THE ESTATE PLANNER

Issue 5 – April 2015

INSIDETHIS ISSUE

Company Wills7 key reasons to plan for the future1. Without a Will, your entire estate, including your business assets, passes under the rules of intestacy. These rules were written around 1925 and are unlikely to reflect what you would really want. One example is that it’s highly unlikely that your spouse would inherit everything.

2. With or without a Will, your executors may need to be given powers to enable them to carry on your business. The law directs that any business owned by the deceased (other than limited companies) should be sold within 12 months. But what if the price is consistently low during that time period? It would be an additional loss to the family if the business had to be sold at a knock-down price just because trading conditions were tough, for example, during a recession. Also, a properly constructed business person’s Will gives powers to your executors that allow them to continue the business.

3. Use trusts to protect the business and massively reduce Inheritance Tax. There are major tax benefits to leaving your business in trust. This especially applies to businesses whose value is likely to grow in value. But trusts can also be used to ensure that the income from the business is protected for dependants such as children. Leaving the business into a family trust could ensure that the business continues to benefit your family for up to 125 years, and all in a tax-efficient way.

4. Most businesses are owed money. Your executors need the power to be able to collect that money in. Without a Will, they only get that power when probate is obtained, which could be many months after the business owner’s death – and by which time the debtor could have disappeared.

5. If your business is a partnership, it will finish when one of the partners dies unless there is a partnership agreement in place.

6. If you have shares in a limited company and you die, will your spouse want to be part of the new business? A cross-option agreement ensures that the other shareholders are given first refusal to buy the shares; this is often supported by life insurance to ensure they have the money to do so. More to the point, would you want your business partner’s family to become involved in your business if your business partner died?

7. If you lose your mental capacity, your family will have to apply to the Court of Protection to get control of your assets – this process might take at least five months, by which time there may be nothing left of your business. A Lasting Power of Attorney solves this problem by appointing people to manage your affairs in advance, before you lose your capacity.

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It’s good to talkTo arrange an appointment or to discuss any concerns that you may have in relation to making appropriate protection for you, your loved ones and your estate, please contact us. We look forward to hearing from you.

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Estate Planning

ESTATE FACTSWhy it could pay to know your triviaINTRODUCTION OF DEATH TAXESDeath taxes were first introduced in England during 1796 in order to finance the war against French military and political leader Napoleon Bonaparte. The Government brought in Inheritance Tax in 1986, and it was originally supposed to be a tax on the rich. More and more people are now being caught by this tax largely due to house price inflation.

SHORTEST WILL ON RECORDThe shortest Will on record consists of only four Hindi characters and was written by Bimla Rishi on 9 February 1995. The characters translated as ‘all to son’. Running a close second to this is the Will of German businessman Karl Tausch, who wrote the Czech words ‘Vse zene’ on 19 January 1967, translated as ‘all to wife’. For a Will to be valid

in England and Wales, it must be witnessed and signed by two people. A spouse or child cannot act as a witness if they are to inherit. This is a major stumbling point for many who draw up their Will without the advice and guidance of a lawyer, because the Will is then invalidated under UK inheritance law.

THE LONGEST WILL ON RECORDThe longest Will ever filed for probate is believed to be that of English woman Frederica Evelyn Stillwell Cook, who died at age 68 on 9 January 1925. Her Last Will and Testament document consisted of 1,066 pages written in four leather-bound volumes and presented for probate at Somerset House in London. Almost all of Mrs Cook’s bequests were to her children, but particularly interesting clauses were added which included the instruction that her two executors should

burn her diaries and that her age was not to be inscribed on her gravestone.

THE OLDEST RECORDED WILLThe oldest recorded Wills are believed to be that of two ancient Egyptians called Ankh-ren and his brother Uah. Both Wills were written in hieroglyphics at around 1797 BC. They were found by archaeologist William Mathew ‘Flinders’ Petrie in 1890 and offered proof to legal historians that the practice of distribution of property and naming guardians for children had been occurring for thousands of years. The Will of Uah had also been witnessed by two signatories, both scribes.

To arrange an appointment or to discuss any concerns that you may have in relation to making appropriate protection for you, your loved ones and your estate, please contact us – we look forward to hearing from you.

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IF YOUR BUSINESS IS OPERATING UNDER THE OWNER-DEPENDENT MODEL, YOU ARE LIKELY TO HAVE CENTRALISED CONTROL, WITH ALL DECISIONS REQUIRING YOUR DIRECT INVOLVEMENT.

Your estate plan, no matter how complex, can be implemented any time before you

die. If you own a business or a professional practice, it is even more important that your estate planning begins today. As a business owner, it’s quite likely that a significant portion of your wealth (and your family’s source of income after your death) is tied up in the family business. The success of your estate plan is dependent upon the business being transitioned to the next generation or sold to someone outside the family. Either way, it takes years of planning and preparation.

GUIDING PHILOSOPHYMany businesses are started and run by one individual and then close when the founder retires or dies. For those owner-dependent businesses, the guiding philosophy is to generate the best income possible each year and allow the founder to take out the profits as current income and retirement savings. There is no expectation that the business will continue past the founder’s involvement.

If your business is operating under the owner-dependent

model, you are likely to have centralised control, with all decisions requiring your direct involvement. All elements necessary to make the business succeed are in the sole control of the owner. All other employees, if any, are essentially clerical support.

The owner-dependent business can be highly profitable during its existence since little is spent on payroll, training or other infrastructure. The fact that the business will literally die with its owner is offset by the potential for increased profitability while the business is in operation.

REDUCE THE RISK OF LIABILITYThe fact that the business will end when the owner retires or dies does not mean the business can be ignored for estate planning purposes. During the years the business is in existence, steps must be taken to reduce the risk of liability arising from the business activity. This will likely be accomplished through a combination of careful attention to quality, adequate liability insurance, well-drafted contracts dealing with issues of liability and indemnification, and possibly the formation of a corporate entity or

limited liability company to shield the owner from personal liability.

Upon termination of the business, the owner (or his surviving family) should look into the cost of continuing liability insurance for a reasonable period of time. If the termination of the business results from the death of the owner, the family should consider appropriate procedures to limited liability by reducing, to the extent possible, the applicable statute of limitations (the period during which clients or customers can sue for alleged harm caused by the business).

LIMIT TRANSFERABILITYFinally, while the business is in existence, steps should be taken to document the intent to terminate the business upon the owner’s death or retirement. Although the business may, in fact, become worthless upon the

Owner-dependent businessesChoosing the model that best fits your business plan and estate planning goals

Estate Planning

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owner’s death, estate tax may theoretically be imposed on the value of the business on the day before the owner died. If the owner’s death is unexpected, the business may be thriving immediately prior to the owner’s death. To reduce the risk of the surviving family members owing estate tax on a business that no longer exists, you should document the business plan and the business’ characteristics that act to limit transferability of the business. Your ability to prove the limited value of the business is crucial to avoiding estate tax on a business that no longer exists.

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INHERITANCE TAX Will the general election result in changes?

The content of this publication is for your general information and use only, and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely informa-tion, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Will Writing, Inheritance Tax Planning or Taxation Advice. All figures relate to the 2014/15 tax year, unless otherwise stated.

THE LIBERAL DEMOCRATS AND LABOUR PARTY HAVE BOTH SIGNALLED AN UNWILLINGNESS TO CHANGE THE CURRENT IHT THRESHOLDS.

The forthcoming general election will soon be dominating the news headlines, and therefore a

number of topics are set to be heavily debated by the major political parties. Inheritance Tax (IHT) is likely to be one such topic on the agenda, as many voters are frustrated by the current rules.

STRAIGHTFORWARD CONCEPTThe concept of IHT is fairly straightforward. If, when you die, your estate is above a certain threshold, 40% of everything you own above it, which is not left to your spouse or civil partner, could be taxed. Bills can typically run into thousands of pounds, which your loved ones would miss out on receiving. If you have built up a reasonable amount of wealth and want to ensure those who matter to you ultimately benefit from it, the prospect of the taxman jumping the queue might be unwelcome.

IHT thresholds stand at £325,000 if you are single, or £650,000 if you are married. If you are widowed, it is up to £650,000, depending on how much allowance your partner has used by the time they have passed away. Thresholds have remained unchanged since 2009, while there has been a considerable rise in the number of people liable for IHT.

UNWILLINGNESS TO CHANGEThis is why many people are not happy with the situation. Traditionally, IHT has been viewed as something only the rich have to worry about, but the freezing of the thresholds has affected middle-class people too.

The Conservative Party has strongly hinted that its general election manifesto will include a pledge to increase thresholds. However, it made a similar promise before the last election in 2010 but was unable to agree a deal with its coalition partners, the Liberal Democrats, to implement threshold rises. In 2013, the coalition Government extended the threshold freeze until at least 2018 to fund the costs of long-term healthcare.

The Liberal Democrats and Labour Party have both signalled an unwillingness to change the current IHT thresholds. With the election outcome firmly in the balance and the prospect of another coalition, it may be unwise to pin your hopes on May’s election resulting in changes.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.