Ensuring more wealth is preserved for your family and future generations

Ensuring more wealth is preserved for your family and future generations

Ensuring more wealth is preserved for your family and future generations

Spouse bypass trusts (also known as a Legacy Preservation Trust) and other estate planning strategies are crucial for business owners and company directors to protect their estates from inheritance tax (IHT). Here’s an overview of how these strategies work and their benefits:

Spouse Bypass Trusts

What is a Spouse Bypass Trust?

A Spouse Bypass Trust is a discretionary trust that allows an individual to leave assets to beneficiaries other than their spouse, bypassing the spouse and potentially reducing the inheritance tax burden.

How It Works:

  • When the individual dies, instead of assets going directly to the spouse, they are placed into a trust.
  • The spouse can still benefit from the trust (e.g., receiving income or having access to capital), but the assets are not considered part of the spouse’s estate for IHT purposes.

Benefits:

  • IHT Efficiency: Since the assets in the trust are not part of the spouse’s estate, they are not subject to IHT upon the spouse’s death.
  • Control: The settlor (person who creates the trust) can dictate how and when the assets are distributed, providing control over the distribution to future generations.
  • Protection: Assets in the trust are protected from creditors and may be protected in cases of divorce or bankruptcy.

 

Protecting the Estate from Inheritance Tax for Business Owners and Directors

Business Property Relief (BPR):

BPR allows business owners to pass on some or all of their business assets free from IHT if certain conditions are met.

To qualify, the business must be a trading company (not an investment company), and the assets must have been owned for at least two years before the death of the business owner.

BPR provides up to 100% relief on qualifying business assets, significantly reducing or eliminating the IHT liability.

Use of Trusts:

  • Family Trusts:  Placing business interests into a family trust can protect the business from IHT and provide income to beneficiaries.
  • Life Interest Trusts: Provide a spouse with the right to income from the trust during their lifetime, with the capital passing to children or other beneficiaries upon the spouse’s death.

Gifts and Exemptions:

  • Annual Exemption: Each individual can give away up to a certain amount each year (currently £3,000) without it being added to the value of the estate.
  • Potentially Exempt Transfers (PETs): Gifts made more than seven years before death are generally exempt from IHT.
  • Business Gifts: Gifts of business assets can be made, taking advantage of BPR and PET rules.

Shareholder Agreements and Wills:

  • Ensure that shareholder agreements and wills are aligned to facilitate the smooth transfer of business interests upon death.
  • Include provisions for the sale or transfer of shares to avoid forced sales and ensure continuity of the business.

Life Insurance Policies:

  • Taking out life insurance policies written in trust can provide funds to pay any IHT due, preventing the need to sell business assets.

 

Steps to implement these strategies

  1. Consult with Estate Planning Professionals at Gilson Gray Financial Management:
  • Engage solicitors and financial advisors who specialize in estate planning and business succession.
  1. Set Up the appropriate Trusts:
  • Work with your solicitor to establish spouse bypass trusts, family trusts, or life interest trusts.
  1. Review and update your will:
  • Ensure your will reflects your current wishes and integrates with your estate planning strategies.
  1. BPR:
  • Structure your business to qualify for BPR and review periodically to ensure compliance.
  1. Regularly Review Your Plan:
  • Regularly review and update your estate plan to reflect changes in your circumstances, tax laws, and business structure.

By taking these steps, business owners and directors can effectively minimize the impact of inheritance tax on their estates, ensuring that more wealth is preserved for future generations.

Lesley McKnight
Partner, Private Client
Phone:01224 011700
Email:  lmcknight@gilsongray.co.uk

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