We need to look more closely and how and why trusts are set up and importantly, by whom, says Paul Wilcox. Chairman, WAY Trustees Limited.
Over the past 25 years since the establishment of WAY Trustees, we have successfully created approximately 1800 personal trusts for clients, across the UK, seeking to protect a portion of their financial assets from public scrutiny, from Inheritance Tax, family disputes, and the inadvertent dilution of their wealth due to unfortunate events such as death or divorce within the family. This focused effort has yielded significant benefits, including estimated savings of over £70 million in Inheritance Tax for those families.
Despite these achievements, I find myself reflecting on the demographics of the trusts we have set up over the years. A preliminary examination reveals an interesting trend: over 90% of the trusts we arranged in the early years had been established by men, particularly elderly men, with an average age of around 70. While this is understandable, given that men in this age range typically have an average life expectancy of about 15 years, which means the trusts they establish may potentially escape Inheritance Tax after seven years, it does raise further questions regarding who actually ‘owns’ the wealth in the UK.
Many of these men were significantly older than 70, which inevitably means that a fair proportion did not survive the full 7 years necessary for IHT exemption (of those gifts into trust) to occur. This prompts one to consider recent studies indicating two further important considerations – that on average, husbands are generally older than their wives, and that, in any case, the majority of wives outlive their husbands – meaning that overall those wives are more likely to survive the all-important 7 years. This begs the question: why are/were husbands predominantly retaining control of their assets, ultimately placing the burden of Inheritance Tax planning on their inheriting widows?
Traditionally, women appear to have been excluded from significant family estate planning decisions, only to find themselves navigating these later challenges alone. In fact, it has been predicted that women already hold more than 50% of the UK’s wealth, largely as a result of this phenomenon.
The solution is clear. Regardless of which partner has amassed the wealth, it would be prudent for the younger spouse to receive exempt transfers of capital from the older spouse, and to immediately gift those assets into a trust. Alternatively, both partners can make such transfers into separate trusts. This strategy enhances the likelihood that the maximum chargeable transfer will survive the seven-year ‘inter vivos’ period, thus becoming Inheritance Tax-free for future beneficiaries.
Then if their children are already at risk of facing Inheritance Tax challenge themselves, it would also be wise to consider generation-skipping, benefiting the next generation down the line, or keeping those trusts in being, after the demise of the settlor, and supporting future family needs by making interest-free loans, which would subsequently further reduce any future tax liabilities.
It is with both pleasure and a small level of satisfaction that I am able to report that over the last year approximately half of all new trusts, established by our team, have been settled by women. Of course, for those settlors who are still young and healthy after the requisite seven years, repeating these gifts is not only feasible but often advisable.
