Contemplating what might happen in the future could be considered a futile exercise, as we cannot know where life will take us. However, being prepared, so far as possible, for the inevitability of death and the possibility of mental incapacity is prudent, as none of us are immortal or immune from accidents.
Seeking professional advice when it comes to investing is well understood but comprehensive estate planning can be equally important in ensuring a smooth transfer of family wealth.
Each individual and family has different goals and for many, providing for their children is the principal aim; maybe alongside a keen interest in philanthropy or ensuring that there is a robust contingency plan for their business. Whatever the aim, it is advisable to start the planning sooner rather than later and to prepare for all eventualities.
The Covid-19 pandemic has perhaps brought into sharper focus the need to have your affairs in order, should the worst happen. It has also shone a brighter light on some of society’s inequities and may have encouraged those individuals in a privileged position to engage in more philanthropic activities.
Central to all sensible succession planning is having a will drafted. This is imperative to ensure that your wishes are fulfilled, and to mitigate the chances of future disputes between family members.
Appointing suitable and trusted individuals to act as the executor and trustee of the estate, to ensure that the assets are distributed in an efficient manner, is a crucial consideration of anyone making a Will. Tax considerations are also very important. Legal advice can ensure the best use of the available inheritance tax exemptions and thresholds, such as the Nil-Rate Band and spouse exemption. Another often overlooked consideration is whether there will be sufficient liquidity in the estate to actually pay the tax.
Lasting Powers of Attorney
Whilst the vast majority of individuals recognise the need to have a Will, fewer get around to completing Lasting Powers of Attorney (LPAs). An LPA is a document enabling a person (the donor) to appoint an attorney or attorneys to manage their financial affairs and/or make decisions as to their health and welfare.
Whilst nobody likes to contemplate what should happen to their affairs should they lose mental or physical capacity, accidents can happen to anyone.
Having a registered financial LPA, so far as possible, can future proof your affairs, safe in the knowledge that, should something unexpected happen, a trusted individual will be able to seamlessly take over the management of your finances.
LPAs can also be of practical assistance even before the issue of lack of capacity comes into play. Your appointed attorney can manage your affairs where you may not be able to physically deal with them, for example in facilitating the signing of documents when you are abroad.
A Health and Welfare LPA is vital to ensure your chosen attorneys can speak to doctors as if they were you when you are not able to make decisions for yourself. “Next of kin” is not a legal status and doctors will take into account their views, but will ultimately make medical decisions for you in the absence of appointed attorneys. Attorneys can refuse medical treatment on your behalf and it is important that they know your wishes in this regard.
One of the most effective tools in estate planning is the trust. Trusts can either be incorporated into the Will, or set up independently.
Trusts encompass a multitude of assets, representing the diversification of wealth portfolios across society. Cash, shares, stocks, and property can all be adequately managed within a trust structure.
They are often perceived as being exclusively for the ultra-wealthy and are often used as a bye-word for shady practices and aggressive tax evasion.
The truth is much more mundane. Trusts represent one of the most prudent forms of asset protection and financial planning, and should be considered by anyone seeking to achieve these aims. Trusts are also subject to ever-increasing transparency regimes, involving substantial reporting obligations.
A life interest trust can be used where you want to give your spouse the right to income throughout their life, whilst preserving the capital to pass to your children. This may be particularly relevant if you have children from a previous relationship.
It may well be that you wish to benefit a member of the family who is vulnerable. In this scenario, a trust can be set up to ensure that money is set aside for that specific individual, but with the security of having trustees to manage the funds on their behalf.
Trusts can be a very useful tool for protecting and transferring the family business. A trust may be set up to establish a group of trustees to act as custodians of the company, allowing time for the younger generation to gain experience before taking over.
Tax regimes are often reviewed and updated. Putting assets in a trust allows for decisions regarding the allocations of funds to be delayed, or brought forward, in order to benefit from any future favourable changes in taxation law.
Pension benefits and Life insurance policies can be written into trust, with the instruction to pay out to a certain beneficiary on death. This can be particularly useful in providing liquidity upon the death of the settlor. The funds from this policy will not form part of the estate for inheritance tax purposes and can be accessed without a grant, and used to contribute towards any tax bill.
The variety of flexible distribution arrangements that can be incorporated into a trust is a significant attraction. This may be particularly relevant to parents when distributing their substantial wealth to their children.
Many clients want to provide adequately for their children without compromising their outlook and motivation in life. A sensible approach in this scenario is to set up a discretionary trust in favour of the children. This gives the trustees control to decide when to distribute the capital to the children. You may wish to delay the age at which children are entitled to receive the capital, for fear that they may be too irresponsible, or that it would be detrimental to their attitude and prospects in life to receive large sums at a young age.
Many individuals’ assets may substantially increase throughout their lifetime. It may be that the value of their property increases, or that they inherit substantial sums from a relative. Other individuals may fall upon hard times and require additional support. Utilising a trust structure means distributions do not have to be set in stone and allows the trustees to take into account the current circumstances of the beneficiaries, before making distributions.
Whilst the days of aggressive tax avoidance have largely been consigned to the past, there still exists a negative narrative around tax planning, especially for high net worth individuals.
The reality is that tax planning is essential and legitimate. Families with considerable wealth often have incredibly complex tax affairs, and frequently encompass international elements.
The question of tax has been complicated by an increasing cosmopolitanism amongst the wealthy and the globalisation of tax laws and regulations across jurisdictions, running alongside the changing nature and reputation of jurisdictions.
ESG – Environmental, Social Responsibility and Governance
There is a growing realisation that investing in products offering financial growth and stability, whilst being socially and environmentally conscious, are not necessarily opposing aims. Responsible and resilient investing and asset protection will by necessity mean a rebalancing of wealth to prioritise assets that create a net positive impact for society and the environment.
The COVID-19 pandemic has further encouraged wealthy individuals to consider how they can use their wealth to benefit others.
The Association of Charitable Foundations estimates that the top 300 charitable trusts and foundations in the UK distribute £2.7billion in grants each year. This accounts to about 15% of all annual income into voluntary organisations.
According to certain estimates from the Organisation for Economic Co-operation and Development (OECED) philanthropy’s economic contribution is as much as 5% of global GDP.
Philanthropy can play an important role in helping to curate a legacy for an individual’s estate. While there is an assumption that millennials are the driving force behind the shift to sustainable investing and responsible capitalism, wealthy older individuals are also now ever more mindful that wealth comes with responsibility.
Estate planning is vital to ensure wealth is transferred to the next generation in the most tax-efficient and timely fashion, taking into account each individual’s priorities and wishes to come up with a plan which gives peace of mind for whatever the future holds.
By Suzanne Mynors, Senior Associate, Russell Cooke
Russell-Cooke is a top 100 London-based law firm advising commercial, not-for-profit, regulatory and personal clients.
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