You Can’t Take it With You

Planning for one’s death is not something that most of us are particularly motivated to do. However, it is worth reminding ourselves that one day that time will come – hopefully in the distant future, but it could be tomorrow.

“When looking at the family’s projected future assets and liabilities it was evident that achieving the long term financial goals was dependent upon the on-going earnings of the client”

We also need to remind ourselves that our death is likely to have a financial, as well as an emotional impact, for those we are closest to.

Planning to protect those that are important to us is not something that should be put to the bottom of the ‘to do’ list. In the hope that it may trigger some action on your part in this respect, let me briefly describe two interesting cases I have been involved with in recent months.

My client, in his early Forties, is married with a child and a second child is due imminently. He and his wife own a property and the related mortgage is covered by a term life assurance policy. Additional life assurance of four times salary is provided through his employer’s scheme.

When looking at the family’s projected future assets and liabilities it was evident that achieving the long term financial goals was dependent upon the on-going earnings of the client.

It was agreed that one of the key objectives of the financial review was to ensure that sufficient funds would be available to ensure a financially comfortable existence for the family in the event of his premature death.

It was also agreed that the priority was for such funding to continue until the children had completed their education and a notional term of 21 years was selected. The most cost-effective method of covering the requirement is decreasing term assurance. This is a form of guaranteed life assurance where the sum assured reduces at a prescribed rate during the term of the policy.

Arguably, the longer a bread-winner continues to live and work, the less becomes the financial detriment caused by their premature death, so this type of cover enables the reducing liability to be reflected.

In the event of premature death his wife would be left with a mortgage-free house (the existing life assurance) a modest pension and a reasonable tax-free lump sum to act as a ‘nest egg’. However, we quantified that £2,000 per month (net) would be necessary to top up the widow’s pension whilst the children were still in full time education.

Many decreasing term assurance policies will pay out cover in the form of periodic payments and having shopped around all of the insurance companies that offer this (it always pays to do so) cover was secured at a premium of less than £50 per month. To put this into context, on Day One of cover the potential pay-out from the insurance company was £504,000 and this was achieved for a monthly premium of under £50 per month.

Although the cover reduces for each day that is survived, even if the client died just six months before the end of the 21-year term, the policy would still pay out a sum greater than the premiums actually paid.

This example relates to a husband and wife in their Sixties. Each has grown-up children from a previous marriage. Their assets are largely owned jointly and to most intents and purposes, their finances are pooled. Their total assets amount to around £1 million.

They wanted to be certain that the respective sets of children would benefit equally from their assets on death. They had, therefore, each drafted a Will that bequeathed their assets (half of the joint assets) to a life interest trust in the event of being the first to die.

The surviving spouse would be entitled to the income from the trust fund (and in the case of property, the right of residence) during their remaining life and following their death the assets of the trust would pass to their (i.e. the first to die) children. In the event of being the second to die, their Estate would simply pass directly to their children.

This is a common approach. However, the couple were not aware of the Inheritance Tax implications for their beneficiaries. In essence, the children of the first to die would receive a greater net inheritance than the children of the second to die.

This is because the transfer of money to the trust on the first death would be exempt from Inheritance Tax by virtue of the fact that the surviving spouse has an entitlement to income from the trust.

On the second death the entitlement to income (the life tenancy) ceases and the fund is distributed to the beneficiaries free of Inheritance Tax. However, the value of the trust is aggregated with the Estate of the second to die for the purposes of calculating the Inheritance Tax liability of the Estate. Therefore, it is the beneficiaries of the Estate that bear the tax burden.

As a consequence of this approach, each set of children (subject to current tax rules, rates and exemptions) would receive either £500,000 or £360,000 depending upon whether their parent died first or second. This is not the outcome they were expecting. There are a number of methods to remove this inequality and we are still discussing the options.