Robert Cartmell explains the benefits of varying a Will including a Discretionary Trust structure
When a person dies, it is often automatically assumed that the beneficiaries of his or her estate can only receive their inheritance as a ‘gift’. People making Wills (Testators) and persons benefiting from them (Beneficiaries) may not realise that there could be a ‘better’ way for the beneficiary to receive inheritance other than by the traditional outright ‘gift’. I, Robert Cartmell, have seen many families in estate administration matters who previously did not realise that within 2 years of the date of death, a beneficiary can ‘vary’ an inheritance to either benefit other person(s) directly or alternatively to establish a trust.
As a result, there may have been very little planning within the Will itself or little regard taken as to protecting the inheritance for the chosen beneficiary.
What are the ‘Issues’ that can arise on inheriting assets as an outright gift?
Some of the issues that arise are:
- Assets received as gifts are usually then subject to Inheritance Tax laws on the death of the beneficiary;
- Assets received as gifts can be lost in a Bankruptcy/Insolvency of the beneficiary;
- Assets received as gifts can then be ‘attacked’ on future divorce of a beneficiary;
- Assets received as gifts become the assets of the beneficiary and can be thus more susceptible to erosion by future care fees;
As such the ‘inheritance’ can be diluted and eroded such that future generations such as grandchildren do not ultimately inherit the full value.
A possible solution to those ‘Issues’?
Within two years of the date of death, if a beneficiary of a gift executes a ‘Deed of Variation’ to their inheritance received, the respective share ‘inherited’ can be varied in such a way so as to do the following, namely
- to still provide the full use of the money/assets for the beneficiary;
and to
- prevent and protect the ‘net estate’ of the beneficiary from being increased by the value of the amount inherited, so better protecting the inheritance from outside attack or erosion.
Note: The Variation itself is not in itself sufficient to achieve this. It is the use of a Discretionary Trust structure within the Deed that achieves the goals above.
The Variation re-writes the terms of the Will so that the share of the beneficiary that would have been received as a direct gift under the Will is instead passed to something called a “Discretionary Trust”.
How does the Discretionary Trust work?
The Trust provides flexibility to provide the beneficiary with a lifetime ‘loan’ of their share of the estate, rather than by an outright gift.
The real essence and advantage of our Trusts is the ‘loan for life’ of the estate to the chosen Beneficiaries in the order you prescribe rather than gifting it all outright to your first chosen Beneficiary with no protection offered due to change of personal circumstances.
THEREFORE
The net estate of the beneficiary is not increased since they ‘owe’ back the value of the assets they receive.
Any consequences of the loan? For example, what if the first beneficiary cannot afford to pay back the loan, what happens regarding the Trust?
The loan from the Trust is usually only repayable out of the net estate assets on death of the beneficiary. If there are insufficient assets in that estate on death to repay the loan, the loan is simply unable to be repaid in full and any amount that cannot be paid from the assets of the beneficiary is written off.
Tax Implications
When varying an inheritance, it is important to consider all taxes, not simply Inheritance Tax. Capital Gains Tax and Trust taxation (6% charges) are all relevant. Allow us to review these with you and to check what is the optimum amount to consider varying taking into account all the factors and your wishes. Remember that tax considerations should not override the ultimate wishes and are simply one factor to consider in all such arrangements.
In Summary
For all regular gift inheritances, consider instead a Deed of Variation which includes a Discretionary Trust structure. At the very least consider that option fully even if you do not go down that road. You have 2 years from the date of death of the deceased testator to execute documents. This is important for anyone who receives a gift of substance in a Will. Consider this even if you receive a legacy of say £25,000 or more. Take expert and experienced advice from us to ensure you understand all options and the tax implications (positive and negative) of the Deed of Variation structure.
If you would like help or advice from Robert Cartmell on the issues raised in this article, please get in touch. Email Robert Cartmell Consulting at info@robertcartmell.co.uk to make an enquiry or arrange a discussion.