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.

I would make gifts now so that a new will is not required. There is no reason why she can't make gifts in expectation of death but timing and legal aspects of this are crucial so proper advice is essential. The gifts are outside the estate for administrative and legal purposes but will incur IHT on death.

If done properly it means that there is no possibility of the Will being challenged as it remains applicable to any remaining estate.

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.

This is not advisable. It adds a lot of complexity to the statement of wishes including a significant risk that the wishes are not or cannot be carried out. Trusts can be tricky for deeds of variation.

Given the diagnosis, it may be too late but a equally may be worth investigating any options to buy life insurance written in trust which would fall outside the estate and could be left to her own niece / nephew.

In this timescale any trust which helped avoid IHT would easily be deemed by HMRC as a tax avoidance measure making it null and void. The result may equally not be as her real wishes.

Equally gifts while still alive reply on the gifted to survive for seven years after the gifting in order to fall outside the estate for IHT

That's a really interesting idea.

We tend to fixate on lifetime gifts as a way of minimising inheritance tax, but in this case where IHT is unavoidable (except within the annual allowances) gifts up to the nil rate band might just simplify the process and guarantee that the OP's friend will definitely be able to give her niece and nephew a substantial sum, in a way that's not going to be challenged after her death and not reliant on executors doing their job.

She'd need to think carefully about which assets to transfer though. Giving shares or property rather than cash could lumber them with an entirely unnecessary capital gains tax bill.

She could distribute her jewellery. Shhh.