Financial Planning and the Practical Use of Trusts

Last time we looked at why many expats consider trusts as vehicles to assist them in a number of ways (here). Today we delve deeper into the practical use of trusts as efficient financial planning solutions and in doing so pose the question “Are they perfect for everyone?”

In our example, George is a British expat, well established in Thailand with his Thai wife, Nok, and two children. George also has a daughter and a granddaughter from a previous marriage.

George’s Thai daughter is currently planning to marry but George has reservations about her fiancée. Concerned that his future son-in-law could gain stealthy access to his legacy, George would like to see protection against this possibility.

George knows that Nok would have difficulty dealing with the administration, probate, investment decisions and ongoing management of his estate if she was widowed. In addition, Nok may come under pressure from relatives who are likely to make pleas for access to the legacy assets, quickly leading to their evaporation.

George has a potential UK inheritance tax (IHT) liability of around £506,400. This is because he is UK domiciled for IHT purposes. George’s estate will have a nil rate band of £325,000 and Nok will receive an additional tax free allowance of £325,000 as a non-UK domiciled spouse. The remainder of his estate will be charged with IHT at 40%.

George’s estate:


London house


GBP   680,000


฿34.68m

Isle of Man OPPB GBP   460,000 ฿23.46m
Guernsey savings plan USD  237,000 GBP   148,000 ฿  7.55m
International Life Insurance USD  750,000 GBP   469,000 ฿23.92m
Isle of Man Life Insurance GBP   500,000 ฿25.50m
Personal effects/vehicle etc. THB2,000,000 GBP     39,000 ฿  2.00m

Total


GBP2,296,000


฿117.11m

Less London mortgage GBP   380,000 ฿19.38m

Net Estate Total


GBP1,916,000


฿97.73m

 


Thus IHT would currently be:

Estate total:                                                                   £1,916,000

Less nil-rate band:                                                      £   325,000

Less UK non-domiciled spouse allowance:          £   325,000

Chargeable amount to IHT                                       £1,266,000


IHT payable at 40%                                                   £   506,400

 

George also has a QROPS pension in Guernsey which is under the care of a trustee and which has no liability to IHT as he has been offshore for more than five UK tax years.

There are two things which George has asked me to help him achieve. First, restructure his assets such that the family receives their legacy shares according to his wishes. Secondly, formulate s strategy to reduce IHT liability on his estate.

George would like his first daughter and granddaughter to have part of his legacy and feels that the QROPS, at a current value of £260,000, would be a relatively fair proportion of his estate.

When he dies, George prefers that these assets be preserved with a succession plan for his granddaughter. As the QROPS trustees will be unable to do this within the actual QROPS set-up, a new trust will be established to deal with the ongoing management of these assets.

George wishes to have his remaining assets settled into trust for Nok and their two children for their own protection and safeguard of his estate. One issue is that if he settles assets into trust valued above the nil rate band of £325,000, he will be required to pay initial 20% tax on the amount above £325,000.

George is currently paying premiums for both his life insurance policies. The Isle of Man policy is intended to redeem the mortgage on his London property. The international policy is intended to sustain Nok and their two children for living expenses if he dies unexpectedly. George may now settle both these policies into trust naming specific beneficiaries.

As the contracts are current and premiums paid from George’s income, the values being written into trust are not assessed for IHT. This action removes £969,000 from the calculation, reducing the IHT liability from £506,400 to £118,800.

George may then consider settling his liquid investments into trust. These are the offshore personal portfolio bond (OPPB) and the savings plan. Their total value is £608,000. George is limited to a total of £325,000 to settle into trust unless he is prepared to suffer an initial tax against IHT of 20% on £283,000, the value above £325,000. So far we are not totally satisfying George’s requirements for IHT planning.

One further fact which must be considered is that any asset physically situated in the UK is subject to IHT, no matter what your nationality or domicile. That means that even foreigners owning an asset there are assessable to UK IHT. Thus George’s property will be assessed, no matter what. The allowances which he and Nok will be entitled to are £650,000. The mortgage principal can be offset against this because the mortgage was originally taken to purchase the property. Therefore, this will leave a current IHT liability of nil.

I must point out that any assets George settles into trust at this stage will be classed as exempt transfers and are subject to IHT on a reducing scale if he dies within seven years. After that time they will be free from IHT. However, it must also be understood that George may not be a beneficiary of the trust and is thus gifting those assets away forever.

Whilst we have achieved partial resolution for IHT planning purposes, this is not totally comprehensive. George came to me for two reasons. The second was the restructuring of his assets so that Nok would not have any headaches when he passes.

There are still further solutions which can be adopted and we shall look at those next time. No two people are the same, so if you believe your affairs could be better structured than they currently are, I encourage you to explore your options with me.

Questions to the author can be directed to PFS International on 02 653 1971 or email to enquiriesthailand@fsplatinum.com

Andrew Wood has been an expat in Asia for 34 years and is Executive Director with PFS International. He has been writing Net Worth articles for six years and has made a significant contribution to the PFS library of financial service articles dating back over nine years. These articles which cover the complete A-Z of financial planning are available to readers on request.

 

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