Who Wants to be a Millionaire? – Planning and Protection

Whether a client has recently come into money (e.g. from an inheritance, lottery win or success on Who Wants to be a Millionaire!), or has built up their wealth over time, it is important to consider succession planning and protection. Hayley Trim (Family Law Partner, Irwin Mitchell) and Laura Colville (Senior Associate Solicitor in the Lifetime & Estate Planning team, Irwin Mitchell) take a look at some often-asked questions and the options available to clients, both from the point of view of matrimonial law and private client law.

The private client perspective:

Question:- I’ve come into money and want to update my Will. My child is vulnerable. How do I benefit them in the right way?

Response:- Vulnerability could indicate someone who has additional needs, a specific disability or mental illness, or an addiction issue. Likewise, it could describe someone who is not very good with money, likely to be influenced by a third party, going through a bereavement or simply someone who is under 18 and still a child. A parent is likely to want to protect a child who is vulnerable (whether they are grown up now or not) and this includes financially. In particular, if the child is in receipt of means-tested benefits, an inheritance could, and often does, affect their entitlement to claim this.

Although you could decide to exclude a vulnerable child from your Will, we find that clients typically like to know that there is money available to their vulnerable child if they need it.

We would recommend considering a trust arrangement in these circumstances.

What is a trust?

A trust separates the legal and beneficial interests in an asset. The person making the trust (either in their lifetime or via a Will), chooses their Trustees who will legally own the assets. However, the Trustees are not beneficially entitled to the assets. An example is a property where Trustees would be named on the title at the Land Registry but the trust beneficiary(ies) will have the right to live in the property.

There are two main types of trust: a Discretionary Trust and a Life Interest (Interest in Possession) Trust. Where we have a vulnerable child who is in receipt of means-tested benefits, a Discretionary Trust would be recommended and the reason for this is because there would be a class of potential beneficiaries named (including the vulnerable child) but none of those potential beneficiaries have an absolute right to income or capital. Due to this, the assets held in the trust would not be brought into account when assessing the means-tested benefits. The person setting up the trust (who may be the parent but it could be another person, including another relative) would then be best advised to put in place a Letter of Wishes setting out their thoughts about how the Discretionary Trust would be administered. They might identify the vulnerable child as being the primary beneficiary should they have needs. They would also be able to set out their thoughts as to how the Discretionary Trust might be distributed finally, after the vulnerable child has died. Although a Letter of Wishes is not legally binding, it can be helpful to trustees in order for them to understand that background and considerations for the trust when it was set up.

Question:- How about giving money to charity? What are my options here?

Response:- It is possible to give to charity in a very tax efficient manner. Lifetime gifts to charity, whether it be of cash, property or other assets, are free from both inheritance tax and capital gains tax. You could also look to claim Gift Aid.

If you need (or wish) to retain your capital during your lifetime then gifting in your Will might be an attractive option, to be combined with lifetime gifts if you can afford both. You can choose to leave fixed sums and the charity would receive the whole of these gifts, again with no inheritance tax or capital gains tax payable from your estate.

Gifts to charity under your Will are, in themselves, free from inheritance tax. As an extension of this, you also have the option of making the most of the charitable giving relief which provides for a reduced rate of inheritance tax, from 40% to 36%, if you give 10% or more of your estate to charity (please note that the calculation of the 10% is complex and specialist advice is needed for wording your Will so that the relief applies). Top tip from the pros - If you are already including a gift to charity in your will equivalent to 6% of your estate then increasing this to 10% will make no difference to the amount that your non-charitable beneficiaries will receive. Those non-charitable beneficiaries (e.g. your children, other family or friends) will receive the same benefit, or more of a benefit, as they would have received if you left the gift to charity at 6%. The benefits are that your chosen charity (or charities) will receive an extra 4% of your estate and HMRC will receive that much less in inheritance tax. The rest of your estate will then benefit from the reduced 36% rate of inheritance tax - an added bonus!

If you know that you would like to make use of the 10% to charity but you are undecided about which charity (or charities) to benefit then the use of a discretionary trust would give flexibility and you could then write a side letter of wishes that you can update over time, and update your charities if needed.

If no provision for charity is included in a Will then it is possible, post death, for the beneficiaries of the Will to enter into a Deed of Variation to redirect some (or all) of their own inheritance to charity. There are strict time limits to adhere to when putting in place a Deed of Variation if it is to be used to change the inheritance tax position. A Deed of Variation can also be used to vary entitlement when a person dies leaving no Will (known as an ‘intestacy’). 

The family law perspective

Question:- What happens if I come into money, whether by a fortunate win, an inheritance or gift, and then I get divorced? 

Response:- In a divorce it can be a point of some contention how certain assets should be shared, or not.

Both parties must give a complete and honest account of all their assets and income including any trust assets and pensions, no matter where they came from. Then they agree how to divide that up, or a judge decides for them.

The starting point is the equal division of matrimonial assets; those are the assets that were built up during the relationship, from commencement of cohabitation onwards. These usually include the family home, assets bought during the marriage - the fruits of the marital partnership if you like.

If you brought money into the marriage, inherit or are gifted money from family, that is generally considered non-matrimonial property and it’s treated differently. However, it’s not simply ringfenced. If it was used it to benefit the family – perhaps it was put into the family home - then it may have acquired a matrimonial quality, and so be treated as a matrimonial asset to be shared. Also, if having shared the matrimonial property, one person is left with insufficient funds to meet their needs, then the court can order that non-matrimonial property is distributed to meet their needs.

Is prize money matrimonial property? The courts have generally found that things like lottery wins are matrimonial property if they were the result of an explicit or implicit joint venture – for example if tickets were being bought from joint funds or with both parties’ knowledge and agreement. But wins where the ticket was bought by one party from their own income without the knowledge of the other will be non-matrimonial – at least at the outset. If the money is used for the benefit of the family, that could change.

It also depends on what the other available assets are. If the winnings are the only source of money and the winner would be comfortably off while the other party has nothing, the court will make an order to meet the needs of the non-winner – they will not be left destitute.

Every case is different and must be considered on its own facts.

Question:- I am planning to marry. Can I protect my assets if the marriage doesn’t work out? 

Response:- As we’ve just seen, just because you’ve brought your money into the relationship or that its source was entirely down to you, doesn’t mean that the court can’t make orders giving some of it away.

You might assume that transferring assets into a trust will protect them in a divorce, but that is, generally speaking, not the case. Trusts can be extremely useful, but the family court has very wide powers and if the judge finds that the trust was set up to avoid a spouse’s claims, and/or that the assets actually remain the property of or under the control of the spouse who created the trust, then they can make orders either directly in relation to the assets, or on the basis that the trustees are likely to help fund a settlement. In some circumstances the court can vary the terms of a trust, for example adding new beneficiaries, to achieve the result it considers fair. However, this can be avoided by taking the right advice at the outset.

A better way to protect your winnings is a prenuptial agreement. Contrary to popular belief, they are not just for celebrities, and they will be upheld by the court provided they have been done properly and meet certain criteria:

• Both parties must enter the agreement willingly;
• They must fully understand the implications of the agreement, so they must exchange financial disclosure and they must both have their own independent legal advice.
• The agreement must result in a fair outcome when the couple separate. If one of them is left in a situation of real need, it won’t be upheld, and any children must be financially provided for.

So prenuptial agreements can’t just leave one person with all the assets, but they can protect against equal sharing, and are particularly effective at protecting specific assets such as a business or an anticipated inheritance.

Question:- Can I pass money on to the next generation and protect against dissipation in a future divorce? 

Response:- The bank of mum and dad or other family members is increasingly involved in helping people get on the property ladder (a recent survey found £8.1bn would be handed to homebuyers by family members this year).

But can you pass money on to your children and “divorce proof” it? As we’ve seen above, it’s impossible to completely exclude the claims of a spouse on divorce, and the family court has wide ranging powers to make orders to redistribute assets even if they are held in trust, offshore etc.

Loaning the money has drawbacks. You are not actually giving your money away for inheritance tax purposes, and if you’re not careful about the terms on which you provide the money, the family court may still consider that it was a gift and treat it accordingly in dividing the assets. The court might look upon it as a “soft loan” which will not be called in if it would cause hardship, so the recipient of the money could be disadvantaged by this.

Ideally the recipient of the funds would agree to enter a prenuptial agreement. Of course you can’t force them, but hopefully they can understand the reasons.

You also can’t stop them getting married although that is the best protection because as the law stands you only have claims on each other’s finances if you are married. If you just live together, there are no automatic claims. However, the law in this area is messy. There are situations in which a cohabitee can claim an interest in their fellow cohabitee’s property, even if it is in their sole name legally. This often flows from direct financial contributions, but it can follow from other things too, particularly if the court finds that there was an intention or agreement (which might not be expressed but inferred from the way they have both behaved).

A cohabitation agreement is an excellent way of making intentions clear. It can set out exactly who owns the property, and that the other person will not acquire an interest in it. It can also deal with practicalities like who will be responsible for the mortgage and bills.

If an unmarried couple have children, then that can give rise to claims to make sure the child is housed and provided for. Those claims can’t be excluded, but being for the benefit of the child, capital for a property is returned when the child reaches majority.

Conclusion

Everyone’s situation is different, and one size does not fit all when it comes to planning for the future and protecting your finances for yourself and future generations.

Talking though your own individual circumstances and what you want to achieve with a specialist legal professional at an early stage can be financially beneficial, avoid problems in the future, and give you peace of mind that you’ve made an informed decision.