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estate planning Inheritance tax planning will trust solution. BEFORE YOU START. Important notes. For the purposes of this brochure partner means a UK domiciled spouse or registered civil partner. The Legal
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estate planning Inheritance tax planning will trust solution. BEFORE YOU START. Important notes. For the purposes of this brochure partner means a UK domiciled spouse or registered civil partner. The Legal & General Will Trust Solution can only be used with one of Legal & General s investment bond products. Legal & General is defined in clause of Part 4 of the specimen clauses. Please read the Important Notes on page 6. This brochure contains reference to terms such as lives assured, policies and regular withdrawals, these are explained in the Key Features of your chosen investment bond, which you should read before taking out an investment bond or amending your Will. Full details of our range of investment bond products are available from your adviser. If you re unsure please ask If anything is unclear or you require further information, we or your adviser will be happy to help. Inheritance Tax Planning Inheritance tax was considered a tax on the wealthy, but now more and more families are facing inheritance tax bills. Inheritance tax is designed to tax the value of a person s estate when they die and on certain gifts they make during their lifetime. Each person is entitled to their own separate inheritance tax exemptions, reliefs and nil rate band (the nil rate band is the amount on which there is no inheritance tax to pay). Inheritance tax and gifts between partners It is natural for partners to want to leave the majority, if not all, of their personal wealth to one another to help provide the survivor with financial security. Gifts between partners are free from inheritance tax. There will be no inheritance tax to pay when the first partner dies and leaves their entire estate to the surviving partner. However, if one partner dies leaving their entire estate to the surviving partner, this means that the nil rate band of the first to die will not have been used. The unused proportion of the nil rate band can be transferred to the survivor and used when calculating the inheritance tax liability on the surviving partner s estate when they subsequently die. For those whose combined estates will not exceed two nil rate bands when the second of them dies, one solution may be to use the transferable nil rate band for their inheritance tax planning. However, it is important to realise that the personal representatives of the surviving partner must make a formal claim to transfer any unused nil rate band from the estate of the first to die. The claim must be made within 24 months of the end of the month in which the surviving partner died and will require the personal representatives of the deceased s estate to complete and sign form IHT 402. This form and the necessary supporting documents should be sent to HM Revenue & Customs. The information requested on IHT 402 and the supplemental documentation required to support any claim is extensive. Any failure to satisfy all the necessary conditions could result in the claim being disallowed, meaning that inheritance tax is paid when in reality no such liability should have arisen. However, for widows, widowers or divorcees who have remarried and for those estates whose combined value will exceed two nil rate bands on second death, the partners may need to consider alternative forms of inheritance tax planning. Page 2/11 The solution What is needed in these situations is an inheritance tax planning arrangement that is flexible enough to allow the nil rate band to be used on the first partner s death, ensuring that any growth on that amount does not form part of the surviving partner s estate for inheritance tax purposes, whilst still allowing the surviving partner to benefit. The arrangement we have produced is the Legal & General Will Trust Solution. The Legal & General Will Trust Solution A Legal & General investment bond and a Will Trust can be a possible solution. It allows each partner to: Retain full access to, and control over, their capital during their lifetime. Take regular withdrawals from the Bond if required during their lifetime. Use their nil rate band without having to compromise their surviving partner s financial security. Enable the surviving partner to have access to capital from the Will Trust. Reduce the inheritance tax liability on the death of the surviving partner. Have the certainty of using the nil rate band on the death of the first partner. Potentially safeguard against the impact of nursing home fees and the costs of long-term care. It is essential to arrange an appropriate Will with your legal adviser. At the end of this brochure you will find specimen clauses that are provided for consideration by your legal adviser. How does the Legal & General Will Trust Solution work? 1. Each partner takes out a Legal & General investment bond. Please ensure that you have read all the literature relating to your chosen Legal & General investment bond. If you don t understand any point, please ask for further information. The investment bond is issued to each partner as a sole owner and is made up of a number of separate policies. It is important for tax planning reasons to ensure that the investment bond is issued with at least three lives assured and that each partner only places their own money into the investment bond they are taking out. Using multiple lives assured means that the bond would continue in force until the last life assured dies. This will provide the trustees with more control and flexibility over how the bond can be used for the benefit of both the surviving partner and the other beneficiaries under the trust. The lives assured can be both partners and their children and/or grandchildren. 2. Each partner has unlimited access to their investment bond during their lifetime. 3. Each partner arranges for their Will to be amended so as to leave their investment bond into a Trust that their legal adviser has written into their Will. As the Will Trust only comes into existence on death, the investment bond remains the partner s sole property during their lifetime. Page 3/11 4. On the death of the first partner, the legal ownership of their investment bond passes to the trustees of the Will Trust under the terms of the deceased partner s Will. The surviving partner should then review their Will with their legal adviser. 5. If the value of the investment bond is within the nil rate band of the deceased partner: (i) (ii The entire bond will be held inside a discretionary Will Trust. Under this Trust, the surviving partner, their children and grandchildren and their spouses or registered civil partners are potential beneficiaries. (iii) The trustees can take withdrawals from the investment bond in order to make capital distributions to the beneficiaries or, alternatively, it may be possible to lend such withdrawals to the beneficiaries to create further inheritance tax savings. 6. If the value of the investment bond exceeds the available nil rate band of the deceased partner: Those policies that make up the investment bond that do not exceed the nil rate band are held inside a discretionary Will Trust. Those policies that exceed the available nil rate band can either pass to the surviving partner directly or be held in a trust known as an immediate post-death interest trust (or IPDI trust), for the benefit of the surviving partner. Any gifts from the deceased partner directly to the surviving partner or for the surviving partner s benefit under an IPDI trust will be exempt for inheritance tax. The specimen clauses provided could be used to draft a Will that creates two trusts: a discretionary Will Trust and an IPDI trust. Under an IPDI trust, the surviving partner will be the initial beneficiary (they are referred to as having a life interest) with the children and/or grandchildren becoming beneficiaries on the surviving partner s death. The trustees of the IPDI trust can take withdrawals from the investment bond to make capital distributions to the surviving partner. 7. When the surviving partner dies: The value of the policies that make up the investment bond inside the IPDI trust forms part of the surviving partner s estate for inheritance tax purposes. The policies that make up the investment bond inside the discretionary Will Trust do not form part of the surviving partner s estate. Page 4/11 8. The discretionary Will Trust allows the trustees to make loans to any beneficiary of the trust including the surviving partner. Therefore, if the surviving partner needs additional funds, they can ask the trustees of the discretionary Will Trust for a loan from the trust fund. The loan can be interest free and repayable on demand. A loan made to the surviving partner can create a debt against their estate when they die for inheritance tax purposes. This is because the outstanding loan is deducted from the estate before any available nil rate band is deducted. This loan must be repaid to the discretionary Will Trust on the death of the surviving partner. It is important for tax planning reasons that each partner only places their own money into the investment bond otherwise the debt may be disallowed. Please note that to be effective for inheritance tax planning purposes the loan must have been spent before the surviving partner s death. 9. Once the discretionary Will Trust is in operation, any growth in value of the investment bond is outside the estate of the surviving partner, unless any capital distributions or loans made to them have not been spent at the date of death of the surviving partner. 10. On the surviving partner s death, both partners investment bonds can be cashed in if it is thought appropriate. The proceeds from the investment bond held by the trustees can be paid to the chosen beneficiaries. The proceeds from the investment bond owned directly by the surviving partner will pass according to their Will. However, instead of surrendering the investment bond, the legal ownership of one or more individual policies that make up the investment bond could be assigned to the beneficiaries, for example, the partner s children and/or grandchildren under either the terms of the trust or the Will as this may be more tax efficient. The nil rate band of the surviving partner is used to pass on that amount of their estate free of inheritance tax, whilst the remainder of the estate will be reduced by the amount of any outstanding loans thereby reducing the inheritance tax liability. Page 5/11 Important Notes Will Trust Solution brochure and Specimen Clauses Please note: 1. The specimen clauses have been produced for consideration by you and your legal advisers for possible inclusion within your Will or in a Codicil to cover the position on the death of the first spouse or registered civil partner. 2. The legal and tax effects of the information in the Will Trust Solution brochure and the specimen clauses will depend on your individual circumstances. Legal & General (as defined in clause of Part 4 of the Specimen Clauses) and its advisers accept no responsibility for ensuring that the information in this brochure and the specimen clauses meet your requirements or for any loss, damage or other claim that may arise from the use of these specimen clauses. We therefore strongly recommend that you consult your own legal or tax adviser before proceeding. 3. Care should be taken if you (or your current spouse/registered civil partner) have been widowed or a registered civil partner has predeceased you. In these circumstances, two nil rate bands are potentially available and you should discuss this with your legal advisers. 4. Where you have assets qualifying for business property or agricultural property relief you should discuss this with your legal advisers. 5. If the aggregate values of the policies held by you are less than your nil rate band specimen clause 2 will need adapting if you wish other funds (say cash/investments) to be transferred to the Nil Rate Fund in order to fully utilise your available nil rate band. If no other funds are transferred a proportion of your unutilised nil rate band will become available to the surviving spouse/registered civil partner, and hence will reduce the inheritance tax payable on his or her death. 6. It is desirable to also complete a letter of wishes to provide guidance to the Trustees in relation to the Nil Rate Fund and, if your Will creates an immediate post death interest trust for your surviving spouse/registered civil partner in the form proposed, in relation to the Residuary Trust Fund. 7. Legal & General has drafted this brochure and specimen clauses to reflect the law as at 1 May Page 6/11 SPECIMEN CLAUSES FOR INSERTION INTO WILL PART 1 Insert the full name and address of the individuals you wish to appoint as executors and trustees. You should appoint at least two individuals. 1.1 I appoint [full name] of [address] and [full name] of [address] to be the executors and trustees of this Will 1.2 In this Will the expression my Trustees means its trustees for the time being or (where the context requires) my personal representatives for the time being 1.3 Any powers and discretions given to the trustees of this Will (by the Will or any Codicil to it or by the general law) may be exercised by my Trustees before the administration of my estate is complete PART 2 The term [my Husband/Wife/ Registered Civil Partner] has been included in these draft clauses for ease of reference. That term should be defined when first used in the Will. You may wish to give the Trustees the power to add to the list of beneficiaries (possibly with the survivor s consent during their lifetime) to give flexibility for the future. *Delete as appropriate. 2.1 I declare that this clause shall only take effect if the gift to or for the benefit of [my Husband/Wife/Registered Civil Partner]* in clause 3 of this Will shall take effect and qualify or would apart from this sub clause have taken effect and qualified in its entirety for exemption under section 18 of the Inheritance Tax Act In this clause: the Beneficiaries means (i) (ii) [my Husband/Wife/Registered Civil Partner]* Any child or grandchild of mine whenever born (including step children and their issue) (iii) Anyone descended from my father or mother and (iv) Any surviving spouse (whether or not remarried) of anyone described in paragraphs (ii) and (iii) above The Policy Fund means the Policy (as defined in clause 4.3.3) or any interest therein which pass under my Will including all monies assured by or payable under the Policy The Policy Legacy shall mean the Policy Fund provided that if the value of the Policy chargeable to inheritance tax after deduction of all or any available reliefs and discounts exceeds the Relevant Amount the Policy Legacy shall include only such part or share of the Policy as has a value chargeable to inheritance tax (after such deductions as mentioned) equal to the Relevant Amount The Nil Rate Fund shall mean the Policy Legacy together with accumulations (if any) of income and all assets from time to time representing the same Page 7/11 PART 2 (continued) The Relevant Amount shall mean such sum as is equal to the upper limit of the nil per cent rate band in the table of rates of tax (applicable on my death) in Schedule 1 to the Inheritance Act 1984 less an amount equal to the aggregate of the amount chargeable by reason of my death to inheritance tax of: (i) (ii) all or any chargeable transfers including potentially exempt transfers which have become chargeable as a result of my death made by me during my lifetime in the cumulation period specified by s7(1)(a) of the Inheritance Tax Act 1984; all other non-exempt gifts if any taking effect under my Will or any Codicil; (iii) all or any settled property in which on my death I have a qualifying interest in possession as defined by s59 of the Inheritance Tax Act 1984; and (iv) all other property if any wherever situate which is or which is treated as property to which I am beneficially entitled immediately before my death (including property subject to a reservation as defined by s102 of the Finance Act 1986) The Trust Period means the period of 125 years beginning with the date of my death. 2.3 I give the Nil Rate Fund to my Trustees upon trust to invest it in exercise of the powers of investment given them in this Will and to hold the Nil Rate Fund upon the trusts and with and subject to the powers and provisions set out in clauses 2.4 to 2.5 provided that the Nil Rate Fund shall bear its own share of any inheritance tax which may be payable on or by reason of my death My Trustees shall hold the Nil Rate Fund and the income thereof for the benefit of any one or more of the Beneficiaries upon such trusts (including discretionary and protective trusts) in such shares and with and subject to such trusts powers and provisions (exercisable by any person) as my Trustees shall at any time or times appoint by deed or deeds executed during the Trust Period which may be revocable during the Trust Period or irrevocable My Trustees shall have power during the Trust Period to pay transfer or apply the whole or any part or parts of the capital of the Nil Rate Fund as they in their absolute discretion think fit to or for the benefit of any Beneficiary Subject thereto: (i) (ii) My Trustees may accumulate the whole or part of the income of the Nil Rate Fund during the Trust Period Subject thereto my Trustees shall pay or apply the income to or for the benefit of such of the Beneficiaries as my Trustees think fit. (iii) Subject to all the trust powers and provisions of this clause and if and so far as (for any reason) not wholly disposed of by it the Nil Rate Fund shall be held in trust for my children alive at the date of my death and if more than one in equal shares failing which for such charity or charities as shall be determined by my Trustees 2.5 The powers in sub clauses and shall only be exercisable when there are at least two Trustees or a trust corporation. Page 8/11 PART 3 Use clause (a) 3 (and omit clauses (b) 3 (3.1 to 3.6)) if you wish the residue of your estate to pass to your surviving spouse/registered civil partner absolutely. Use clause (b) 3 (clauses 3.1 to 3.6) (and delete clause (a) 3) if you wish the residue of your estate to become held on an immediate post death interest trust for the benefit of your spouse/registered civil partner. *Delete as appropriate. (a) 3. Absolute gift of residue of estate to spouse/registered civil partner Or I give all the residue of my estate (out of which shall be paid my funeral and testamentary expenses and my debts) and any property over which I have at my death any general power of appointment to [my Husband/Wife/Registered Civil Partner absolutely]* if he/she* survives me for twenty eight days] (b) 3. gift of residue of estate to a flexible life interest trust for spouse/registered civil partner 3.1 I give all the residue of my estate (out of which shall be paid my funeral and testamentary expenses and my debts) and any property over which I have at my death any general power of appointment to my Trustees UPON TRUST to sell call in and convert into money such parts of it as do not consist of money but with full power to postpone doing so for as long as they see fit without being liable for loss (and such residuary estate and property together with the property representing it for the time being is referred to in this Will as the Residuary Trust Fund ) 3.2 My Trustees shall hold the Residuary Trust Fund and the income thereof for the benefit of any one or more of the Beneficiaries (for the purposes of this clause as defined in clause 2.2.1) upon such trusts (including discretionary and protective trusts) in such shares and with and subject to such trusts powers and provisions (exercisable by any person) as my Trustees shall at any time or times appoint by deed or deeds executed during the lifetime of [my Husband/Wife/Registered Civil Partner]* which may be revocable
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