In the previous blog series, we covered the basics of legacy planning, including a very high-level overview of how wills work and inheritance tax. The main point, though, was that estate planning starts with you and what you want to happen. Only once we’ve established that can we talk about how to navigate the system to make it happen.
We’ve written down some thoughts about what we wanted to happen with our wealth both before and after we pass away. We let ourselves dream a bit and think bigger than we might have otherwise done. Now, we really need to learn to navigate the system to make those dreams a reality.
Anything You do can be Challenged
Right off the bat, it is crucial to understand that anything can be challenged. Anyone who feels they have a legitimate claim on your estate can go to court to challenge your will. I don’t know about you, but my mind goes back to Agatha Christie-type dramas where the family – who all hate each other – gather for the reading of the will.
There’s a massive shock as the old geezer leaves his wealth to his cat or something, and then everyone starts killing each other. In reality this doesn’t happen, but nothing has the power to tear families apart more than greed over the wealth of a deceased patriarch or matriarch.
Don’t let me worry you. I’m sure your family will be very civilised, but you need to know that anything you plan and implement is open to challenge. All the more reason to be clear with those wishes and to set them up as unequivocally as possible.
Transparency is Usually the Best Option
Another way to reduce the chance of misinterpretation after you’ve gone is to be clear about your plans while you’re still here. Communication is almost always the best option as you make your legacy plans. Speak with the family members involved and let them know what you’re planning.
I appreciate that this might not be easy – it’s a delicate subject to say the least. AND there may be occasions where it will help you to keep the peace in the present by being a bit more circumspect.
But remember that by avoiding addressing these things, you’re simply kicking the can down the road till after you have gone. Maybe that’s exactly what you want to do: ‘I’ll no longer be around, so they can squabble as much as they want.’
I guess it’s each to their own, and every family is different, but if you can communicate your plans clearly while you’re alive, then it will help to reduce confusion and squabbling after you’ve gone.
Trusts are Useful, but Require Compromise
Trusts are perhaps the most misunderstood mechanism I’ve ever had to deal with in my career. And I don’t mean misunderstood by clients, I mean by advisers, which is a little bit scary. I remember being very confused by the whole idea when I was a green adviser some 20-odd years ago.
I did three consecutive Five Minute Friday videos explaining how trusts work, and you can find them at the following: part one, part two and part three.
Essentially, you can think of a trust as a box. You are the settlor; the one setting up the trust. Your trustees look after the box and make sure they carry out your wishes. They’re also the legal owners of the box, which has implications. Your beneficiaries are the ones who get whatever is in the box, whenever you say they can. A trust is a separate legal entity and it has its own tax rates and regulations.
When I say that trusts require compromise, I mean it. You cannot expect to get the benefits of a trust in your planning, without giving something up in return. For example, let’s say you have a buy-to-let property, and you’d like to put this into a trust and leave it to your grandchildren.
That’s no problem, but you wouldn’t be able to keep enjoying the rent, and the transfer would be a capital gains taxable event. The gift may also end up being charged to inheritance tax, depending on the kind of trust.
So trusts are not a magic bullet. They are very useful, but you cannot get away from the fact that putting anything into trust, whether it’s property, or investments or money, means you are giving it away. You don’t own it any more, and you need to think through the implications on that. Remember, your needs always come first when estate planning.
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