- Estates in Excess of £650k
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- July-Sept 2009
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- Oct-Dec 2011
Case Study I - Divorce/Separation's Asset Dilution
Minimising the amount of Inheritance Tax payable on death has always been at the centre of prudent estate planning; however, very few people would even consider the affects of divorce/separation within the family tree on their estate. The example below explains why it should regarded as important if not more important than Inheritance Tax planning.
Mr & Mrs Montgomery have an estate - including home, cash, investments, life insurance, etc, worth £400,000. They wish to give everything to each other when the first partner dies, and on the second death, they wish everything to be shared equally between their two children, Paul and Joanne. Paul is away at University in Cambridge studying Physics, Joanne works at a local Solicitors firm as a Legal secretary and currently lives with her boyfriend Jack in a rented apartment, they intend to be married next year and purchase their first house.
A number of years after Joanne's marriage to Jack, both Mr & Mrs Montgomery pass away after short illnesses, the family home is sold and the estate of £420,000 (after costs) is split equally between the Paul & Joanne, each inheriting the equivalent of £210,000 apiece in cash and investment.
So where is the problem?
Lets looks at this a little more closely, Paul has received £210,000 in inheritance, and most people would say so has Joanne, and yes they would be correct. However the reality is that if Joanne & Jack were to divorce/separate some time in the future, Jack as Joanne's husband would, in the eyes of the law, have a right to a half share of Joanne's inheritance which would amount to £105,000. If Paul was to find himself in a similar situation some years down the line, first tier divorce/separation would have accounted for 50% of the Montgomery estate, a total loss of £210,000. It follows that subsequent divorce/separations would have further dilution affects on inheritance.
So how can you safeguard your children's Inheritance from Divorce/ Separation?
By incorporating Nil Rate Band Discretionary Trusts into their Will, Mr & Mrs Montgomery can protect the assets of that Trust for the beneficiaries of that Trust (i.e. their children Joanne & Paul). If either child is faced with the unfortunate circumstances of divorce/separation in their lives, the Trust offers a mechanism to draw any inheritance back into the Trust, so inheritance received can NOT be considered when assessing the value of joint assets during legal proceedings.
Protection of your children's inheritance is commonly known as Bloodline Planning, and the use of Trusts discussed above also works very effectively in preserving inherited assets from creditors, bankruptcy, future taxation & long term care.
Setting up Discretionary Trust Wills takes a little more time and costs slightly more than an average Will, but for most people the advantages are well worth the effort.
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