The Famous Five - How can Irwin Mitchell help?

The team at Irwin Mitchell in Chichester recently enjoyed The Famous Five musical at Chichester Festival Theatre. The show got us thinking about some of the legal issues which they might need help with and especially when planning for the future. By bringing the facts up to date a little, we’ve come up with some solutions.

Quentin’s legacy 

Father to George, Quentin is a highly intelligent and hard-working, famous inventor and scientist. He’s on the brink of making a fortune having developed an eco-friendly product that can be used to help organisations reach their carbon-neutral goals.

However, he can sometimes be forgetful when managing his affairs. He’s never had a large disposable income and only has some investments. However, he’s now inherited the large family home and associated land. Due to its size, he struggles with managing everything and worries about the potential burden on his daughter, George.

Quentin has approached us because, now that he’s about to come into a large amount of money, he’s decided he really should make a Will. He’s looking to do the following:

• Make sure that George will benefit from his wealth when he’s gone. Quentin would like George to inherit most of his wealth however, he doesn’t want this to deter her from working hard. He worries that she wouldn’t be responsible looking after large amounts of cash as a young adult.
  
  
• Should he pass away before his wife, he’d like to ensure that Fanny can continue living at their home, and that she’ll have enough money to continue living the lifestyle they enjoyed together. Therefore, he plans to leave everything to Fanny as she’ll be able to ensure that George gets a share in her own Will. He’s also heard that, if he gives everything to his wife, there will be an inheritance tax (IHT) break.
  
  
• He’s also fond of his nephews and niece, Julian, Dick and Anne. Their parents don’t have much in the way of wealth so if possible, Quentin would like to ensure he can provide enough for each of the cousins to get onto the housing market when they’re old enough.
  
  
• George is the main carer for the family dog, Timmy, so if Quentin passes away, he’d like George to be fully responsible for looking after him.
  
  
• George would also like to leave something to several scientific charities that are close to his heart. As well as Chichester Festival Youth Theatre, who’ve inspired his niece to become an actress.

How could we help Quentin? 

Benefitting Fanny and George

Quentin has said he’d like to give everything to Fanny who he trusts to then pass on the estate to George. In terms of IHT, the spouse would be exempt for having to pay this. However, he should consider if Fanny might remarry or have more children after his death. She then may decide to change her Will so that her future children and new husband benefit.

This would mean George may receive a smaller share or nothing at all. Despite Quentin thinking this won’t happen we’ve seen similar situations like this many times. After all, no matter what has been agreed in principle, Fanny can change her Will at any point in her lifetime if she has mental capacity to do so.

Our solution

Quentin includes a life interest trust in his Will so that he can benefit Fanny during her lifetime. Fanny would be entitled to live in the property, and to all the income produced by the estate assets which will be held in the trust. However, the underlying capital would essentially be ring fenced so it would pass to George when Fanny passes away after Quentin.

In terms of protecting the assets for George, a simple solution here would be to leave monetary gifts to her in the Will that require her to reach a certain age. This is because the legal age to inherit is 18 however, it’s difficult to predict how responsible a child will be in the future.

A good solution here would be setting up a Discretionary Trust, naming George as a potential beneficiary.  A Discretionary Trust should be accompanied by a robust Letter of Wishes setting out how Quentin envisages the trust to work in the future. For example, the Letter of Wishes could include guidance to the Trustees to allocate some of the capital funds in the Trust to George should she need them.

As the family home, and surrounding land would also be included in the assets, the Trustees would also be under a duty to manage the property. Therefore, easing Quentin’s worries about George having to manage a cumbersome property at a young age. We can also help him ensure that, if Fanny passes after Quentin, the assets in the Life Interest trust for Fanny then become part of this new Discretionary Trust for George.

Using trusts might sound complicated, but they offer security and flexibility to ensure that Quentin’s assets are protected and can pass to the people he wishes to benefit, at the right time.

In terms of tax, the first portion of Quentin’s estate can benefit from an IHT allowance and can be passed free of IHT. The current value of this allowance (known as the nil rate band) is £325,000 and if Quentin’s late wife had passed all her estate to Quentin when she died then hers may be available to transfer. Meaning that Quentin’s estate may be able to benefit from a maximum allowance of £650,000.

When property is being passed to a child, there is also a £175,000 residence nil-rate-band which, again, is transferrable between spouses (subject to maximum overall estate values). When we add together the maximum nil rate band and residence nil rate band allowances, we reach a total of £1,000,000 of the estate which may be transferred to George free of inheritance tax. 

There’s also other recommendations we’d make such as using Nil Rate Band Discretionary Trusts in their Wills.

Quentin’s Personal Possessions 

We’d recommend Quentin writes a ‘Letter of Wishes’ setting out who he’d like to pass his belongings to. A Letter of Wishes is not legally binding and so, unlike a Will, the Letter of Wishes can be changed at any time, with no need for a formal signing process. Allowing Quentin to change his mind about the personal belongings at any point or add in new ones should he have acquired further assets. Once Quentin has passed away, his executors would distribute his belongings according to his wishes.

Benefitting his nephews and niece

As Quentin expressed a wish that he’d like to help his nieces and nephews get onto the housing ladder when the time comes. We’d recommend using a trust as this prevents them inheriting a large sum of money before they’re 18.

The Discretionary Trust that was set up in relation to George could include the nephews and niece as potential beneficiaries as well and the Letter of Wishes could provide guidance as to making payments to them for purchasing a property at a certain age.

Quentin may also wish to consider setting up a lifetime trust for Julian, Dick and Anne, as an alternative to having them named as beneficiaries of the Discretionary Trust. A lifetime trust can be used as an estate planning tool as it will allow Quentin to reduce the value of his estate if he survives for 7 years after making the gift to the trust.

Timmy, the Family Dog

Quentin thinks he can add a clause to ensure that George becomes Timmy’s official guardian and leave some money specifically for the dog ensuring it’s looked after for the rest of its life. Interestingly, pets are legally considered to be possessions, just like a car or a piece of jewellery would be. Timmy should be included in the previously mentioned Letter of Wishes. Quentin can then instruct his Trustees to set aside money to take care of the dog in the letter.

Charitable Donations

Quentin seems keen to leave a substantial amount to several charities. We’d advise him that leaving a legacy of 10% of his estate (as calculated using the relevant legal formula) to charities would mean he can reduce the IHT due on the taxable portion of his estate from 40% to 36% - quite a substantial saving if he has a large estate.

Fanny’s Will 

Fanny has said she’d like a similar Will to her husband, so she can also benefit both Quentin and George. We’d advise her to have a similar Will to Quentin, making use of the trusts mentioned above. However, there is one additional element to think about for Fanny – she’s a rising social media star and has aspirations for writing a book. This means that she’ll continue to receive royalties and fees after she’s passed away. She would need to make it clear who this ongoing income would go to if they generate money after she’s passed away. 

If any of these issues sound familiar or have got you thinking about how you can plan for the future, our local solicitors are here to help. Simply get in touch to arrange an initial appointment.

Photo credit: The Other Richard’ - ‘The cast of The Famous Five: A New Musical at Chichester Festival Theatre.