As the law surrounding inheritance is continually changing and few of us have a crystal ball, we are increasingly advising our clients to consider flexible wills that can cope more easily with future changes to the law and adapt to suit your family’s changing needs.
A flexible will gives peace of mind in the knowledge that your assets will be distributed in accordance with your wishes and the financial, family and beneficial tax opportunities existing at the time of your death can be considered.
So how can you set up a flexible will and what are the main advantages? Here are five key points:
LEAVE YOUR ESTATE TO A DISCRETIONARY TRUST
A discretionary trust is a trust which can be created in your will. No beneficiary has an absolute right to the assets within it but your appointed trustees are given wide powers to pay or apply income or capital to one or more of the potential beneficiaries listed in your will. These beneficiaries typically include your spouse or civil partner, your descendants, wider family members and charities.
Discretionary trusts can also be used to ring-fence assets for the future needs of grandchildren who may require greater financial assistance than your children.
CHOOSE YOUR TRUSTEES CAREFULLY
Only appoint trustees who you are confident will safeguard your assets and act in the best interest of your beneficiaries. They will have the complete discretion to decide who takes what, if anything, when the time is right. If any of your trustees are also beneficiaries, you should consider appointing one or more independent professional trustees to ensure impartiality.
WRITE A LETTER OF WISHES
This should provide clear guidance for the trustees on how you would like your assets to be distributed. Although this is not a legally binding document, it is morally binding on the trustees. You can keep it up to date in your lifetime without the strict formalities required of a will execution. Ultimately, your wishes will be interpreted in light of the circumstances at the time of your death such as the needs of your family and how tax legislation might impinge upon their wealth.
PROTECT YOUR ASSETS
Flexible wills offer some protection against claims from your potential beneficiary’s creditors, divorcing spouses and separating civil partners, thus preserving the estate for the use of future generations. They can also protect against the first spouse or civil partner’s estate being spent on residential care fees. Assets can be retained in trust for beneficiaries who are not yet capable or responsible enough to deal with the money themselves.
MINIMISE THE LIABILITY TO INHERITANCE TAX
Another advantage of a flexible will is that it utilises a tax provision that treats any distributions to beneficiaries within two years of death as forming part of the distribution at death for inheritance tax purposes.
This means that it is possible to use the spouse exemption or ensure that beneficiaries are treated as inheriting assets as early as possible. Inheritance tax will be assessed on your estate before the remaining funds pass into the trust but, while the trust is discretionary, the assets are not included in any of the beneficiaries' estates for inheritance tax purposes. If the trust is kept going, on-going inheritance tax charges will only ever be at a maximum rate of 6% every ten years rather than 40%.
For legal advice on wills and probate, private wealth and tax planning, please contact Matthew Briggs or Liz Garvey in the Guildford office of Penningtons Manches on 01483 791 800.
This article was published in Surrey Life in February 2016.