Is a trust the best vehicle to achieve this objective ?

[3point14]

If I wish to make sure that my surviving partner does not squander my estate, should I predecease her, what is the best vehicle to use ? I understand that I will need to consult a solicitor on this but I want to try and get my head around things first.

The assets will be cash, a SIPP pension balance, property with equity but also a mortgage and funds from term life assurance. I have a 3 year old child and my partner is from a country where there is no trust law, necessitating the setting up of something either in the UK or offshore.

My main concern is that my partner cannot handle the sums involved (circa £1-2m) and would be susceptible to third party interests and the making of poor decisions. There is also the tax situation to consider.

I would prefer that she be given an income but that all significant items, such as school fees, replacement cars etc. are paid for her. I would not wish her to be able to liquidate the family home nor raise capital against it. I would also prefer she did not raise capital using the income received. There may be a need or desire to move overseas so the vehicle would need to cope with that eventuality, including the sale of the UK property and the purchase of an overseas property. I have spoken to local legal representatives in the overseas country who are confident in principal that they could offer a management service in that country.

Eventually, I would like my child who has dual nationality to also benefit from an income and later to receive the balance of my estate. My partner would keep her income for life.

Sorry if I am making a very complex situation too vague or if it is outside the scope of this forum but I see the tax situation going hand in hand with the provisions I wish to make. I would appreciate any response. Thank you.

[AvocadoK]

Yes, a trust is an appropriate vehicle. One of the most important things to consider here is who will be your trustees? They will be the people who are instructed to carry out your wishes after your time. Preferably, they will be professional people who know you well. Alternatively, a combination of someone who know well and a professional person could be considered.

Your instructions will be set out in a trust deed, and possibly also a letter of wishes to the trustees. These will specify the degree of discretion you give to the trustees. For example, you may fix an income to pay each year to your partner; or you may give discretion over the sum. Likewise, you can give discretion over capital payments or loans to your partner.

As regards the SIPP, if you have not taken benefits from it when you die, you could have the funds paid into the discretionary trust.

Possibly, problems would be encountered in the trust buying property overseas in jurisdictions that don't recognise trusts. You might consider giving the trust power to lend money to your partner to buy the property (secured on the property).

You will also need to consider how inheritance tax is to be funded. Assuming you are not married to your partner, there will be IHT to pay, before the funds can be transferred.

You are correct to say you will need a solicitor - hope the above gives you some more to consider in advance.
AK

[3point14]

Thanks a lot for your reply.

The issue of trustees is a difficult one, especially when their may be continental distances between the parties. This will need some thought.

The life policy could be written in trust and thus fall outside of IHT but not in trust for my partner, the sum is too large.

The SIPP would be (currently) pre retirement (need to review prior to and at retirement). Is there a tax charge on the fund value post my death ?

The foreign property ownership has perplexed me for some time, so much so that one thing the SIPP might do is purchase a property anyway. Unfortunately the foreign country does not allow non nationals to own land so direct participation is impossible. I am looking into whether a property can be purchased for my daughter (dual nationality) as a minor and somehow give the mother a life interest. I have no solution at present. A foreign entity owning a first charge over an asset they are not allowed to own is also spurious. The worry is that a simple purchase would allow her to raise capital against the property and from any number of legal and illegal sources. Pay it off and it just starts again if you see what I mean. Not that she will, but I find the removal of temptation the best way.

How can we deal with a mortgaged property ? I would have thought a non mortgaged property could just be placed in a trust now but the mortgage presumably means it cannot.

The IHT thing is worrying but marriage would sort that out. However, it would open me up to potentially great liability should the relationship flounder. Where is Cameron and his £1m IHT threshold ?

Is IHT really that hard to avoid in the UK ? Can't things just be fudged and sold or whatever and someone given a bung if need be ? Or can't you just sell up and bugger off ? It does seems a terrible tax.

Thanks again, things are clearer than before.

[AvocadoK]

Trusts/IHT are complicated at the best of times - and your situation is more complex than most!

Re the SIPP - if you die before 75 AND before taking any benefits from the fund, then the fund can be paid tax free to the nominated beneficiary (which could be a trust). If you die before 75 but AFTER starting to take benefits, there is a 35% tax charge. Post 75, the current rules impose tax equivalent to 82% on lump sum paid out on death.

As regards the foreign property, the trust could lend the money to your partner to buy a property, and put a charge over it to stop her raising money on it. In practice, your partner would never see the money - it would go via solicitors, with strict instructions from trustees as to what to do and what not to do!

Transferring a mortgaged property to a trust would not be easy - how would the trustees pay the interest? In any case, the lender is unlikely to be willing to let the mortgage be transferred to trustees on death. You probably need to plan to have the mortgage repaid on death (e.g. using the life assurance).

As for evading IHT, I know you are only joking, but it falls on the executor to make sure the right IHT is paid on death. He could lose his freedom if he did anything silly!

AK

[3point14]

Thanks once again for your kind assistance. I think I was joking about giving a "bung" but my time on this planet has shown me that few things one dreams of do not actually exist in practice, often to the benefit of others. However, I should not wish to have an innocent man incarcerated !

Your confirmation surrounding the mortgaged property is as I suspected. You are also right that I would wish to remove any mortgage from the property as part of my estate planning. However, giving my partner a mortgage free house, in her name, free to borrow against at will, is not on the agenda. I am not sure whether a mortgaged property can have the mortgage paid off and then be absorbed by a trust ? I see a number of potential issues with that.

The foreign property would seem covered but it is in a far away and lawless land where money talks, even to the extent of new title deeds appearing. I have to do the best we can as outsiders with local representation but it will never be 100% guaranteed. Still, the numbers are relatively small, sub £100k.

Thanks for the SIPP update. My intention at the moment is to use QROPS to evade UK legislation on my pension. My understanding is that 5 years away from Blighty and reporting restrictions no longer apply. It is early days and much more investigation must be done but that would seem to allow the scheme to scheme to free itself from the shackles of UK legislation and basically pay out whatever you want. As I said, it needs to be looked at further.

I know it is very difficult to judge but what do you think would be ballpark annual running costs for the UK side of this trust ?

[AvocadoK]

The professional costs of running a trust will vary tremendously, depending on the firm used. They will (or should) at the very least prepare annual accounts and have an annual meeting. If there are assets to invest, they will doubtless take investment advice, but they still need to devote time to monitoring investments. I would say upwards of £1,500. Clearly, you should get any professional trustee to give you an indication of likely fees!
AK