Helen Morrissey talks to industry specialists about the importance of estate planning and what advisers can do to raise awareness of the need to make adequate provision
Mark, can you talk a little bit about the potential implications of not having an estate planning strategy in place?
Mark Green: I think the main issue is the government all of a sudden becomes the main beneficiary of the client's estate and all the family members are obviously deprived of it. If the client were given a choice, I don't think they would necessarily want to benefit the government, presumably they'd want to benefit their own family. Therefore, estate planning is an absolute must for any individual, irrespective of their position and certainly a valid will is a starting point in that regard.
Tim, if you can just run through some of the misconceptions that people hold about estate planning. A lot of people assume that, for instance, their partner will get everything when they die, so they don't see a point in making a will. They may feel a common law partner has an automatic right to their estate, for instance
Tim Thornton Jones: That is the prime misconception. If you are not legally married, then your partner will not inherit your entire estate. What's even worse is that they will pay inheritance tax on your estate, whereas if you are legally married, anything that the surviving spouse inherits is free of inheritance tax.
What are the other key elements of estate planning and why?
Mark Green: The starting point is the will - that really is the basic starting point for any estate planning. I think then the next thing you've really got to consider with the client is how much they can afford to give away.
Can they afford to give away in the first instance, given the number of people living longer at the moment? The estimate is that more people will live to 100 and on that basis, they obviously need to stretch their resources to actually keep them in income until their death.
Tim Thornton Jones: The basic rule is you really do have to know your clients extremely well in order to give sound estate planning advice.
Don't assume when you see a couple that they are married. Quite often they're not, even though they've got children. It can have dire inheritance tax consequences, if you get it wrong. You've got to find out what their long-term plans are. Are they going to move abroad? Are they selling a business? All of these things can have a real impact on what you actually do for them.
Retirement Planner did some research quite recently and it showed that while there is an awareness of the need to do estate planning, a lot of people aren't doing it. What are the key challenges for you as a solicitor in actually getting people to address estate planning?
Tim Thornton Jones: The opportunity to discuss estate planning arises in so many circumstances. It can be on retirement, it can be when they come to make a will, or it can be on the sale of a business.
One of the questions RP asked in the research was ‘What challenges do advisers face when it comes to dealing with estate planning?' 55% said client apathy, 27% said they didn't want to lose control of their assets, and 16% said the cost. What would you say to that?
Mark Green: Apathy. Obviously, a lot of clients don't think about estate planning - it's one of the things you want to put off.
But given the opportunity, most people should be aware if they're given the choice, do you want to benefit your family or the government? I think most people will obviously want to benefit their family.
I think there's a lack of awareness, certainly among clients, of the consequences. No-one wants their beneficiaries to pay inheritance tax when they could have avoided it.
I think the thing most people need to be aware of is you need a will and you need to keep it up to date. I've had dealings where an out-of-date will can be just as aggravating as no will at all in some respects.
So certainly from an adviser's perspective, they should have yearly reviews of clients' investments. It may be an opportunity to discuss the chance to do some estate planning at that stage.
Many clients often leave estate planning till quite late on. What are the potential issues surrounding putting off planning?
Mark Green: An adviser asked if there was anything we could do for a 97 year old client, not in the greatest of health, and the answer was no. The client wasn't insurable, so you couldn't use discounted gift trusts or whole of life policies in trust. There was really very little can be done.
Start as early as you possibly can. Bear in mind that you can't necessarily afford to give all your assets away.
But you certainly need to give some thought as to the structure you can place around the asset that can potentially give you access while also doing estate planning.
Tim Thornton Jones: You've got to get that seven-year clock ticking if you're going to give things away. Most of the death-bed planning routes have been closed down by the government over the years.
You can still invest into assets that are relieved for inheritance tax, such as agricultural property and business property. But even then, you've got to survive that by two years to escape altogether.
What avenues are open to people that are scared of losing control of their assets?
Tim Thornton Jones: There are various schemes, loan trusts, discounted gift schemes and so on. Using insurance policies is really the best way of retaining control. Otherwise, giving things away and surviving by seven years only works if there's no reservation of benefit. You have to use these insurance-based products to retain control over your assets.
Mark Green: We've seen a lot of people using loan trusts and discounted gift trusts because they are a nice straightforward arrangement. Most life companies provide them, so you have a choice of provider.
With loan trusts, you simply make a loan and the client accesses the loan as and when they need to access it. With discounted gift trusts, you set them up and you get a payment stream coming back.
I quite often say to people you might actually need to use both trusts for one client - part of it for loan trusts so they've got immediate access, and discounted gift to actually provide the regular payment stream.
Tim Thornton Jones: I think one of the underused ways of doing it is making gifts out of your normal income, even though that is actually under attack by the government at the moment.
But drawing off the income from your SIPP, for instance, and giving that away - if you don't need it - is quite a good form of inheritance tax planning.
Can you give a little bit of an overview about how that works and how advisers and solicitors can use that to help clients?
Mark Green: I've come across a number of clients over the years where they have an ISA they never access, so the value accumulates. Their ideal situation would be, if they can afford to start giving it away, to take the income from that ISA and start making gifts of it.
You can set up a discretionary trust and make regular payments which will qualify for normal expenditure out of income. Therefore, it's an exempt transfer. That's quite an easy route to take.
One has to be careful in terms of insurance policies. Taking 5% from an insurance policy would not be classified as normal expenditure. That's been recently pointed out by HMRC, which said it is not income, but capital.
The key to estate planning is strong documentation. What are some of the key issues advisers and solicitors need to be aware of to make sure their documentation is as robust as possible?
Tim Thornton Jones: Keep very comprehensive file notes, and make sure that everything is properly documented and that documents are dated. Also, make sure the clients and the beneficiaries know where these documents are.
Do you think there's a bigger role pensions can play within an estate planning strategy?
Mark Green: Absolutely. At the end of the day, everyone should have a pension. They need to prepare for retirement. People are living much longer, so we're going to need to stretch those resources for a longer period to provide the income. I would suggest the pension is the starting point, the actual basic core income. Things such as discounted gift trusts and loan trusts provide the top-up. If a client needs extra money, they've got that to access it. But it is in a more friendly IHT environment. So, have a pension and other things as well.
What are the options open to people with long-term care funding and estate planning?
Mark Green: It's not a cheap exercise to fund a care home. In terms of planning, I think one has to be very careful because to deliberately deprive yourself of assets would mean that the authorities can overturn that. So, you have to be very careful and seek proper advice. If you're planning for care fees, you want to plan to go into a home that you might want to go into, rather than allow the state to put you somewhere you might not want to be.
Tim, how big an issue is long-term care funding when you're speaking to your clients?
Tim Thornton Jones: It is a big issue. it comes back to this point about don't give away too much too soon. You've really got to look after yourself first.
This is only an excerpt from a longer debate. Listen to it in full at www.ifaonline.co.uk/ifaonline/discussion/2114875/
Mark Green is head of tax and estate planning at Legal & General
Mark has been involved in taxation for more than 25 years, having gained considerable experience with the former Inland Revenue, two major life insurance companies, and as an IFA. He has a Masters degree in law and is a member of the Society of Trust and Estate Practitioners, the Association of Taxation Technicians and the Society for Advanced Legal Studies. Mark is also a Fellow of the Personal Finance Society and a chartered financial planner. He is an excellent communicator, regularly presenting to IFAs and professional connections on a variety of tax and estate planning issues, and has frequently been asked to comment in the national press.
Tim Thornton Jones is a founding partner of Berkeley Law
Tim specialises in private client tax planning, mainly for UK-domiciled clients, UK and non-UK resident, land owners, businessmen, farmers, entrepreneurs, sportsmen and entertainers. He is also involved in heritage property and in the creation of private charities for wealthy philanthropists. Tim has built a significant practice advising the ex-pat community in Monaco.
To listen to the whole debate go to http://www.ifaonline.co.uk/ifaonline/discussion/2114875/interactive-financial-adviser-tax-planning
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