Case Study 4

Planning ahead in retirement

The situation

M r and Mrs D are a retired couple aged in their 70s, both in good health. Mr D has a very significant pension income whereas Mrs D, who is the younger, does not.

Should Mr D predecease her, the income she receives from his pensions will be more than halved. They own an investment portfolio and cash - neither of which are needed to fund their current lifestyle.

Their objectives were to ensure Mrs D’s financial security in the event of Mr D predeceasing her, to ensure that either of them could fund a good standard of care in later life if the need ever arose, and to maintain the value of their joint estate and to ensure that it passed down to their children in the event of their deaths.

They were also concerned to mitigate the amount of tax paid on their children’s inheritance.

Given their relatively good health it was very likely that either, or both, Mr and Mrs D would survive for in excess of seven years - opening up a very wide range of possibilities.

While Business Property Relief Investments – a popular option - would have achieved inheritance tax exemption after only two years and ensured funds could have remained accessible to pay an income to Mrs D or pay care fees if required, it would have restricted the choice of investments and probably have resulted in either relatively low returns or relatively high risk - depending upon which option was pursued.

The solution

Instead, we recommended that two “revert to settlor” trusts were established. These are based upon insurance policies, which gives Mr and Mrs D an opportunity once a year to draw upon the funds invested if they need to. The amount they have access to depends upon the performance of the underlying investments; but, once the trust was created, the responsibility for managing investments was handed back to their existing investment manager. The underlying portfolio is exactly the same as the one they originally held.

If Mr and Mrs D do not actually need the money each year their trustees (who are their Solicitor and their children) can decide to keep the funds within the trust. If the money is not paid out it stays within the trust and becomes available at a future annual anniversary date.

Any funds remaining in the trust on Mr and Mrs D’s death become available to their children and grandchildren and the trustees can decide how it should be distributed. If Mr and Mrs D’s deaths occur later than seven years after the trust was established, the distribution to the children should be exempt from inheritance tax; it will also be exempt from capital gains tax and, in all probability, also exempt from income tax.

We have established two trusts, one for each of Mr and Mrs D, so that in the event of the death of either, the surviving spouse can potentially access all of the deceased spouse’s trust as a single lump sum, in addition to an annual sum from their own trust. This potentially gives the surviving spouse greater flexibility and financial security. We have made sure that the arrangements are not “mirror images” of each other in order to avoid any tax complications on death.

The outcome

The arrangements we put in place ensure that Mr and Mrs D have access to sufficient funds during their lifetime if the need to fund care arises. They also ensure Mrs D’s security in the event of Mr D’s death. If it transpires that neither Mr nor Mrs D actually need to access the trust funds, the money should pass very tax efficiently to their children and grandchildren as the children decide.