Win-win situation

The solicitor of one of my clients missed chances to assist them (see ‘Are you missing a trick?’). As a result the solicitor’s own potential fee income was somewhat lower than it might have been. In addition, the oversights could arguably create a future complaint.

On the other hand, I recently worked with another solicitor to identify opportunities for the benefit of our mutual client. Not only did we significantly improve the client’s financial position
but also our own fee earnings – a true win-win for all.

The client had received a substantial inheritance from a parent, and both the solicitor and I explained to them that the money, once in their hands, would be subject to inheritance tax (IHT) on their eventual death. Combined with their other assets, and based at current values, the tax payable by their heirs would
be in the region of £250,000.

While the client could have simply gifted the money into a trust, it would not actually count as ‘out of their estate’ for IHT purposes until a seven-year waiting period had passed. It would also mean that they would have irrevocably given away the money, and they personally could never benefit from it again.

At this point, it is important to bear in mind that there are some specialist investment trust options that allow the client to receive an ‘income’ from the gift, or to receive a return of the gift at a specified point in the future. However, these specialist options are not really needed as there was a much simpler, and more flexible, option available.

The solicitor and I recommended that the client should look to take advantage of the two-year window for a deed of variation. This legal arrangement means that it is not the client that gifts the money to the trust but rather your deceased party.

The deed of variation effectively rewrites the deceased party’s will as if the money (from an IHT perspective) had never been left to the client at all, but instead had been bequeathed straight into a discretionary trust from the outset.

The advantages are:

• There is no waiting period: the money is exempt from IHT on the death of the client from day one rather than after seven years.

• The client can be named in the ‘class of potential beneficiaries’, which means they can borrow or draw money from the trust to use as they wish, while at the same time keeping the bulk of the money out of their taxable estate.

• By having this trust available to the client but outside their estate, it allows the client to spend their own capital first, thereby reducing their
  own IHT liability

• The client can also decide to gift monies from the trust to other members of the family. Importantly, nobody has a right to anything from the trust
  but only as and when the trustees decide.

In addition to the significant potential IHT savings to the client and their family, the solicitor benefitted initially from the work, and fees, in drafting the deed of variation/discretionary trust and amending the client’s will to take into account the assets that would be held via the discretionary trust.

Moving forward, the solicitor would also have the opportunity to advise and assist the trustees of the new discretionary trust.

Finally, by helping the client and their family avoid unnecessary IHT and preserve their wealth, we have generated immeasurable goodwill and ensured that future generations require ongoing assistance from both me and the solicitor. 

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser