilities under the various Trustee Acts
  • Not setting up trusts, or understanding the role of trustees
  • Not understanding the required probate and Inheritance Tax forms
  • The executor(s) may fall ill or loose mental capacity
  • Liability can fall on the executors if they act negligently or if they submit a fraudulent Inheritance Tax return to HMRC they can be imprisoned.

So what are the advantages of having family as executors?

The executors can in fact be the beneficiaries. So a classic example is Mr & Mrs Jones with two adult children choosing the two children as their executors and also being the beneficiaries.

The children will have a keen interest in sorting out the estate quickly and efficiently and if they have some skills in organisation and administration that is an advantage. Because they are likely to know all the beneficiaries it is generally easier to locate them.

Of course, lay executors such as these adult children can seek the advice of professionals from outset or when they find themselves out of their depth and can hand over to a professional executor or accept their help on an ad hoc basis with them charging accordingly. But note they can shop around for the best professional in terms of costs and skills.

Mix and match. There is nothing to stop a testator choosing BOTH family and a professional executor to act as executors. This may solve some of the problems mentioned above, but it will come at a cost as the professional has to be paid and doesn’t prevent executors being in dispute with each other.

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Inheritance Tax planning after loss of mental capacity

Many advisers ask this question, and the truth is that planning is severely restricted but sometimes possible.

 

Large lifetime gifts

Firstly the advise6498081_sr must consider the position of the person who has lost capacity, let’s call them P. Do they have a Power of Attorney in place? If not, has anyone been appointed as a deputy by the Court of Protection? To what extent have they lost mental capacity?

For example P may still have the mental capacity to understand and approve a simple lifetime gift, but not have the mental capacity to understand and approve a sophisticated investment such as a Discounted Gift Trust. As such, it would be prudent to request and record a mental capacity test prepared by a professional at the point of making such a gift. Of course, P could fail the test.

Hereafter we will assume that P does not have any remaining mental capacity and that they have an appointed attorney under a Lasting Power of Attorney for property and affairs.

The attorney must act in Ps best interests. So it would appear to be logical that there is no way that gifting monies or assets to others could possibly be in P’s best interests. However if an attorney or deputy want to present a case to make a lifetime gift or a specific investment for Inheritance Tax planning they can ask the permission of the Court of Protection.

The Court of Protection will take into account the following:

  • The information presented to them
  • How much the gift is in relation to the size of their estate
  • Will there be enough financial resources remaining for P for the rest of their life?
  • Will the gift change the treatment of beneficiaries bearing in mind the contents of the last Will?
  • Had P done any Inheritance Tax planning before loss of mental capacity?

The Court may agree that making a gift is in P’s best interests, bending the “best interest” principle somewhat. However there may be situations where it is not worth making an application to the Court, for example where P’s wealth has been derived from a successful personal injury payment which was meant to provide for them only.

What if the attorneys just go ahead and make lifetime gifts?

In serious cases this may be regarded as fraud and a matter for the police. Alternatively the attorneys may be asked to pay the money back personally, or at least have their appointment as an attorney revoked. Not good options if the gift is likely to be contentious.

 

How can an attorney create, change, or update P’s Will for Inheritance Tax planning?38697289_s

Answer, they can’t. The attorney cannot create, change, or update a Will. However once again an application can be made to the Court of Protection for what is known as a Statutory Will. This can be a new Will that can take advantage of IHT planning.

The Court takes this very seriously and is likely to involve the Official Solicitor. The fullest information should be presented similar to the bullet points above for lifetime gifts. However anyone who may be disadvantaged by such a Statutory Will that would benefit under the previous Will or intestacy can object to the application.

Incidentally all these actions involve expense, and you should consider the legal costs and where the burden of the costs will fall. In some cases however it will definitely be worth the trouble.

So in conclusion, the moral of the story is to ensure that elderly clients act while they have their full mental capacity and deal with these issues as urgent before it becomes impossible.

 

Radical changes to Inheritance Tax-The Family Home

The summer Budget introduced a new Family home allowance to start in April 2017.

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Key points

  • The new allowance that is in addition to the existing nil rate band will be phased in from 2017 eventually giving an extra £175,000 allowance to those that qualify.
  • The inheritors must be your children, step-children, or their descendants. Included also are adopted children (as you would expect) and foster children.
  • Wealthier multi-millionaires may not benefit as the allowance is reduced if the net estate (after qualifying liabilities are deducted) is over £2 million. It is reduced by £1 for every £2 that the estate exceeds £2 million. So if an individual had a net estate of say £2.5 million they would not qualify.

 

So here is how it looks for each person:

Existing nil rate band allowance £325,000. (This is transferable between couples.)

From 6th April 2017 additional allowance will be £100,000.

From 6th April 2018 additional allowance will be £125,000.

From 6th April 2019 additional allowance will be £150,000.

From 6th April 2020 additional allowance will be £175,000.

Thereafter it should increase in line with the Consumer Price Index.

So using simple maths you can see that the total allowance for a couple will reach £1 million from 6th April 2020.

 

So what qualifies as your home or the “qualifying residential interest”?

  1. Your interest in a home that has been lived in as your main residence.
  2. If you have more than one residence then your executors or personal representatives can elect which one is to qualify.
  3. A “Buy to Let” property for example would not qualify unless it had been your main residence at some time.
  4. There are various other minor provisions for those living away from home in job-related living accommodation.

 

Example

In 2020, Dave & Samantha jointly owned a home worth £900,000 and had two grown up children. Dave died in May 2020 and he willed everything to Samantha. Because he had not gifted monies in his lifetime or in his Will, he had the full nil rate band (NRB) of £325,000. In addition he has the new residence nil rate band (RNRB) of £175,000. However there is no Inheritance tax to pay at this time because everything has passed to Samantha.

Sadly Samantha died soon after. Happily for the children Dave’s NRB and the newRNRB are transferable to Samantha’s estate. So in total the allowance was £1 million.

Samantha has spent all the remaining family cash on nursing care. Despite the fact that she died in a nursing home and had not lived at home for 6 months, the full allowance was available.

When Samantha’s estate was concluded HMRC collected no Inheritance Tax at all from the estate.

 

Very nice, but what are the problems?

Apart from the political nature of this concession which we shall leave aside, most commentators feel all this is unnecessarily complicated.

As an example, “The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.”

This point alone will employ lots of folk in HMRC in lengthy correspondence with executors and PRs who incidentally will need to know about this in order to claim it!

There is much to be ironed out in the legislation, too much to mention here.

One issue that is notably important is that some may have discretionary trust arrangements in your Wills passing family homes and other assets via this route. It looks likely that if you continue to use that route you will NOT qualify for the allowance. Other types of trusts such as life interest trusts and trust for minors and under 25s will be okay.

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Picture :  Executor who missed out on the family home allowance.

 

Pilot Trusts

The other names for this type of trust are Family Trusts or Spousal By-pass Trusts. It’s nothing to do with airline pilots!

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A Pilot in this sense is the one that goes before, the forerunner, like this tug guiding the Concordia. Hence the Pilot Trust is set up during your lifetime with a notional £10, say, attached to it as the asset. This is the forerunner, as it is added to later on. Maybe on death, from a Will, a life cover, or a pension plan death benefit.

What is the point of a Pilot Trust?

The Pilot trust is a discretionary trust with a list of potential beneficiaries contained within. So the assets of the trust do not belong to any one individual beneficiary.

Say you are traditionally married with a wife and children, but your wife is unlikely to need all the life cover or pension fund on your death. You can arrange for the life cover or pension to be directed to the trust on your death. This could save the monies going to your wife’s estate and increasing the Inheritance Tax bill on second death should you die first. She could however still benefit if she was a potential beneficiary. The monies could be distributed or held depending on circumstances. The children could benefit immediately on your death free of Inheritance Tax or monies could be held for wife, children, grandchildren etc.

There are many other circumstances and reasons where this makes sense and it’s not always to save Inheritance Tax.

This is where you need to concentrate. Each trust created on a different day has it’s own Nil Rate Band (currently £325,000). Any assets over that value will be subject to the 10 yearly inheritance tax charges under the “relevant property” tax regime.

So if you had a pension Death in Service benefit to redirect to a trust like this of £900,000 you are likely to be advised to create 3 trusts on different days so as to avoid the 10 yearly inheritance tax charges. So £900,000 divided by 3 = £300,000 into each trust and a little space to allow for some growth. If it grows beyond the Nil Rate Band any excess will be subject to the 10 yearly charges.

 

 

 

New EU Succession Regulations

Let’s assume you live in England and have a villa in Spain. Like all things from the European Union you know it’s going to be complicated. However this is good news for UK residents. It will allow you to avoid Spanish succession law and choose the law of, say, England and Wales.

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The impact is enormous. Succession Law in much of continental Europe is based on Napoleonic Law which means that any children must inherit, whereas in the UK we largely have testamentary freedom to benefit whoever we wish.

These regulations have been brewing for some time and (EU) 650/2012 came into effect from 16 August 2012 and apply from 17 August 2015.

So how do you choose to elect UK law for the Spanish villa?

You can make a declaration of choice under EU regulation 650/2012 choosing the Laws of England and Wales for example.

If you have an English Will covering worldwide assets and no Spanish Will then you can include it in your English Will.

If you have both an English Will for your UK property and a Spanish Will for your Spanish property you can include it in your Spanish Will or make a declaration in Spain. You should take advice from your Spanish lawyer.

“Just a minute”, I hear you say,  the UK opted out of this regulation along with Ireland and Denmark, so it doesn’t apply.

This is where many people are confused. The UK opting out means that the Spaniard with habitual residence in London cannot elect in his Will for his London property to be administered in Spain, or at least it is not binding on the UK to allow this.

Conclusion: This is a complex advice area and much is uncertain as no one has tested it in practice. Are some European Courts going to dispute cases? This will need time to settle down before the muddy waters clear.

Footnote: This does NOT affect Inheritance Tax which for UK domiciles is payable on your worldwide assets.

 

 

 

Choice not Chance

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The Government has launched a new advertising campaign aimed at those that have not yet sorted out a Will or Lasting Power of Attorney. Interestingly for the Lasting Power of Attorney it is not just aimed at the elderly. It is suggesting that younger people too can suffer an accident (as in the rugby image above) causing lack of mental capacity and you should think about having a Lasting Power of Attorney.

I am not sure I like the use of black. It will no doubt attract those that dwell on the depressing, but it is really very relevant for those of us who are positive minded too!

Welcome to our new Blog

This is our way of communicating some of our ideas. We are driven by one principle. That is that we give those that should write a Will an opportunity to do just that. They can talk to a Will writer face to face, to ask questions, and in the comfort of their own home or place of work. All this done at a price, and with skills that are the envy of many high street solicitors.

I hope you enjoy reading and commenting. FullSizeRender

Best Wishes

Donald Reevely

Understanding the value of assets

During your lifetime you may have accumulated a few bits and pieces. Some in the form of investments, savings or pensions. Generally they can be easily valued. However it may be important to understand the value of other chattels. For example you may unknowingly have an item of value that is included in your Will under your general chattels that may have great value. This is good news for the beneficiaries. However it may have unintended consequences whereby you are giving substantially more to some rather than others, simply because you didn’t value items during your lifetime.20511635_s

Most auction houses can prepare professional valuations for you which can help executors enormously. Sometimes the shock is in reverse where you thought an item had great value when in fact it doesn’t. Much better you know in advance so you can plan a sensible Will.

Has your family had a valuation shock?