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Flexible Life Interest Trust

Flexible Life Interest Trusts are designed to preserve wealth when it flows from one generation to another. Placed in Mum and Dad’s Will it can save a lot of money even if they are not in the inheritance tax bracket and when they are it can prevent the common problem of their estate being taxed twice. I am providing this solution for more and more of my own client families and, as you might imagine, it is very well received.

Please talk to me about this as your client families may be losing money when they don’t need to and you certainly don’t want this solution to be provided by someone else. It is not expensive, it is extremely flexible and it works. When combined with Lasting Powers of Attorney the family are provided with a powerful set of tools that are becoming increasingly necessary.

The Power Of A Flexible Life Interest Clause In A Will

A Flexible Life Interest in a Will only comes into effect following death and so, like other Will trusts, does not restrict management of financial affairs during a person’s lifetime.

The main advantage of the trust is that it gives great flexibility to the Trustees, in helping them achieve multi-generational tax planning. A Memorandum of Wishes to the Trustees should make it clear that the principle beneficiary, during their lifetime, is the surviving spouse and that nothing should be done that would undermine their security. The surviving spouse and adult beneficiaries are likely to be the Trustees and no Trustee can be outvoted or ignored. Even where Mum and Dad are not in the inheritance tax bracket this solution can save the family a considerable amount of money and if you are not sure how then I shall be pleased to explain. Where Mum and Dad are in the inheritance bracket it can save the family even more. The following shows how the trust might work.

Example: Mr and Mrs A have assets on which Inheritance Tax will be payable even after all reliefs have been applied including the transferable threshold for IHT and the recently introduced Main Residence Nil Rate Band (which is also transferable). They do not wish to reduce their estate by giving away assets at this stage. Following first death it may be possible to reduce exposure to IHT by making gifts which, if the survivor lives for at least seven years, will be free of IHT. There are other steps they may be able to take during their lifetime that may reduce the amount of IHT payable BUT given their circumstances there will almost certainly be some tax payable, possibly a substantial amount. Sadly, it doesn’t end there. When the accumulated wealth passes to the next generation, less the tax paid at 40% of everything above the accumulated thresholds, it increases their wealth and the amount of IHT which they may have to pay. (Bear in mind that their spouse may be due an inheritance which may push their joint estate into the IHT trap even if you think IHT should not be a problem.) The truly shocking thing that most people forget is that when inherited wealth, on which tax has already been paid, becomes part of the estate of the next generation it may, due to the value of their estate, be taxed again. And at 40% again.

What if there is something you could do to help pass on family wealth much more tax efficiently? What if your beneficiaries had the opportunity to take their inheritance without it becoming part of their estate so it couldn’t be taxed again? What if the money could be held in a special trust that enjoyed much better capital tax treatment? Say, a ten yearly charge on everything above the threshold at a maximum rate of 6%? What if beneficiaries could take their inheritance from that trust as a loan? That loan would be a debt to be repaid back to the trust at their death, their inheritance never having been part of their estate during their lifetime – even though they have had the money. Then it couldn’t be re-taxed at their death. What if the trust lasted for 125 years so the same thing can be done over more than one generation?

What if, while the trust is running, the trustees (who could be the family beneficiaries themselves) had the power to set up further trusts and dictate the terms of those trusts so that if changes in the law meant that the trust set up from the Will was no longer tax efficient then they might have a chance to transfer the money into another type of trust if that would be more helpful? Would that be a good thing do you think? If it would be expedient to set up a separate trust for a beneficiary’s children at any point while the Trust is being administered (following death) that can be done. In fact there is an incredible degree of flexibility and once you are aware of how this can be used and just how effective it can be it is likely to be something you will want to discuss with quite a few of your clients.

There is no reason why discretionary trusts should not be set up from the personal estate of each spouse or partner (in other words at both first and second death). Each trust would have its own IHT threshold. As the trust is not operational until death it doesn’t complicate anyone’s financial affairs while they are alive or restrict decisions they make in regard to their assets or diminish their control over them. The trust gives a family the opportunity to act on appropriate professional advice in order to plan the distribution of family wealth down the next few generations as effectively as the law allows and also allows them to change those arrangements if it becomes appropriate to do so. Of course, I cannot guarantee that it will cover everything that might occur but it certainly gives beneficiaries the opportunity to monitor not only their personal tax liability and to take their inheritance as a loan to repaid back into the trust at their death but also the flexibility to transfer their share of the trust to a separate and different trust structure which might help to overcome the effect of any future changes in legislation. The trust can be brought to an end at any time it is expedient to do so but they last up to 125 years if still needed and that gives plenty of time for effective planning.

The trust would also help ring-fence a beneficiary’s inheritance against possible divorce or bankruptcy as the benefit of a discretionary trust with multiple potential beneficiaries is that not one penny forms part of the personal estate of any individual. It can be extremely effective in ensuring that assets remain within the family and do not go ‘sideways’ because the assets in a discretionary type trust do not belong to any individual and therefore cannot be included in any claim that may be made against their estate.

The details here do not describe the full opportunity for ducking and diving that these trusts give. So please call 01373 471117 for more details of how you and your clients may benefit.