There are so many options when it comes to inheritance tax [IHT] planning but one of the main reasons that clients do not want to plan is the fear of giving away capital that may be needed in the future if their circumstances change.
One option that may suit some clients is the Wealth Preservation Account, which allows a lump sum to be invested into a series of policies, each with a maturity date and on maturity the Trustees can pay the maturity benefits to the settlor.
In a nutshell the benefits are:
• Provides flexible payments to supplement your client’s income.
• The tax efficient growth of an investment based on the Isle of Man for a UK resident is similar to that of a pension or ISA as any growth achieved in the Account is not subject to the UK tax regime. UK tax may apply when any profit is brought back into the UK.
• IHT efficiency with the amount invested being outside of the estate after seven years and the growth from day one.
• The trustees can make payments to other people if required, for example for a grandchild’s education fees.
Here’s the technical details:
The Wealth Preservation Trust allows the settlor to invest a lump sum into a cluster of specific term life insurance policies. Each policy will confer a death benefit and a maturity benefit.
The policy may be surrendered in whole (but not in part) at any time. Each policy will also have an extension option, to extend the term (once or more than once, if required).
The maturity dates will be sequential (they will coincide with the commencement date of the policy) and they will begin on the anniversary date chosen by the Settlor. It is also possible to have more than one policy in the cluster mature on the same maturity date. At which time the original value of the invested policy can be paid to the settlor.
The Settlor will take out the policies and immediately assign the legal title to the policies to the trustees of a bare trust (the ‘Initial Trust’). At outset, the trustees of the Initial Trust will be the Settlor and one other individual.
The day after the legal title to each policy has been assigned absolutely to the trustees of the Initial Trust, the Settlor will irrevocably assign all his beneficial interest in each of the rights, powers and privileges conferred by and the benefits payable under each policy to the trustees of a settlement, who will hold the same upon the trusts of that settlement (the ‘Settlement’).
The Settlement will confer a series of discretionary trusts in favour of chosen beneficiaries (the ‘Beneficiaries’). The Settlor (but not their spouse, widow(er) or civil partner) will be expressly precluded from being or becoming a beneficiary.
The beneficial interests in the rights, powers and privileges conferred by and the benefits payable under each policy will be held by the trustees of the Settlement on a separate discretionary trust, with its own trust period (each, a ‘Sub-Trust’).
There will be no restriction on the trustees of the Settlement directing the trustees of the Initial Trust to surrender in whole the rights conferred by one or more of the policies whilst the policies are in force. The Settlor will not be able to benefit from the proceeds of surrender of any of the policies.
If the trust period of a Sub-Trust terminates during the Settlor’s lifetime by virtue of the maturity of the corresponding policy, the Settlor will become absolutely entitled to the property formerly comprised in the Sub-Trust.
In other words, the Settlor will have a reversionary interest in each Sub-Trust, and that reversionary interest will be limited to the proceeds of the maturity benefit of each policy.
• Is aged 63
• A widower
• Has two children from his previous marriage, Dan and Sally
• Married Carol four years after his wife’s death
• Has assets worth £3 million
• Is aged 42
• Has three children from her previous marriage
• Has assets worth £1 million
• Live in Guildford
• Own their house as tenants in common
• Have a two-year-old daughter, Evie
Both Alan and Carol had made wills before they married each other, but their second marriage revoked their wills and the rules of intestacy now apply.
If Alan died first, the current rules of intestacy would mean that Carol would inherit the personal effects, £250,000 (free of tax) and half of the remaining estate (£1.48 million).
The other half of the remainder would be divided between Dan, Sally and Evie (£1.23 million).
The inheritance tax (IHT) bill is £290,000 (assuming Allan’s executor’s use his first wife’s transferable nil rate band).
When Carol died subsequently, her three children and Evie would share her estate – which includes the amount she inherited from Alan.
But is that what Alan would want to happen?
What Alan would like to happen is:
1. For Carol to have enough to live on for the rest of her life
2. For Evie to be provided for until she finishes her education and to have a substantial amount in trust for her benefit
3. For Dan and Sally to receive a substantial legacy
4. For IHT to be reduced as much as possible
5. For nothing to go to Carol’s children; they will inherit substantial amounts from her estate anyway
Alan could achieve most of this by making a new will but he will not reduce his potential IHT bill.
A permanent solution would be to use a flexible reversionary trust.
Alan makes a new will anyway and also invests £335,000 into a Wealth Preservation Account.
Of this investment, £4,000 is the initial adviser charge, £6,000 is his IHT annual exemption for this and the previous tax year and £325,000 is a chargeable lifetime transfer.
This achieves his objectives because:
• It is a discretionary trust, so Carol and his children can receive trust funds after his death
• The trustees will decide on the appropriate amounts and timing; guided by a letter of wishes that Alan has provided
• The growth will accrue outside Alan’s estate
• Provided he lives for another seven years, the trust fund will not be part of Alan’s estate on death
In addition, the Wealth Preservation Trust allows the trustees to sanction payments to Alan if he is in need of money by letting policies mature each year.
Also, policies in the trust can be appointed to any beneficiary. So Alan’s trustees can help out if his children need help with buying their first home, for example.
If you would like to know more about this solution or have any clients that you think it would be appropriate for, do contact Savvy to discuss – 0845 680 8910
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