Doris Raggatt, Author at MLP Law

Probate Administration and Trust Administration – pros and cons

Clients often ask if they should transfer part of their estate into a trust in lifetime, to avoid the need for a grant of probate upon death. This can be a useful strategy for various reasons, but there are also administrative and accessibility issues to consider before doing so.

Currently, the wait time for a grant of probate is a minimum of 16 weeks from submission of the application to the Probate Registry and can be much longer if a paper application is required rather than an online submission. This can cause inconvenience and distress for families when assets cannot be accessed until probate has been granted – causing financial problems for a surviving spouse or either beneficiaries. Additionally, if a house in an estate is to be sold, the delay in receiving the grant of probate can cause the sale to become very protracted and even for a buyer to withdraw due to the delay.

If, however, a client has transferred assets into a trust during their lifetime, then a grant of probate is not required for those assets to be distributed to the named beneficiary(ies) and can therefore save a great deal of time and expense in having to apply for probate.

An individual can transfer assets up to the value of the nil rate band (currently £325,000) into a lifetime trust. If a transfer exceeds this sum, then a lifetime inheritance tax charge of 20% is levied upon the value of assets in excess of the nil rate band. This of course is 50% less than the death rate value of inheritance tax at 40% and so although is a tax levied in a lifetime, does reduce the death rate by half.

Once assets are transferred into the trust, they are transferred into the legal names of the trustees. The person who set up the trust (the settlor) can be a trustee but there are potential adverse tax implications if the settlor is also to be a beneficiary and advice should be taken on this point. The trust deed would name the potential beneficiaries – for example, the children and grandchildren of the settlor.  There are potential benefits in protecting assets from care home fees by transferring them into trust, but again, this is a wide topic and outside the scope of this introductory blog. Always seek professional advice when planning for care.

There are different types of trust explored in other blogs by mlplaw, such as discretionary trusts and life interest trusts. The broad position is that once assets have been transferred into a trust, and you are not longer ‘retaining a benefit’ from those assets then they are regarding as being ‘outside’ of your estate for inheritance tax purposes, and those assets will not require a grant of probate to be dealt with upon your death.

If you have transferred your home into a trust, then upon death a grant of probate would not be required to sell the property, however, the value of the property may still be regarded by HMRC for inheritance tax purposes as being in your estate, as you have continued to live in the property therefore ‘retained a benefit’ from this. There are ways to avoid this trap however which advice should be taken on.

A further consideration with transferring assets into trust is that you may no longer be able to have use or easy access to them, so if you are likely to require access to those assets in future, by transferring them into trust, you ‘lose control’ of disposal of those assets as they are then legally owned by the trustees.

Therefore, although there are advantages of transferring assets into trust, for tax planning and possible care home fee protection reasons and to avoid the need to obtain probate, there are serious considerations to be taken into account and professional advice should always be sought.

Here at mlplaw we are experts on trust and probate matters and advise extensively upon estate planning to ensure the best outcome for tax effectiveness, and care home fees planning whilst ensuring that a client has access to all the assets they need for a long and comfortable retirement. Please call Doris Raggatt, Legal Director on 0161 926 1538 or dorisr@mlplaw.co.uk for a 30-minute free advice appointment.

The Importance of a Will in Simplifying the Probate Process

The importance of having a Will in place cannot be overstated. In other blog articles, my colleagues have discussed the importance of a Will and the various reasons why it is crucial to have one in place to ensure your wishes are carried out by your chosen executors and that any individuals you do/do not wish to benefit have been fully considered. There are also the tax and asset protection implications that having a professionally drafted Will in place will provide.

However, an additional reason to have a Will in place is when it comes to after your death and the process of obtaining a Grant of probate for your estate by your executors. Sometimes a client will say to me ‘Do I need a Will if the intestacy provisions will have the same effect as a Will to my wishes?’. This would for example be in the case where a client who was single (with no spouse or partner or a widow(er)) and was leaving their estate to their children in equal shares. In this instance, not having a Will would mean that under intestacy (not having a Will), the children would all be entitled to act as administrators of the estate and beneficiaries in equal shares.

Well, a major reason is the current severe delays at the Probate Registry, which unfortunately show no sign of abating. Having a Will in place usually means that the online probate application service may be used. If you do not have a Will, with only a couple of exceptions, then your case will not be able to be dealt with via the online service, and an ‘old fashioned’ paper application needs to be made for probate. Paper applications are submitted to the Newcastle Probate Registry only (rather than for dispersal to any of the other registries around England and Wales as happens with the online applications). Consequently, the delay for paper applications is closer to 6 months or more, rather than the 16 weeks that we are currently advised that online applications will take.

In my recent, professional experience, cases that would have been dealt with much sooner and more easily, with less delay and expense to the estate could all have been solved if the deceased had had a Will in place – even a simple Will that may have reflected the position on intestacy. Thousands of pounds in costs and weeks of delay may be averted for your family after your death if you have put in place a Will before you die.

A professionally drafted Will provides you with the peace of mind and assurance that your wishes have been confirmed for your executors to carry out and that probate will be dealt with on a much simpler and more streamlined basis than if you do not have a Will in place.

Additionally, if you hold assets abroad such as a holiday home in Spain, then having a Will in place for each jurisdiction where you hold assets will also massively simplify the administration of your estate post-death and again, will save your executors and family thousands in fees and months in delay if you have a Will for each country where you hold assets. Again, the Will does not need to be complex necessarily, and your Spanish Will may reflect exactly the same wishes as your English Will. The importance of having both documents comes after death and in the probate process, which is speeded up considerably by having separate wills in place.

The reasons for having a Will in place are many and varied. As a senior solicitor within the Wills, Trusts and Probate Team at mlplaw, for any advice or questions regarding this blog or wills and probate in general, please do contact me for a free 30-minute consultation on 0161 926 1538 or dorisr@mlplaw.co.uk and I would be pleased to assist.

Avoiding Common Pitfalls in Estate Planning

In order to avoid common pitfalls in estate planning, it is essential to take expert advice and our team at mlplaw are ideally placed to offer you tailored advice to ensure your estate planning is undertaken effectively and efficiently. Here, we detail the most common pitfalls made in estate planning.

 

  1. Pitfall One – Not Making a Will

A Will is the most important estate planning document that you should have in place, whether you are married, single, have children or not. A Will is the only document which deals with the whole of your estate (barring some assets such as pensions or life policies) and how it will be transferred following your death. The value of a Will should not be underestimated and the time and cost devoted to its preparation should reflect its importance and value. Ensure you review your Will regularly.

 

  1. Not Taking Proper Advice as to Inheritance Tax

When seeking advice regarding your Will, it is also important to consider the tax implications to give effect to your wishes in the best interests of your intended beneficiaries. Do not undervalue this exercise or cut corners. A well drafted will ensures your estate can take advantage of all available tax reliefs.

 

  1. Make Proper Provision for Blended Families

Second and third marriages are no longer uncommon, creating difficulties where there are children from the previous relationships which each party to the marriage wishes to ensure benefit from their share of the estate whilst also ensuring that the surviving spouse can continue to occupy the family home and receive the income they need. Where Wills do not fully appreciate and understand the complexity of these arrangements, the result can be that the children of one party to the marriage miss out on what would otherwise be their share of the estate, and this can lead to expensive claims and litigation over the administration and distribution of the estate later. Once again, careful estate planning and a well-prepared Will should help to avoid those consequences.

 

  1. Asset Protection

The desire to keep things simple must be weighed against the need to provide the protection that beneficiaries require. Where a potential beneficiary of your estate is young or disabled or not able to manage their money, there are ways in which the estate can be protected for their use and benefit by using the appropriate forms of trust. Trusts can also offer protection in the longer term against the possibility of a beneficiary divorcing at some point in the future and also lead to longer term IHT savings for the family.

 

  1. Family Disputes

If you are intending to exclude a close family member from a Will, or to leave your estate in unequal shares between your children, then it is essential to take professional legal advice as to the possibility of post-death claims and how to take steps to try prepare for such claims by  the careful drafting of your Will and any ancillary statement of reasons.

To ensure you avoid the above pitfalls and that your estate is planned to provide for your chosen beneficiaries please contact wtp@mlplaw.co.uk or call on 0161 926 1538 to speak with one of our experienced and friendly lawyers.

The Power of Planning: Understanding Trusts in Wills and Lifetime Trusts

Trusts can seem a daunting prospect to clients when considering estate planning, however, our expert team at MLP Law can help to clarify and explain in straightforward terms the pros and cons of entering into a trust arrangement, whether that be in your will or a lifetime trust.

Certainly, the taxation landscape around trusts can be a minefield so it is crucial to seek expert legal and taxation advice when considering trusts and how they can help you to plan your estate. If used correctly and at the right time, a trust can save you considerable sums in tax and also offer protection and support for your chosen beneficiaries in the long term.

A trust is a legal arrangement that can give you control over what happens to your financial assets both during your lifetime and when you die.

Trusts can protect your assets from inheritance tax and care home fees. However, different kinds of trusts have varying financial and practical implications, so the first step in setting up a trust is to seek tailored legal advice.

There are two main types of trusts you might consider: a Lifetime Trust, which you set up during your lifetime; and a Will Trust, which is created upon your death. Here we talk about the advantages and disadvantages of both.

Who are the parties in a trust?

When you set up a trust, you are known as the ‘settlor’. You will choose a third party (‘trustee’) to manage your assets for the person you wish to benefit from the trust (‘beneficiary’). You can choose more than one trustee and more than one beneficiary. Here we discuss the legal terms used to define the parties involved.

Settlor

This is the person or the company who sets up the trust. They can also be called the donor, grantor, trustor or trust-maker. The settlor makes the decision about how the assets in the trust should be used and this is set out in a legal document called a ‘trust deed’. Once the assets are in trust, the trustee—not the settlor—legally owns them (although the trustee is bound by law to make sure the beneficiaries receive the benefit of the trust). It’s important to know the trustee well before appointing them. In some kinds of trust, the settlor is also the trustee and/or the beneficiary.

Trustee

A trustee is a person or company who manages the trust’s assets for the benefit of the beneficiaries. Their duties are set out in the trust deed. Trustees must not benefit personally from their role unless they hold the trust in a professional capacity and receive a fee for their service.

It’s the trustee’s role to manage the trust prudently according to the settlor’s wishes by investing assets wisely (if applicable) and paying any taxes due. They must also keep accurate accounts and records, which are completely separate to their personal finances. Trustees can be held personally responsible for any breaches, so it’s important that they follow the advice of an experienced private client lawyer and fully understand their responsibilities.

Trustees can be removed or replaced by settlors or beneficiaries in certain circumstances, but this depends upon the type of trust and the terms of the trust itself.

Beneficiary

A beneficiary is a person who will benefit from the assets in the trust.

If the trust set up is a ‘revocable’ trust, which means the settlor can change it or revoke it at any time, the beneficiary (unless they are also the settlor) has no rights until they receive the assets from the trust. ‘Revocable’ trusts, by their very nature, must be Lifetime Trusts (see below).

If the trust is ‘irrevocable’, meaning it cannot be changed by the settlor without a court order, then the beneficiaries have certain rights before the trust is redeemed. They can make sure the trustee is acting in their interests by asking to see records and accounts. The full scope of their rights depends upon the terms of the trust.

What is a Will Trust?

A will trust or ‘testamentary trust’ is only created upon death. You set up the trust as part of your Will in order to pass assets on to your family or loved ones.

There are different types of Will Trusts.

Discretionary Trust

This trust gives the trustees the discretion to decide which of the Will’s beneficiaries to pass trust assets on to, how much they will receive, and when they will receive it. This protects a beneficiary’s money if they are financially unstable for any reason and it means money does not have to pass to a beneficiary who has become wealthy.

Property Protection Trust

A property trust helps to protect property from being used to pay for long-term care fees. For this kind of trust to work, you and your partner or spouse must own the family home in joint names as tenants in common.

Each partner sets up a Will with each of you leaving your share of the property in the property trust. When one of you passes away, that share of the property passes into trust. Then if the survivor needs long-term care in the future, only their share is used by the local authority for a means-test when calculating contributory fees, because the other share is protected in the property trust. The protected share will eventually pass to the Will beneficiaries.

Flexible Life Interest Trust

A life interest trust allows you to specify who will have the rights to your property after you die. It’s very similar to a property trust in that it offers protection from home care fees. The main difference is that a life interest trust protects all your assets and not just your property. It also enables you to choose somebody to benefit from the trust whilst they are alive and at the same time to protect the underlying capital for other beneficiaries after their death.

Your chosen beneficiaries can have access to capital sums as agreed by the trustees

What is a Lifetime Trust?

Lifetime trusts are different from Will trusts because they are established straightaway and not upon death. You may however have to pay an immediate inheritance tax charge of 20% on the value of trust assets transferred into trust and in excess of the nil rate band (currently £325,000).

Bare Trust (or Simple Trust)

Assets in a bare trust are held by a trustee until the beneficiary is 18 years old (it’s also possible to state that the beneficiary will receive these at a different age, such as 21 years). Once the beneficiary turns 18 they have the right to all the income and capital of the trust immediately. Beneficiaries are liable for Income Tax and may be liable for Capital Gains Tax. However, they are likely to be exempt from inheritance tax as a bare trust is treated as a ‘potentially exempt transfer’. This means that inheritance tax will only be payable if the settlor dies within seven years of setting up the trust.

Interest in Possession Trust

This type of trust is similar to a life interest trust (see above) except that the beneficiary can receive income from the trust as soon as the trust is set up.

Discretionary Trust

These can be established in the lifetime as well as by Will.

Settlor-Interested Trust

Settlor-interested trusts are not trusts in themselves. They are any type of trust in which the settlor, their spouse or civil partner benefits from the trust’s assets in any way.

For example, if Fred has an illness and can no longer work then he might decide to set up a trust. Fred is the settlor of the trust and the trustees make payments to him. Since he receives benefits from the trust he ‘retains an interest’.

The settlor is liable for income tax on all payments made by the trustees and may also be liable for Capital Gains Tax. When the settlor dies, inheritance tax will be payable above the £325,000 tax-free threshold.

Vulnerable Beneficiary Trust (or Disabled Trust)

These trusts are set up for beneficiaries who have a mental or physical disability or who are under 18 years of age and have lost a parent. Vulnerable beneficiary trusts can claim ‘special tax treatment’ as long as the beneficiary qualifies under HMRC rules and the circumstances of the trust allow. Broadly speaking, ‘special tax treatment’ aims to tax the beneficiary’s proportion of the trust as if their usual rates, reliefs, and allowances are applied so that they gain maximum financial benefit.

Assets of other beneficiaries of the trust who are not classed as vulnerable must be kept separate for tax purposes.

When planning your estate, you want to make sure the people you choose will inherit your assets according to your wishes, that you minimise inheritance tax losses, and that your entire property isn’t lost to home care costs. Trusts can achieve your aims, but it’s important to select the right one for your particular needs and circumstances.

A trust can be set up at any time or written into your Will. At MLP Law Ltd our specialist trust and Will, solicitors are here to help you protect your assets both now and in the future. Call us on 0161 926 1538 to discuss your options and how we can help.