A client (in her 80’s) was sole residuary beneficiary under her friend’s Will. The estate was subject to IHT . Client did not wish to enter into a deed of variation at the time and the estate has been wound up. Some assets were encashed and other investments were transferred into the beneficiary’s name.
She has since taken advice from her financial adviser in connection with her own estate and he has advised her to vary the terms of her late friend’s Will so that the whole estate passes into a discretionary trust with client as one of the potential beneficiaries and with an accompanying letter of wishes outlining the deceased’s “wishes” for client to be primary beneficiary during her lifetime and then for the estate to be divided in unequal % between the other beneficiaries of the DT.
I am uncertain as to what place a fabricated letter of wishes has? I would appreciate any guidance , thank you.
Assuming the firm is regulated you can contact the FCA. Pretty strict rules on vulnerable clients, I can’t see advising over 80s on any scheme is advisable.
Whilst I agree with Richard that one needs to tread carefully when advising a (potentially) vulnerable client I can also fully understand why the adviser will have suggested a deed of variation.
As the friend’s state was subject to IHT, its inheritance will create an IHT issue for the client. Whilst QSR might be claimed, the amount of such relief, even if at 100%, may well be small compared with the additional IHT the client’s estate may suffer.
The suggestion that she makes a variation may therefore be in her best interests and the variation into a discretionary trust the most advantageous course of action for the client.
To suggest that persons over 80 should not be advised to enter into a variation may, in many instances, be verging on the negligent.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
The financial planner appears to have failed to understand the DoV concept. He/she is presumably operating in the belief that a DoV “re-writes the deceased’s will” which he/she thinks could thus include a letter of wishes written by the deceased.
Confusion as to the position of a DoV in the real world versus IHT treatment is by no means uncommon.
I was in the past asked to “educate”/“train” financial advisers in a number of banks. It became clear to me that most (not all) of them were unaware of what they didn’t know when it came to tax issues. Thus, for example, re DoVs, the common understanding was that a will could simply be rewritten in its entirety and, typically, most had never even read any part of IHTA 1984 including s142.
Commissions on selling SPBs were I understand relatively high. Many were sold to non-UK domiciled resident individuals out of the Isle of Man on the basis that remittance basis treatment applied to any chargeable event gains arising.
It was agreed that such planners within the banks did not give tax advice and were told to refer clients to their own tax advisers. Unfortunately, this didn’t always happen in practice.
Advisers, like to keep clients to themselves and whilst perhaps understandable tends to mitigate against referring the client to other “competitors” when specialist knowledge is needed.
I appreciate that a Deed of Variation incorporating a Discretionary Trust would prevent the inherited part of client’s estate being subject to IHT again on her death, however, as client is unlikely to need money from the trust during her lifetime, I wonder why she has not been advised to simply enter into a Deed of Variation to divert part of the deceased’s estate to the beneficiaries of her own Will. Or, am I oversimplifying matters?
There appears to be one no reason why the client could not simply redirect the whole or part of her inheritance from the deceased under a DoV to, for example, beneficiaries she has included in her own will. There is no specific need for a DT created under a DoV.
The trust would also be settlor-interested for income tax purposes if implemented as proposed.
The letter of wishes should be written by your client: the reality of the matter is that she is establishing the trust, but that it qualifies for special tax treatment.
The advantage of using a trust, rather than redirecting to other individuals by way of outright gifts under the Deed of Variation, is that the funds can be ring-fenced from those other individuals until your client has died, just in case she does need additional funds which she had not expected. There is a cost to doing that (ie the administration of the trust) and the complication of the trust being settlor-interested, but it will still avoid the funds being redirected forming part of the client’s estate for IHT.
A bit late to this thread but I agree with both Paul’s. From the initial question it appears clear that a DoV was considered at the outset, and rejected. However following input from the financial adviser, the matter was reconsidered. Without being privvy to the finer details, it is difficult to pass judgement. The key issues appear to be:
i) DoV or not.
ii) If yes, then absolutely or into DT
iii) Type of investment.
I can think of good IHT reasons for a DoV, (especially if I was one of the intended beneficiaries - and as an adviser I am clear that my primary duty is to my client the testatrix, but that does not mean that the interests of the potential beneficiaries should be ignored, indeed this is what many testators are interested in).
Paul D has explained the benefits of (ii).
I am not sure we have enough information on (iii) to pass judgement.
As to the letter of wishes, I agree that a low should be prepared, but from the point of view of the beneficiary, not the deceased.
Very late to the party - I see only the summary postings.
If the estate of the 80-year-old is likely to be taxable, the DoV is a no-brainer.
Variation to her own beneficiaries keeps the inheritance out of IHT on her death, but the inheritance then forms part of someone else’s estate - it just kicks the can down the road. If the estate of any of her beneficiaries is likely to be taxable, variation to a DT insulates the inheritance from 40% IHT on anyone’s death for 125 years.
If what the trustees are given is the right to call in the value on demand, then the admin overhead is minimal, and the complication of trustee investments does not arise.
The DoV to a DT will negate the value of the inheritance in her estate by balancing with the corresponding debt to the DT. If she really will have no use for the money, then she can make PETs on top of that and, if she survives the seven years, that will remove additional value from her estate.