Mr Thompson

Report
Financial Planning for
Second Marriages
Colin Jelley
Private Client Director
St. James’s Place Wealth Management
Agenda
Objectives:
• Identify the issues
• Examine the solutions
• Case study: Mr & Mrs Thompson
The Family
Mr Thompson Aged 58
Widowed
Andrew (24)
Brenda (22)
Mrs Thompson Aged 52
Divorced
Catherine (12)
Ross (27)
Bradley (25)
Asset
Mr
Thompson
£k
Mrs
Thompson
£k
London home
(jointly owned)
1,000
1,000
Holiday Cottage
Cash/Investments
800
1,900
Personal Pension
Employer’s Pension
Life Cover (whole of life)
800
500
1,000
Total
6,000
Assets
500
250
250
2,000
Wills:
Frequent issues
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•
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Marriage revokes a Will
No wills – “It’s just too difficult”
Wills leaving assets outright to own children
Wills leaving assets outright to survivor
Mr Thompson:
No Will
Intestacy rules apply
• Prescribed process
• £250,000 (and personal belongings) to Mrs Thompson
• Half of residue to Mrs Thompson in trust (£1,725,000)
• Half of residue to Mr Thompson’s children (£1,725,000)
No Will:
IHT on Mr Thompson’s death
Assets to children
Less transferable nil rate band
IHT at 40%
IHT on Mrs Thompson’s death
Assets
Less Mrs Thompson’s nil rate band
1,725,000
(650,000)
1,075,000
£430,000
IHT at 40%
1,975,000
(325,000)
1,650,000
£660,000
TOTAL IHT
£1,090,000
Mr Thompson:
Outright gift on death to his children
£3.7m
Andrew (24)
Brenda (22)
Catherine (12)
Mr Thompson:
Outright gift on death to his children
IHT on Mr Thompson’s death
Assets to children
Less transferable nil rate band
IHT at 40%
•
•
•
Mrs Thompson is unhappy
Possible claims against the estate – under IPFDA
Conflict between Mrs Thompson, Andrew and Brenda
3,700,000
(650,000)
3,050,000
£1,220,000
Mr Thompson:
Outright gift on death to Mrs Thompson
Assets (£3.7m)
Catherine (12)
•
•
•
Ross (27)
Mr Thompson’s assets will pass in accordance with
Mrs Thompson’s wishes on her death
Andrew and Brenda could be “disinherited”
Family conflict and unhappiness
Bradley (25)
Mr Thompson:
Value of advice
TRUST
Assets (£3.7m)
Andrew (24)
Brenda (22)
Catherine (12)
Ross (27)
Bradley (25)
• The Trust “ring-fences” Mr Thompson’s assets
• Mrs Thompson occupies trust property and receives income
• Mrs Thompson has access to capital if necessary ….
at the Trustees’ discretion
• Choice of suitable trustees
Further opportunity
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The Trust (£3.7m) will form part of
Mrs Thompson’s estate for IHT
Does Mrs Thompson need to have access to
all of Mr Thompson’s assets?
Terminate Mrs Thompson’s interest in some of the
assets in favour of Mr Thompson’s heirs?
Professional Trustees – Mrs Thompson’s formal
consent not required
Significant IHT savings
Further opportunity
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Trustees decide to terminate Mrs Thompson’s interest in:
Holiday cottage
£800,000
Cash/investments (half) £950,000
Total
£1,750,000
IHT saving after seven years of £700,000
Taper relief after three years
CGT on the termination of Mrs Thompson’s interest?
Sufficient assets left in the Trust to protect Mrs Thompson financially
Andrew and Brenda no longer ‘waiting for step-mum to die’!
But what if Mrs Thompson dies within seven years?
What if Mrs Thompson dies within 7 years?
• Mrs Thompson’s nil rate band will have been used up
• Ross and Bradley pay more IHT on their inheritance
• No more IHT payable as a result of the gifts to
Andrew and Brenda but…
• Trustees should have a plan of action to ‘compensate’
Ross and Bradley
• Term insurance
• Retain sufficient assets within the Trust
How to turn two nil rate bands
into three nil rate bands: the issue
TRUST
£650k TNRB
Mrs Thompson (1)
Mr Thompson
Mrs Thompson (2)
•
Mrs Thompson (1)’s nil rate band (NRB) fully available on her death –
transferred to Mr Thompson
•
•
•
On Mr Thompson’s death, he can only transfer his to Mrs Thompson (2)
Mrs Thompson (1)’s NRB is wasted
Only £650k available to pass tax-free on Mrs Thompson (2)’s death
How to turn two nil rate bands into
three nil rate bands: the solution
TRUST
£650k TNRB
£325K IOU
£975k tax-free
Mrs Thompson (1)
Mr Thompson
NRB TRUST
Mrs Thompson (2)
IOU
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Mr Thompson’s will leaves Mrs Thompson (1)’s NRB to a NRB Trust
NRB Trust lends assets to Mrs Thompson (2)
Debt (plus rolled up interest) deductible on Mrs Thompson (2)’s death for IHT
Summary:
no/poor planning
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Ticking time bomb
Loss of control
Family conflict/resentment/additional costs
Tax on first death and wasted tax planning
opportunities
.…. Unhappy clients!
Summary:
sensible planning
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Assets properly managed by professional
trustees following Mr Thompson’s death
Assets pass as intended
All members of the family properly provided for
Lots of IHT saved
Happy clients!
Property ownership
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Does the ownership of the London home properly reflect their
respective contributions and intentions?
Has Mr Thompson contributed more than 50% to the purchase?
Does he want to confirm this in a simple declaration of trust?
Beware stamp duty land tax if there’s a mortgage
Sever joint tenancies so that joint assets pass to the
professional Trustees on the first death
Joint property discount on the second death on the London
home (to save a further £120k of IHT) – 15% discount
Cash & Investments - £2.4m
Bespoke investment strategy
Bespoke tax strategy
• Income Tax
• Capital Gains Tax
• Inheritance Tax
Mr Thompson:
Lifetime IHT Planning
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Discounted Gift Plans
Loan Trusts
Gift Trusts
Discretionary Trusts
Bare Trusts
Family Limited Partnerships
Private Investment Funds
Donor
100%
Ltd Company
General Partner
1%
Child
Ltd Partner
20%
Child
Ltd Partner
20%
FLP
Investments
Donor
Ltd Partner
19%
Grandchild
Ltd Partner
20%
Grandchild
Ltd Partner
20%
Mr Thompson’s £1m life cover
TRUST
Mrs Thompson
Loan
Loan
+
5 children
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In Trust?
Right beneficiaries
Possible to alter?
Pension planning
Letter of
nomination
PP/EMPLOYER
PENSION
MASTER TRUSTS
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Pension schemes in trust?
Using pilot trusts
Check letter of wishes
PILOT TRUSTS
Order of gifts
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Exempt gifts
Loans to trusts
Chargeable lifetime transfers
Potentially exempt transfers
The Inheritance
(Provision for Family and Dependants) Act 1975
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Continuing financial obligations from first
marriage?
‘Clash of the wives’
Mr Thompson’s Will: what he should have
done
Summary
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A golden opportunity for you to encourage clients
to review their financial affairs, including pension
arrangements and life assurance
Cement your role as their trusted adviser
Don’t let them bury their heads in the sand
– recipe for disaster
There are solutions to meet clients’ needs and
save significant amounts of tax along the way
Advice is of paramount importance

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