Estate planning: Trusts, pensions, and gifting strategies

In light of the frozen inheritance tax (IHT) allowances, trusts are becoming a more frequent topic in estate planning discussions. 

This is compounded by the increasing frequency of later life divorce and re-marriage, whereby more and more clients are entering into second marriages later in life, often with children on both sides from prior relationships and each party bringing considerable wealth into the marriage. Understandably, in this scenario there can be a preference to pass wealth prior to marriage down the bloodline in the event of death.

Trust planning

Following the advent of Pension Freedoms there has been a marked change in how individuals approach IHT planning, with many choosing to spend down non-pension wealth and preserve the pension fund due to its favourable IHT tax treatment when it is passed onto future generations. 

However, it is not possible to direct pension wealth to specific individuals on death without bringing the pensions into scope for inheritance tax as part of the assessable estate. 

Where there is a strong desire to control who inherits pension wealth after death, an appropriately worded Trust and letter of wishes can be an effective tool to preserve inheritance to specific individuals or groups of individuals. 

With many years of expertise, we incorporate trusts as part of a comprehensive estate planning solutions to optimize tax outcomes ensuring that conversations with our clients solicitors and accountants take place so that all aspects of estate planning are working in harmony and that the clients wishes are understood by all professional partners. 

Of course, we are not qualified to set up a Trust for a client but we can support the Trustees and their professional advisers in ensuring that an appropriate, well diversified investment strategy is in place to assist the Trustees in meeting their duties to the beneficiaries.

Gifting to individuals

Where retaining control of assets is of lesser importance and your clients want to consider making direct gifts to their children or grandchildren, perhaps to help them get onto the property ladder, we are able to use our extensive expertise in cashflow modelling to establish the core fund needed to provide them with a comfortable lifestyle for the remainder of their lives. 

This provides reassurance that any capital gifted away is affordable and will not be detrimental to their own quality of life in later years, while also enabling them to have the joy of seeing their children and grandchildren get off to a great start in life. 

Of course, making a direct gift to family members is a Potentially Exempt Transfer (PET) and if you are making gifts of considerable value over time it is important to ensure that the recipients are aware of the potential inheritance tax liabilities that may arise in the event of premature death. 

At TPO we are able to access the whole of the market and can help you and your clients source the most competitively priced, suitable life policy to provide the recipients of a gift with the funds to meet that potential IHT liability should it arise.

Retaining access to capital

The economic environment in recent years has been particularly challenging with high inflation and rising prices, causing some to press pause on their IHT strategies, preferring to keep their assets available to them during their lifetime. 

As our population ages there are also an increasing number of instances where Powers of Attorney have been put into place which greatly restricts estate planning opportunities unless one is willing to apply to the Court Of Protection for approval to make anything other than seasonal gifts. 

One option which could be considered, although it is a higher risk approach to planning and not suitable for all, is to invest in a Business Relief (BR) scheme* which will invest capital in a range of companies. 

In the main, these companies focus on capital preservation and risk mitigation through direct investment in unquoted trading companies. You need to be invested for a period of two years to qualify for BR and the two year qualifying period will effectively start from the date HMRC declares the investment obtains qualifying status, rather than the day invested. 

This type of investing is really only suited to individuals who have some experience of investing and it is important to take expert advice from a firm which has a robust due diligence process in place as well as a sound advice process. 

Our Alternative Investing Guide explains more about this valuable planning tool and the governance processes we have in place at TPO to support this type of advice; please speak to your usual TPO contact to request a copy.

In conclusion, being an independent firm of advisers, who are planning led and have many years of experience advising clients across all wealth tiers, we are able to consider all options when helping construct an effective IHT strategy for your clients. Please speak to your usual TPO contact if you would like to know more about our services.

The information in this article is correct as of 21/05/2024.

This article is intended for information purposes only and does not constitute individual or legal advice. 

Please note: The Financial Conduct Authority (FCA) does not regulate cash flow modelling, estate planning, tax or trust advice.