gifts – Wills and the rest

Why d’you have to make things complicated?

Types of Trust (UK specific) explained, and why they are used

Trusts are something that people often get worried about – they think it’s all too complex and not for them. But basically it’s about putting a defined amount of money (or other assets) under someone else’s control for the benefit of defined group of people (and you choose who those people are). The person who is listed as the owner is not necessarily entitled to the money themselves, but is looking after it for others. They are entrusted with its care.

This is written about UK trusts, but they can exist in other forms in other countries in the world. The choice of trust is important, as there can be adverse tax consequences if you are using the wrong type for the task in hand. This short post is not a substitute for specialist legal advice tailored to your circumstances.

Why would I need one?

You might be using a trust structure without realizing it – now! If you and your partner own a house together, then you might both be listed on the deeds. When you sell, do you each get half of what is left over after expenses? If you died, would you want your partner to automatically have all the value in the house? How have you decided the terms of your house ownership with each other?

If you have a child who is under the age of 18 when you die – who will look after the assets you have on their behalf until they are old enough? Is 18 old enough to inherit what you have? Do you have a child who has additional needs? Do you want them to have all your money when their needs might be lifelong, and they might not be able to manage money well?

Do you worry about what might happen if your partner meets someone new and forgets about how much they have inherited from you – and spends it on them? Or if they get into debt, and it eats up not only all their share, but yours as well? A trust can be a good way of letting your partner have some of the benefit of what you have, but keeping a bit of security, so they don’t spend it (or have it spent for them)

Are they expensive?

There will be a cost for setting up your trust. Running a trust can cost, but then again, if you choose non-lawyers or non-accountants to be your trustees, the cost may be minor, being limited to out of pocket expenses. Looking after a million pounds means more work to do than if you were being asked to look after a thousand pounds, and you might need professional help.

Apart from working out what sort of trust suits you and getting the right sort of trust in the beginning, making it work will require some effort, just like running a car or getting a regular haircut.

Will I need a lawyer all the time?

Probably not, if you still have an idea of what the responsibilities of a trustee can be. However, if you are worried, then legal advice is available, if your trustees want to know more. It can be necessary to have an independent person as a trustee – a friend or someone outside your closest family.

You mean there are different sorts of trusts?

Yes – there used to be many more types of trusts – and confusingly, not everyone talks about them using the same labels. Basically, trusts now can be broken down into four types:

The bare trust

The Interest in possession trust

The discretionary trust

The charitable trust.

A bare trust is similar to a nominee – you decide that someone is to own the asset in name only. But you expect that the proceeds of sale will not go to the person who appears to own it, but to your choice of recipients

An Interest in possession is where a named person is entitled to receive the income (or to live rent free) in an asset. The capital remains safeguarded. Some sub-types of this sort of trust can also be chosen. These are usually set up in a will, to take effect after death, for tax reasons.

A discretionary trust is one where you place the most trust – because it is the most flexible arrangement. You give your assets to your trustees, identify the people who you want to benefit, and then leave the management of the trust, including how and when people benefit to your trustees. It is helpful to leave them some written guidance, so that they know what you have in mind – but ultimately, you give them the authority to do the “right thing” with your assets, for the benefit of those whom you have chosen.

So, a bare trust is quite simple?

Yes – it’s the sort of thing you have if you purchase a house for a person under 18 – when they turn 18, they can force the trustee to hand it over. You find this sort of thing when administering an estate – an executor, once they have paid debts, can say that they are holding assets for your benefit – and sell on your behalf, at your direction.

Interest in Possession sounds really weird…

This is one of the sorts of trusts that ends up with lots of different names, because the technical name is not really all that catchy. Sometimes it’s called a property trust – because it’s often used to safeguard a share of the house for the benefit of the surviving member of a couple, so they can continue to live in a house rent free, but without being able to spend it on someone new. Other names can be “Life Interest Trust”, “home trust” and so on – sometimes there are advisers that use this structure and want to brand it specifically so that it has more appeal.

Discretionary Trusts sound so complicated. Why would anyone want them?

These are the most flexible sort. If you have a person with a learning disability, they may need money throughout their lives, but may not be able to make significant financial decisions either now or in the future. They may be able to live independently, but be easily swayed by people who want to take advantage. They might have a physical disability that could need more and more care as time goes on. Choosing a discretionary trust structure allows those in charge of it (trustees) all the power they need not only to invest according to the needs of those who benefit, but also to pay out in all sorts of different ways – as and when needed.

It is true to say that Discretionary Trusts are used in times of uncertainty, for those who are wealthy and who want to pass on money for tax reasons, perhaps for their children not to receive the money too soon, if at all. Or for business owners who want there to be only a few people that own a block of shares, rather than lots of minor shareholders clamouring for power. But essentially the structure is the same – two trustees who look after something for the benefit of a range of people.

You left out charities!

Well, there are not many people who want to set up charities – usually there is a charity to suit every need in existence already. Sometimes using an existing charity presents the best value for money for those who are in need – saving on set up costs and running costs. Charities can be made using trust documents, setting out their objectives and who is proposed to benefit. Similarly, pension fund trusts are less often the creation of an individual – and pension fund trustees have wide powers over what they do to invest, and distribute.

What else do I need to think about?

Taxation is something that can come into your decision making process. If you give a property away, there might be a Capital Gains Tax bill – but your advisers might have a way of postponing this. If you have a fund larger than £325,000 initially, then there are other considerations for Inheritance Tax. Inheritance Tax capital gifts also have fairly strict allowances – otherwise they might be a gift that you need to survive by a period of years (7 years to a maximum 14 years from trust gift). As with all Inheritance Tax gifts, you cannot benefit from what you have put into your discretionary trust, or it will not work ⁽¹⁾

During the lifetime of the trust, the size of the fund and how it is invested can be important – because it means there will need to be more financial housekeeping. This can be a relevant consideration in many cases.

What do you recommend?

It depends on what matters the most to you – behind every choice there is a risk and benefit. There is not really a one-size-fits-all solution for every circumstance, and that is where the advice from your solicitor (or accountant) about a trust can be so beneficial. For more in –depth analysis of the structures you would like to use, and their implications for your own financial situation, you should consider this general note with tailored advice to suit you.

(1) There are exceptions to this rule, but only very few. Tread carefully, with advice.

Day -v- Harris [2013], Curnock v IRC, Phizackerley

Just a quick reminder to myself that these are the current cases concerned the ability of attorneys to make valid gifts, and the interaction with IHT.

Day -v- Harris 2013 Day v Harris and others Same v Royal College of Music and another (Arnold and another, interpleader claimants) [2013] EWCA Civ 191; [2013] WLR (D) 112 and PDF of judgment concerns a registered EPA – and gifts made by the attorney (who was also a joint holder of a bank account) and whether the gifts that he had made were as attorney for the donor, or in another capacity as being access to the joint bank account as was his right as a joint bank account signatory

In my judgment, it remained open to Mr Day to operate the bank account after registration of the EPA as he had done before such registration. He could not use it to benefit himself without the full, free and informed consent of Sir Malcolm but, if he had that consent, as the judge held he did, gifts made by drawing cheques on the joint account were not invalidated by the effect of section 7(1)(c) of the Act even though made after registration of the EPA.

Had the gifts not been validly made, then they were still part of the donor’s estate for IHT purposes – on the basis of Curnock v IRC, Curnock v IRC [2003] SWTI 1053 where a cheque was not encashed prior to the death of the donor – and therefore the gift was not complete by the time of death. This could also be seen in conjunction with Phizackerley, Personal Representatives of Phizackerley v HMRC [2007] SpC 591

An earlier version of Day -v- Harris, in 2010 concerned the nature of the accounting to be made for the researches of the executor into the amount of the gifts that were made and how far back the executor should go in attempting to ascertain what gifts had been made, and whether the expenses of the executor in doing so were reasonable.

Budget 2015 and initial thoughts.

Budget statement in pdf from Inland Revenue

Some of the things I think this means.

Terms:

Although this refers to a “main residence nil rate band” the personal representatives can elect for any property owned and lived in by the deceased to count as the residence for this purpose. The term is not related to the main residence or Principal Private Residence. Potentially, each spouse could have a separate private residence, therefore.

The residence nil rate band (which if someone else has not already labelled it thus, I shall call it the “RNRB”) can be transferred to a spouse and remain intact. This applies no matter when the first death occurs, so long as the second death occurs after the start of the tax year 2017-18.

The RNRB might end up, therefore, also being called the TRNRB when claimed on the death of the second spouse. There will be new additional forms to complete in addition to the IHT402 and the IHT217. There will need to be new evidential burdens to show that a recipient falls within the class of acceptable beneficiaries called “descendants”.

The NRB as we know and love it applies at the current rate until the tax year 2021-2 commences. It applies to all transfers whether intervivos or on death.

The RNRB applies only where there is a residential property in which the deceased has resided (or the spouse of the deceased???) and where the “proceeds of sale of that property” or the property itself pass to a linear descendant of the deceased (or of the deceased’s former spouse??). The bits in brackets are where I am less certain of the detail. One thing is clear – the definition of what is considered “linear descendants” is different from the standard definition of “issue” or “bloodline” since it includes not only the usual adopted children and children of the bloodline but also step children and foster children.

Things I am not sure about:

I don’t understand quite how you can quantify the foster children – but perhaps it is possible to prove that an individual is a foster child or has been one at any date. Similarly, step children. But then again, this gives an allowance for those children, rather than penalising them or giving them an entitlement.

I am not sure about the “proceeds of sale” aspect of things. The Inland Revenue states that identifying what has been the proceeds of sale of a family home and making sure that there is a credit for this will be something that will be the subject of a consultation paper shortly. Presumably, there is some paperwork required for Inheritance Tax purposes on the sale of a family home – so where downsizing from any home worth less than £2,400,000 is potentially eligible for this – so as to preserve the relief on this home. This will be something that all conveyancing solicitors will need to know about as well, since otherwise it would not be something that would be mentioned to the client. Few clients associate the sale of their home with the need to consider how it fits in with estate planning.

Does this now mean that flexible life interest trusts now need to be altered so as to take account of this potential future relief? A “FLIT” by which I mean a discretionary trust, subject to a prior life interest. I think it does. Because the whole flexibility of these relies on the discretionary trust *not* being an individual or descendant. Time to review these I think, and adjust expectations and drafting accordingly.

I think the new legislation means that (at least initially) if you are worth £2.4 million or more, then this RNRB is useless to you.

I also think this means that if you are selling up so that you can free up capital to make potentially exempt transfers, then you have to weigh up carefully whether doing so means that you will lose out on the RNRB. The RNRB *only* applies on death, and does not apply to PETS that become chargeable. Worst case scenario is that you free up funds, give some away to your children and do not survive the seven years. When I say “some”, I mean if you give away more than one Nil Rate Band’s worth of gifts. So – PETs will have to be limited to below £325,000 for each individual donor if they are within 7 years of death, or statistically likely to be so. Or in other words, there is no such limitation, but without advice on the pros and cons, the decision should not be taken without, for example, more seriously considering term life insurance, in the very least.

In conclusion:

Possibilities of legal involvement in people’s affairs seem to have increased. And in a way that doesn’t seem right – why should the taxpayer be hemmed in at every turn? Why not just increase the whole of the NRB to £500,000 each – and not have this extra complication? What about those childless couples who want to leave their money to nieces and nephews? Why is this budget not making it easier for the rich to pay tax, rather than harder for the middle income people to manage the burden of it? This extra complexity just means more work for the civil servants, more bad luck for the childless, more work for lawyers, more fees for professional advice. And the extra complexity is not actually needed – it doesn’t close any major loopholes or planning issues where “clever lawyers/accountants” have been finding “loopholes”.

In the Matter of Buckley [2013]

Attorneys are expected to be aware of the law regarding their role and responsibilities. Ignorance is no excuse.

– a highly unsuitable investment and she broke almost every rule in the book in making it”

This is the case of the reptile breeding investments, if ever you needed something to remember it by, and was recently decided in the Court of Protection (Number 12228697) Click here for the full court transcript It concerns a lady who had made a Lasting Power of Attorney in her later years, appointing her niece C (her only living relative) to be her attorney. Miss Buckley had moved to a private nursing home, and was, at the time of the case, 81 years old and of fragile mental health.

The Office of the Public Guardian received a complaint about the way C was handling Miss Buckley’s finances, and it started an investigation. A Court Visitor went to see Miss Buckley. She made detailed impartial observations about the way Miss Buckley talked about C, and her account of matters that had occurred during her residence at the nursing home was corroborated. Although communication was difficult, there appeared to be a recognisable element of lucidity and it was apparently that Miss Buckley viewed her relationship with C as being one where C was only after her money, and where she didn’t trust her.

The Office of the Public Guardian applied to the Court for an order that the LPA be suspended, her accounts frozen, full accounts to be made up and for C to be prohibited from encashing any asset owned by Miss Buckley.

The OPG’s investigator summarised the facts as follows:

Miss Buckley’s house had been sold for £279,000 in April 2011
Between January 2011 and June 2012 C had used £72,000 of Miss Buckley’s money to set up a reptile breeding business
C admitted that she had used at least £7650 of Miss Buckley’s capital for her own personal benefit
At one stage there had been daily maximum cash withdrawals of £300 a day from Miss Buckley’s Nationwide account.
The Nationwide had alerted Social Services in April 2012 and the Police interviewed Miss C in July 2012
Miss Buckley may have incurred a loss of about £150,000

The legal issue that has been clarified by this case, to the extent that it was not covered by the earlier case of Re Harcourt (31 July 2012) is the responsibility of an attorney when investing the donor’s funds.

There are two common misconceptions when it comes to investments. The first is that attorneys acting under an LPA can do whatever they like with the donor’s funds. And the second is that attorneys can do whatever the donors could – or would – have done personally, if they had the capacity to manage their property and financial affairs. Managing your own money is one thing.

Managing someone else’s money is an entirely different matter.

The Master went on to declare that whilst an individual can choose to act unwisely, or not at all, stashing their money under the mattress, this was not something that an attorney could do.

Under the Mental Capacity Act 2005 (MCA) s1(5) an act done, or decision made [by an attorney], must be done or made in [the donor’s]best interests.

Before the MCA came into force, there was a separate investment branch of the Court of Protection who carefully considered the suitability of investments for each patient. They divided up investments into short term types and long term types, and assessed the type of asset against the investment requirement and suggested a strategy appropriate for that investment.

When considering the suitability of investments, the person’s age and life expectancy are considered to be the most important criteria. A person of over 80 at the time the court would be asked for investment assessment would be considered to have a life expectancy of less than five years, unless there was clear medical evidence to the contrary. As such, a short term code would be selected, depending on the amounts at stake.

The Master went on to state that

“generally speaking , attorneys acting under an LPA should ensure that any investment products or services they acquire on a donor’s behalf are provided by individuals or firms who are regulated by the Financial Services Authority.”

This means that part of the value of the investment will be covered under the Financial Services Compensation Scheme.

I would suggest that, as they have fiduciary obligations that are similar to trustees, attorneys should comply with the provisions of the Trustee Act as regards the standard investment criteria and the requirement to obtain and consider proper advice. I would also recommend that attorneys and their financial advisers have regard to the criteria that were historically approved by the court and the antecedents of the OPG.

The master also reiterated the rule that investments should be made in the name of the donor, not that of the attorney, but that if it was not possible for the asset to be held in the name of the donor, that there must be a declaration of trust over the asset, documenting the true beneficial ownership. And that any loans of money to a member of the donor’s family should be (unless very small indeed) approved by the court, especially when it is in a case where there might be conflict between the attorney and the donor.

The Court therefore ordered that the LPA be revoked and cancelled, so that a deputy could be appointed. It was reported that the police had considered her conduct naïve but that no crime had been committed.

This case is one of the most important to come out of the Court of Protection in recent years as it clarifies many of the frequently asked questions and misconceptions. The Master went on to observe that the court’s authority should be sought in circumstances where it might appear as if the attorney’s own interests might conflict with those of the donor, in particular that:

Attorneys should keep the donor’s money and property separate from their own or anyone else’s money
Subject to a sensible de minimis exception, an application must be made to the court for an order under section 23 of the MCA 2005 in any of the following cases:
- Gifts that exceed the limited scope of the authority conferred on attorneys by section 12 MCA 2005
- Loans to the attorney or to members of the attorney’s family
- Any investment in the attorney’s own business
- Sales or purchases at an undervalue; and
- Any other transactions in which there is a conflict between the interests of the donor and the interests of the attorney

Give Generously: why leave it to the taxman?

It is a truth universally acknowledged that a person with fortune must give some of that wealth to the government of the day. But it is not necessary to do so with every appearance of enjoyment, and it is not a moral obligation, but a legal one.

Death and Taxation are two of the great certainties. In the UK, we have a wealth tax that is calculated on the amount a person leaves when they die (Inheritance Tax). This is in addition to the wealth tax that a person pays when they dispose of an asset that has increased in value (Capital Gains Tax) the wealth tax that a person is in the process of acquiring (Income Tax) and the wealth tax paid on the transfer of a property (Stamp Duty).

It might almost seem as if the money that a person makes, saves, invests and then finally dies owning has been taxed two or three times over before it can be passed on to one’s family. The moral certainty about paying one’s fair dues can wear a little thin, in the circumstances.

If you are an individual and have assets exceeding £325,000, then there is a real possibility that you will be giving the taxman a large chunk of what you have worked hard for – everything over this amount will be taxed at 40%, unless it goes to an exempt person. The figure of £325,000 is not an arbitrary sum – it is the amount that an individual can leave at 0% tax, and has been set for the next three tax years.

Happily, there are some ways of lowering an inheritance tax bill. Essentially, the basic way to reduce the tax is to be poorer by the time you die. To spend so that there is less money, or give money whilst you still have many years to live, when your children can appreciate it. By the time you die, your children might be well into middle age, and perhaps may have got past the difficult years.

The very basic patterns for giving are permitted by legislation – an annual amount per donor of £3000, together with small gifts that can be given, and gifts out of surplus income. The one that people know best is the Potentially Exempt Transfer – this is where you give something away (completely, and do not keep any benefit from it) and if you survive that gift, it is out of your estate. You are thus poorer when you die. A direct gift is a potentially exempt transfer.

My uncle, now in his seventies, made a trust for the benefit of his children and grandchildren. That trust fund was set up a few years ago, and is the means of providing for not only his daughter (who is not quite married but not quite divorced), his disabled granddaughter but also his able sons and grandsons. By using the trust, he can retain control of the assets, to a certain extent, and make sure that the money is used in a way that truly benefits his grandchildren, rather than giving them too much money too young. This also indirectly benefits his adult children, who have their lives lifted slightly, by knowing that there are some reserves for school expenses when times are tough. And best of all, with luck, in a few more years, the amount put into the trust will have ceased to be counted as part of his estate planning strategy. This latter sort of giving is not potentially exempt – but if kept within a single 0% band, is effectively without any lifetime Inheritance Tax to pay.

This is not a complete list of all the ways in which you can reduce your inheritance tax liability, and if you are planning to give away a substantial sum to lessen the inheritance tax burden, you are best advised by a professional, to make sure that your objective is achieved. Your own situation is the most important to bear in mind, when giving, and your legal adviser can give a particular view based on your particular circumstances.

Auth comment: yes, this was written to be a small article. Now I look at it, I know it is not really a blog post. Soz.

Tribute and the Wedding Gift

These specific gifts are called those in contemplation of marriage, defined in section 22 IHTA:
•a parent of a child to the marriage may give £5000
•a grandparent or remoter ancestor £2500
•a party to the marriage, £2,500
•If you are not related to the parties getting married, £1000

Weddings are both a time of celebrating, where a beautiful couple decide to make a declaration to each other that they will stick together through thick and thin. And the declaration is in front of friends and family (and sometimes colleagues) and published appropriately. Being married creates a contract that is witnessed before numerous people, which is as much kept by the parties to it, as it is sheltered by social norms.

A more jaded person might think that any time between May and September is wedding season, and judge just how expensive a wedding might be. Not only for the nuptial pair, but for all the rest. How many times can you wear that wedding hat? And can you really afford to attend seven weddings in a year, where the gift list ranges from the Denby cups and saucers through to the Villeroy & Boch and all the way through to the very best of wedding ranges on offer. Being a guest at a wedding can involve an outlay from £100 through to many thousands. The wedding lists can be enormously revealing – how can the happy couple expect to manage without silver napkin rings from Tiffany ? At what point does a gift become just the price tag for entry, the tribute to be rendered?

In ancient times, of course, the wedding of two people was the moment when they set up house together for the first time, when they left the home of their parents. In more recent centuries, a couple would have to work towards their “bottom drawer” of items for the new home. Making quilts for the bed was part of the way that friends and relatives could make a contribution, if you came from humbler stock, and wanted to wish the new couple well. Perhaps in previous decades even, the items commonly bought for the happy day was limited by the technology available – the automatic pop-up toaster was not patented until 1919, and so cannot have featured before then – the microwave, breadmaker, smoothie maker, vacuum cleaner, fridge, freezer, and electronic food processor also being recent inventions.

What might have been more important in those times would be the financial security of the couple – perhaps in a time when marriages left one party more financially vulnerable than the other. Marriage settlements safeguarding the assets of the female party were common amongst those who had significant assets to preserve.

Inheritance Tax legislation has existed in many guises, and has preserved a special category of gifts for the wedding event, but some might think that the allowances given do not reflect the size of gifts that are expected (moneysavingexpert
reported the average price of a wedding as £20,000 for this year)

These specific gifts are called those in contemplation of marriage, defined in section 22 IHTA:

a parent of a child to the marriage may give £5000
a grandparent or remoter ancestor £2500
a party to the marriage, £2,500
If you are not related to the parties getting married, £1000

When it comes down to what counts as a gift for this exemption, then clearly, proving retrospectively that a gift is made in this way requires a nexus between the event and the gift that is reasonable. For example, the delivery of presents to the home of the bride and groom two weeks after the event would be in contemplation of the marriage, on the basis that the event can clearly be tied to the item transferred. However, the gift of a cheque that did not clear the bank until three months after the marriage might not – as it might be unclear that this was a gift made for the marriage. The payment of the invoice for the cake might be closely connected with the wedding as to form part of a wedding-gift. Payment for a late honeymoon trip might not, if it cannot be distinguished from an ordinary holiday.

To err on the side of safety, all cheques to the couple should probably be presented and have cleared by the date of the wedding or civil partnership. You might keep a record of your gift card to the happy couple for later reference.

If you spend more than £5000 on your son’s civil partnership, as one of the more honoured guests, you might have to use your annual exemption for gifts (ss19 IHTA) to the total. This could give you up to £6,000, if you did not use the previous year’s allowance. As this allowance relates to you as an individual, then potentially there might be four parents with their allowances intact.

Gifts, Tribute and Taxes

In my family, where there are important gifts to be made, gift giving is noted formally, and full notes are kept. For this purpose, when I’m talking about gifts, I mean a gift of money or items that have a resale value that is relatively substantial – and which has a meaning for Inheritance Tax – since the particular giver (aka donor) is someone who might be expected to have an estate that would suffer inheritance tax on death.

In my own circumstances, where there are children who share one parent, but not both, recording gifts has also been a way of making sure that the pattern of giving is fair.

Fair is a subjective term – of course it is. Children born earlier may be fully “paid for” by the time a person dies. Children (and of course grandchildren) born later may not be so. To keep things fair is a difficult subject. What is fair to one might not be to another. What makes judging these things so hard is that usually, no records are kept.

Not in my particular family – largely because my father is very familiar with family disputes and inheritance tax law, having been a succession and tax lawyer for many decades.

Being a person who likes to understand the principle of equity and to practice what he preaches, he has devised a way of making sure that all his children understand the impact of the gifts that have been given over the years and the exemptions that cover each gift, so that in the event of his death, his executors have an easier time of it, and that if there are any disputes (polite or otherwise) between his heirs, at least there are some documents to back up the process. On the basis that knowledge can give you truth, if not happiness.

If the role of being a child is to learn from a parent, then this is something that I hope to be able to use – in the role of a lawyer learning from another in the same field, I would also like to take this on board.

And tribute? That’s the way the family choose to look at an enforced gift – one that has to be made, for social or other purposes. Like gifts for a wedding… or gifts on the occasion of an event that is made popular by greetings card manufacturers. It does have the feel of an individual approaching a tribal leader, laden down with gold and silver, spices and fine goods, to impress or placate. On reflection, that is rather like the wedding gift table.