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14th December 2018

Protecting your estate

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As Cambridge’s business sector continues to grow, significant new wealth is being generated in the city. With plans on the horizon for further large-scale developments, such as those relating to the Oxbridge Corridor, this trend seems likely to continue.

Together with rising house prices, this has led, and will probably continue to lead, to an increase in the value of many private individuals’ estates. One potential consequence of this is that it may also increase the likelihood of claims being made against these estates.

In the UK, testamentary freedom – the freedom of individuals to dispose of their property upon death as they see fit – remains paramount, as shown by recent rulings. However, claims against an estate can still arise when there is a dispute among family members about how their relative’s assets should be divided upon death.

In recent years, an increasing number of these claims have made it all the way up to the High Court. This trend also remains upward. There are several possible reasons for it, none of which Cambridge is immune to. For example, one is the increasingly diverse nature of families in the UK, with many more now including stepchildren, adopted children, children of civil partnerships and so on. Another is the country’s ageing population, which is making illnesses such as dementia more common. In some cases, this may raise questions about testamentary capacity – that is, capacity to make a Will.

Claims against an estate are often costly to resolve and can delay the estate’s administration, so they are best avoided. Unfortunately, it is impossible to entirely eliminate the possibility of a claim  being brought. There are, however, several ways to lower the chances of a claim and minimise the potential disruption to the administration of  the estate. 

A  family investment company (FIC), family partnership, discretionary trust or Will (accompanied by a Letter of Wishes) are all  useful vehicles for passing assets in the way you wish to.  Each has its own particular points to consider.

An FIC is a corporate structure, designed to work in the same way as a discretionary trust that enables you, as the founder, to pass assets to the next generation through use of a limited company whilst retaining control of the assets.  Take for example parents wishing to pass assets to their children but who do not wish them to have access to the assets at a young age.  The parents would own shares which had rights to take the investment decisions in relation to the assets, and no right to dividends, and the children would hold shares that had no rights to make investment decisions but full entitlement to dividends or return on capital (subject to the approval  of the parents).  These structures can be more tax efficient than trusts, as corporation tax rates apply rather than inheritance tax rates, but specialist tax advice should always be sought at the outset as there is still potential for gifts of shares in the FIC to be caught by inheritance tax.  A limited company can be set up fairly quickly and inexpensively and the governing rules set out in the company’s articles of association, with more sensitive matters dealt with in a separate shareholders’ agreement. 

Family partnerships are a similar idea, but, as the name suggests, they involve setting up a partnership, rather than a company. This method brings in the next generation and allows parents to transfer assets to their children immediately, being taxed at the current rate, while retaining control of the assets during the lifetime. This can be particularly useful if the value of the assets is likely to increase over time.

Discretionary trusts, meanwhile, have traditionally been the most popular method of passing down wealth. They are particularly useful for individuals who foresee that a dispute may arise among family members after death, and as an alternative to making no provision whatsoever for somebody who might be eligible to bring a claim to challenge the dispositions in a Will. Those who may potentially bring a claim against the estate can be named as objects, or beneficiaries, of the trust, so the potential claimant cannot say that no provision whatsoever has been made for them.  The trustees will have power to exercise their discretion over the fund in a potential claimant’s favour, which may be an effective way of buying off a nuisance claim which has weak merit.

With a Will, a testator can set out precisely how he or she wishes the estate to be divided.  . However, family members and dependants may still bring claims against the estate, alleging that the will is invalid or that insufficient financial provision has been made for them.  If you are proposing to make no provision for a family member (and often there are good reasons for this), it is recommended that the Will is accompanied by a Letter of Wishes giving objective, brief reasons for the decision.  Evidentially, this is a useful document if disputes arise on death and, although not bound by it, the Court will take into account the Letter of Wishes.

At Hewitsons, we have a large team of solicitors experienced in all private wealth matters, as well as a specialist team equipped to resolve disputes at highly competitive rates, should they arise. Our Contentious Trusts and Probate team has been consistently rated as a top tier firm by the Legal 500 guide and each of its members belongs to the Association of Contentious Trusts and Probate Specialists (ACTAPS). The team is also recognised in the Chambers High Net Worth Guide 2018 as one of only two firms with this specialism in East Anglia.

However you choose to protect your estate, the bottom line is that the more discussion and planning that take place between family members during the lifetime, the better. Do not leave this until it is too late. Surprise and shock amongst family members are a catalyst to disputes.

For more information, please contact Lucinda Brown on 01223 532721 or click here to email Lucinda. 

This article was first published in Business Weekly 13th December 2018 and online.