When it comes to legacy planning, especially for later generations, there are a number of things you need to consider.
Decide Whether Your Wishes are Fixed or Flexible
If you’re thinking of getting fancy with your legacy planning, you’re going to need to think through what might happen if circumstances change.
A classic example is this: Let’s say you have an investment property you want to give to your daughter. You could just sign it over to her. It becomes hers from that point. You’ll have some tax implications most likely, but other than that, it’s a fairly straightforward transaction.
But when thinking through the implications, you remember that relations have been a bit strained between your daughter and her husband. What if they divorce? Well the property you gave to your daughter is now fair game in any divorce settlement. What if she dies? Assuming she has willed everything to her husband, that property is now his and is no longer owned by blood family – that might be important to you.
It is possible to plan in some flexibility your arrangements, so if circumstances change, then your arrangements can change. So in this case, you might consider placing the property in a discretionary trust. In such trusts, no-one has the absolute right to the property, so you daughter would be a potential beneficiary, not an absolute one.
This means that the property would be safe in the event of a divorce. If you have more than one child, or maybe you have grandchildren, or even nephews and nieces you care about and want to look after, you could write the trust to say that any of them can benefit from the property, at the discretion (the clue’s in the name) of the trustees.
So maybe one of your grandchildren is going to university – you could decide (because you will be a trustee) that you will direct the rent from the property to them while they are studying to help support them. Once they graduate, you could redirect the rent to another family member who needs it, or even let them live in the property for a while if that’s needed.
The downside to flexibility, particularly when it comes to trusts, is that discretionary trusts have a pretty punitive tax regime attached to them, so that will be a factor in your planning.
As depressing as it sounds, you’ll need to think through some worst-case scenarios around your planning goals and in light of that, decide whether you want any structures put in place to be flexible to cope with change in circumstances. It’s really important that you try to think through what might happen and not just think in terms of what you want to happen today.
Property First
Thanks to the MeaningfulMoney podcast, and to the very early-days link with Rob and Rob of The Property Hub, I get loads of clients coming to me with significant wealth in property. That’s fine of course, property is just one of many asset classes with unique, erm, properties (!) and many benefits.
But property can be difficult to plan around, particularly when it makes up the vast majority of someone’s wealth. And the reason for this is because of its illiquidity. This is less of an issue with Buy-to-Let property as opposed to residential property.
If your home represents the lion’s share of the value of your estate, and it turns out you have an inheritance tax issue, or you want to do something fancy with your planning, you may have significantly limited options.
If you own a property jointly with your partner, you could consider severing the joint tenancy and instead owning the property as tenants in common, where essentially you own half each. This gives somewhat more flexibility as to what you do with your half of the property value, but may also have implications for your partner, so you need to be careful.
I mentioned the Residence Nil Rate Band in the previous blog series, which is an extra inheritance tax-free amount that you can leave to your beneficiaries as long as your primary residence is left to your direct descendants. This could be jeopardised if you decide to leave your half of a property in a discretionary trust for example, as you may not get the benefit of the residents’ nil rate band.
When planning, start with your property, as it is usually your biggest asset, but be aware that property can be a limiting factor when it comes to estate and legacy planning.
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