How Can I Protect My Children’s Inheritance?
- Written by: Jason
- Category: Inheritance Tax Planning, Uncategorised
- Published: 25th March 2013
“Bloodline Planning” is the process of ensuring that your assets reach your children, grandchildren and other relatives. Rather than ending up in the wrong hands!
When assets are distributed in a Will to beneficiaries absolutely so much can be lost.
Assets gifted absolutely form part of the beneficiary’s estate and would be at risk of attack from any future divorce settlements, creditors and taxation.
Effective Estate Planning utilising Trusts can ensure that your children and grandchildren are able to benefit in full from the inheritance you want them to receive. And at the same time, protect the family home and other assets from being lost to the costs of Long Term Care.
Have you considered what might happen if your surviving spouse were to remarry?
How would this affect your own children if he/she later changed their will in favour of the new spouse and any subsequent children?
If you already have children from a previous marriage how do you ensure that they would get their fair share?
What if your children are very young or have special needs? How can you ensure that they are fully provided for?
There may also be a business you have worked hard to build up. Surely you would want to protect this for your family too?
Asset Planning In Your Lifetime
Some Estate Planning can be done whilst you are alive. For example, assets could potentially be gifted to beneficiaries before your death.
This could prove extremely tax efficient in terms of Inheritance Tax. As assets gifted away are fully outside of the donor’s estate 7 years after the gift is made.
However, rather than gifting assets absolutely, as this would mean that these assets will again be potentially at risk from divorce, creditors and long-term care costs, as well as adding value to the recipient’s estate. It would be wise to consider gifting with the aid of Discretionary Trusts.
A Discretionary Gift Trust means that although you make a Gift to your children and grandchildren. The asset need not enter their own estate thus protecting these assets from any possible claims on them in the future.
By Gifting to a Trust, the donor retains full control but, cannot have access to the funds. Even if the donor never received any benefit, but potentially could, the Gift is classed as “With Reservation of Benefit” and the full value is deemed to be in the donor’s estate at death for Inheritance tax purposes, not just the initial Gift.
The Gift Trust ensures that a spouse, children grandchildren and any other named beneficiaries can benefit at the Trustees discretion.
Access To Protected Assets
We sometimes recommend a Discretionary Trust called a Probate Trust which, whilst still protecting assets from attack from care costs, allows the Settlor access to the assets held in the Trust. The Trust has a memorandum of wishes where the Settlor is also a beneficiary. The purpose of utilising this trust will be for bloodline planning and not Inheritance Tax as a transfer of an asset by the settlor would be a Gift With Reservation of benefit.
In addition, for a single/widowed client, a proportion of the main residence can be conveyed to a Probate Trust which can protect the house from care. Individual advice would be required as to whether this is an appropriate course of action.
Utilising Trusts For Bloodline Protection
Its been established that your children/grandchildren’s future inheritance can be at risk from a number of issues. Taxation is one, but inheritances can be impacted by a number of other more emotional issues. Such as care costs, where an estate can be reduced significantly in value to pay for these costs.
Family homes may have to be sold, and income and investments drained seriously reducing any subsequent inheritance.
Family circumstances can also be a concern
It may be that there are some family members you would wish to benefit and some that you wouldn’t. A classic scenario would be an individual who has married into the family. But you wouldn’t want them to benefit from your estate.
Family disputes do occur and divorce and or remarriage can greatly influence who inherits and by how much.
Subsequently, if on inheriting monies, an individual then divorces that same inheritance is at risk. Similarly, if an individual inherits assets but then is later subject to bankruptcy proceedings. Or has creditors liabilities, then the whole inheritance could be at risk.
The correct Trusts can provide the protection and control of a multitude of assets from those risks noted above. This protection can extend from the family home to investment products and Family Businesses.
There are two potential scenarios when using Trusts to protect your children’s inheritance. One is placing an asset in Trust during your lifetime. The other is in preparation for a Trust in the event of death.
Its advisable to seek the help of a professional consultant when considering your options for which trust is best for your circumstances.