‘I don’t need a will because my wife will receive everything if I die without one,’ a client said to me at the start of a meeting earlier this year. He had a landed estate in the West Country, a comfortable property in London, a villa and farm in Spain, a shooting estate in Scotland and substantial interests in a complex group of UK and overseas trading companies which he had set up twenty years ago.
He was married, with two adult sons who were successful entrepreneurs and had young children of their own. In total, his estate was worth more than £100 million.
Fortunately, by the end of the meeting I had managed to persuade my client that dying without a will would not be sensible from either a tax or a practical perspective, not least because of the risk that his wife might die first. He, for his part, had also decided that he wanted something that would offer more flexibility than anything the intestacy rules might offer. The careful use of trusts in his will would achieve both those aims.
It is likely that a claim for inheritance tax reliefs such as agricultural and/or business property relief (APR/BPR) will be possible in respect of my client’s worldwide business interests and his UK and EU farmland. These could potentially exempt a substantial proportion of his estate from a UK IHT charge.
If my client’s entire estate passed to his widow (assuming he dies first), there would be no opportunity to claim any IHT reliefs on his death, as his relievable assets would qualify for spouse exemption. True, there would be no IHT, but for the ‘wrong’ reason. It would also bunch both spouses’ combined assets in his widow’s estate, where they would potentially be exposed to a 40 per cent IHT charge on her later death.
However, ring-fencing my client’s relievable assets in a discretionary trust under his will would avoid that risk. This would have three main advantages. First, it would facilitate a significant IHT saving on the first death, as it would bank the reliefs. Second, provided that the conditions for the reliefs continue to be met, the relievable assets could be held in the trust without any ongoing IHT charges. Third, the relievable assets would be kept outside my client’s widow’s own estate, so that if any relief ceases to be available (for whatever reason), the unrelievable value would not be exposed to a 40 per cent IHT charge on her death.
During the meeting my client and I explored some ways of allowing his widow to benefit from the rest of his estate, but giving some asset protection if she remarried or lost mental capacity. I explained that one of the most effective ways to achieve this would be to leave his residuary estate on trust for her for life, so that she receives its income as of right, but with powers for the trustees to pay capital to her or hand it on early.
This would safeguard the trust assets if my client’s widow were to lose mental capacity or remarry, as the trustees would control the underlying capital. In addition, if she does not need all the income from the trust, the trustees could hand on any surplus assets on her behalf, with a view to mitigating IHT on her death. Because the trustees would retain control, that could be done even if she lost mental capacity and could not make any lifetime gifts herself.
A further advantage of these two trusts would be that together they could allow IHT reliefs to be ‘recycled’ after my client’s death. Briefly, this could be done by ‘swapping’ assets between the two trusts once the reliefs have been banked, so that his widow is left holding relievable assets on her death. Provided that the reliefs remain available, the effect of this would be that they could be claimed twice in respect of the same assets. Overall, that could enable a substantial additional amount of IHT to be saved.
Initially my client wanted to leave his residuary estate to his sons outright after his widow’s death. However, my client said that one of them is having marital difficulties. I explained that using a further discretionary trust after his widow’s death would give some flexibility in how his sons could benefit, and would offer some protection if either son were to divorce or become bankrupt. It would also mean that my client’s estate could ‘skip’ a generation and be held for his grandchildren when they are mature enough to use the assets wisely, without any IHT implications for his sons.
Despite the often adverse publicity surrounding them, will trusts are still invaluable for individuals with significant personal wealth. Careful structuring of them can give flexibility in how assets are passed on, whilst also giving some protection against the divorce, bankruptcy or loss of mental capacity of a family member in the future. Crucially, using them can also enable IHT to be saved both on a person’s death and after it.
Luke Busbridge is a lawyer at Bond Dickinson