Will: deed of variation/ family trust/ IHT implications

[pearpporridge]

A friend of mine (69) learned on Tuesday that her cancer treatment hasn't worked and she may well have only six months left to live.

She married her partner later in life and they have no children. Her partner owns a very nice house but has limited savings or investments. He has a teacher's pension worth around £8k pa and the full state pension. My friend lives with him, lets out her former home in London for income and, via inheritance from her parents and other elderly relatives, has a substantial investment portfolio. I suspect from things said over the years we're easily talking £1 million+ invested in ISAs and a SIPP etc. Plus she has what most people would consider a good workplace pension after a fairly senior career in the civil service. Her husband is the named beneficiary of her workplace pension and the existing will, drawn up when they married 12 years ago, left everything to him in order to avoid IHT.

Now that it's clear that there is nothing more the medics can do, my friend wants to leave around 70% of her estate to be split between her niece and nephew, both in their late 20s and struggling to get on the property ladder. My friend has recently become concerned by the emergence of her husband's niece who has started taking an interest in them after many years of silence.

Friend has to wait till after Easter to take legal advice but has been googling the implications of IHT. Her first thought was to leave a letter to her husband stating her wishes clearly and leaving it to him to create a deed of variation and distribute the estate per her wishes. However his behaviour since she was diagnosed last year has revealed unexpected vulnerabilities and she is worried that he won't, for whatever reason, be able or willing to carry out her wishes. Her solicitor talked about creating a trust a few years ago. My friend's only experience of a family trust was fraught, with the fees of solicitors and financial advisers whittling away at its value, and she isn't enthusiastic about the idea.

She is googling and making herself anxious, realising that she should have dealt with this a long time ago. Instead, she lived in hope that the chemo would work and she wouldn't have to think about finances and inheritance. She has talked to me about the situation and I'll see her over the weekend. It would be nice to be in a position to have something positive/ constructive to offer. Can anyone with legal/ financial knowledge suggest a way forward? Thank you in advance.

[crabbyoldbat]

There doesn't seem to be any reason why she can't just do a new will - just because they drew them up together post-marriage doesn't mean they have to be the same and can't be changed. The only concern is inheritance tax on the estate, which she will need advice on from an appropriate professional (accountant/financial).

That will still be much more straightforward and reliable than expecting her husband to change or rearrange things when grieving, or setting up a trust (assuming nephew and neice are adults)

[Geebray]

Why can't she just make a new will?

And yes, there are many stories on here about spouses who were left everything and, instead of leaving it onwards to various of the OP's relations, kept it all for their family and/or next partner...

[muddyford]

Just do a new will.

[Yogatoga1]

@muddyford

Just do a new will.

You’re not getting it.

yes she could do a new will, but if she leaves it to anyone but husband anything over £325k will be liable for 40% IHT. Which will be a significant sum on the assets o/p mentions.

she needs proper advice o/p. Obviously it’s too late now for gifts, but there may be ways of using trusts etc.

but definitely get proper qualified advice, not just mn opinion.

[Soontobe60]

She should do a new will, leaving whatever % she wishes to each person on the understanding that her estate will be subject to IHT. The current will may well avoid IHT, but her actual blood relatives wouldn’t get anything.

[BorgQueen]

If trusts aren’t the way to go, I know I’d rather my family get whatever is left after IHT than 100% of nothing if her Husband decides to keep the lot.

[muddyford]

@Yogatoga1

You’re not getting it.

yes she could do a new will, but if she leaves it to anyone but husband anything over £325k will be liable for 40% IHT. Which will be a significant sum on the assets o/p mentions.

she needs proper advice o/p. Obviously it’s too late now for gifts, but there may be ways of using trusts etc.

but definitely get proper qualified advice, not just mn opinion.

Yeah, well most of us posting are saying the same thing. 60% of something after IHT is better than 0% of nothing from her erstwhile DH.

[Collaborate]

She should take proper advice. 30% may not be enough for her husband, who may well have a valid claim against the estate under the Inheritance Act.

[CaptainTuttle]

@pearpporridge
If she hasn’t made any gifts over her annual allowance of £3000, she could gift £6000 NOW before 5 April. This would use her annual allowance for 2023 and 2024. Then gift another £3000 on 6 April which will use her 2025 allowance.
She can leave £325k to her relatives in her Will. She won’t qualify for the additional £175k residence nil rate band unless she has direct descendants who benefit under her Will.
She can leave the rest to her husband on a life interest trust so he has the benefit for his life but won’t own the assets. Then her assets pass on his death to whomever she chooses. No IHT on her death but would likely be IHT to pay on the husband’s death.
This is general advice based on no knowledge of her personal circumstances so she should definitely take professional (paid) advice.

[nosalt]

Why all the worry about wills and succession - cash in some investments and gift it to niece and nephew while alive.

[Yogatoga1]

@nosalt

Why all the worry about wills and succession - cash in some investments and gift it to niece and nephew while alive.

Because if she dies within 7 years of the gift it is included in inheritance tax. So it doesn’t matter whether they get it before or after death, it will be taxed heavily.

i suppose one way round it would be to liquidate everything now, gift it to her husband, who then makes the gifts to her niece and nephew. Then as long as he survives 7 years the gifts are tax free.

i am no expert though, and it would of course depend on the husband agreeing.

[Chickenrunning]

She should take some advice because she may be able to nominate her niece and nephew as beneficiaries of her SIPP.

Also, everything that @CaptainTuttle said.

[CaptainTuttle]

@nosalt

Why all the worry about wills and succession - cash in some investments and gift it to niece and nephew while alive.

True. She could gift £325k now and then leave her remaining estate on trust to her husband.
Cashing in that level of investments though could give rise to a hefty CGT charge.

[Yogatoga1]

Another way around it could be to open joint accounts - any money in a joint account automatically goes to the survivor and isn’t included in the estate.

again with the caveat that I’m no expert and proper advice should be sought.

[CaptainTuttle]

@Yogatoga1

Another way around it could be to open joint accounts - any money in a joint account automatically goes to the survivor and isn’t included in the estate.

again with the caveat that I’m no expert and proper advice should be sought.

Joint accounts usually pass by survivorship but the amount is still included in the estate for calculating IHT.

[DianaTaverner]

Pension benefits are free of IHT, so one obvious approach would be to nominate her relatives for that (ideally with a note to the trustees explaining her reasoning).
Then give them her annual gift allowances for this year and the next as per @CaptainTuttle post upthread.
Then give them £325,000 in the will.
Then consider whether that's enough or whether she wants to give her relatives more and have it taxed at 40% - subject to the requirement to give her husband his fair share.

NB that a formal deed of variation of the will won't help with the IHT situation: it would effectively rewrite the will and the estate would be taxed accordingly.

This weekend I'd suggest that you help her to arrange a cheque/bank transfer to her niece/nephews for the 2022-3 / 2023-4 gift allowances. And another post-dated one to send next weekend after the tax year ends. And help her look up the details of her pension nominations, and the amount involved. And book a meeting with a solicitor to rewrite the will.

[pearpporridge]

@CaptainTuttle and @DianaTaverner — and everyone else, but the two of you in particular — thank you. You've offered something positive she can do immediately, over the Bank Holiday, to enable her to feel that she's not just sitting around doing nothing.

I have no idea how big her SIPP is, but I understand that can be transferred to the niece and nephew and doesn't attract IHT — so that, and the £325k allowance, may be all she needs to call on. Ideally her husband would follow her wishes after her death and transfer significant sums to the niece and nephew, and then oblige by living for seven years. Unfortunately the stress of her illness seems to have precipitated a degree of cognitive decline in him. The idea of a lifetime trust to cover his needs is a good one. I know she is kicking herself for not transferring significant sums to the niece and nephew years ago. She will get professional advice in the coming weeks, but Diana's suggestion will give her something to investigate over the weekend and keep her busy until normal business resumes and she can consult an expert. Thanks again.

[sheenawasapunkrocker69]

Also worth considering gifting more if the gift is from income.

If it comes from income there is no limit

community.hmrc.gov.uk/customerforums/pt/29489805-d3b2-ee11-a81c-000d3a86ec77#:~:text='There's%20no%20limit%20to%20how,gift%20must%20be%20used%20for.

[concernedchild]

Her husband will be able to challenge the will, on the IPFDA and on the basis of her possibly lacking capacity.

A lifetime trust has been held, multiple times, to not be sufficient provision for a spouse. Especially if the spouse is used to a good quality of life.

[OneWiseDuck]

@sheenawasapunkrocker69

Also worth considering gifting more if the gift is from income.

If it comes from income there is no limit

community.hmrc.gov.uk/customerforums/pt/29489805-d3b2-ee11-a81c-000d3a86ec77#:~:text='There's%20no%20limit%20to%20how,gift%20must%20be%20used%20for.

It’s too late to do that really (I’m a tax adviser).

There is no way of mitigating IHT in this scenario unfortunately. IHT would still be paid on assets going into trust on death and trusts continue to pay IHT every 10 years.

[pearpporridge]

@concernedchild

Her husband will be able to challenge the will, on the IPFDA and on the basis of her possibly lacking capacity.

A lifetime trust has been held, multiple times, to not be sufficient provision for a spouse. Especially if the spouse is used to a good quality of life.

There is no questioning her capacity, it's her husband whose capacity seems to have suffered in the time she's had cancer. There'd be a queue of friends and medical professionals prepared to support that in court.

He'll have around £20k from his own pensions and (guessing based on occasional hints) probably £30k+ from his share of her civil service pension. Plus, obviously, he'll have the house he owns outright and, I imagine, top ups provided by a trust if that's what she decides to do. So he'll be much, much, better off than he was when she married him only 10 years ago and it will be difficult for him to argue that he can't support himself more than adequately.

[TheaBrandt]

You give the spouse a life interest in your whole estate so you get the iht spousal exemption on first death. Then estate in trust with letter of wishes telling trustees to maintain spouse he can live in house etc carry on as before but if spouse can spare capital to gift to other beneficiaries during spouses lifetime using 7 year rule to reduce tax on second death. Then remainder passes to other beneficiaries on spouses death or before is spouse can spare it.

[prh47bridge]

@concernedchild

Her husband will be able to challenge the will, on the IPFDA and on the basis of her possibly lacking capacity.

A lifetime trust has been held, multiple times, to not be sufficient provision for a spouse. Especially if the spouse is used to a good quality of life.

A lifetime trust has also been held to be adequate provision. It depends on the circumstances.

[TheaBrandt]

It’s adequate provision if the spouse has a right to live in the property move and buy another and access the capital as they see fit. Spouse also a trustee alongside someone else. So they don’t notice the difference except first to dies share protected if spouse makes another will / remarries / needs care and on their death first to dies share passes to first to die’s beneficiaries not spouses

[CaptainTuttle]

@OneWiseDuck

It’s too late to do that really (I’m a tax adviser).

There is no way of mitigating IHT in this scenario unfortunately. IHT would still be paid on assets going into trust on death and trusts continue to pay IHT every 10 years.

@OneWiseDuck
IHT would not be paid on her death because a life interest trust would benefit from the spousal exemption. There would be no ten year charges on this type trust as the assets would be charged to IHT on his death.