David Denton, Head of Technical Sales, outlines the key considerations for advisers when succession planning for their wealthy clients.
Help your clients to plan to pass on their wealth at a time of uncertainty
Having accumulated wealth, internationally mobile and high net worth clients then face the matter of succession law and how they can pass on their wealth efficiently. Understandably, there is often a strong sense of proprietary control and the desire to distribute to beneficiaries as they see fit, and with the uncertainties of COVID–19, wealth transfer is firmly on people’s radar.
However, different legal systems such as the Common Law, Civil Law or Sharia Law, will impose their own rules on how the estate in a particular jurisdiction can be distributed on death. The law will affect any testamentary freedom (the freedom of individuals to dispose of their assets upon death as they see fit) and whether forced heirship rules will apply.
· Common Law – A valid will allows for testamentary freedom over who is to benefit – clients can distribute their wealth to their beneficiaries as they wish. However, in the absence of a valid will, intestacy rules determine the distribution.
· Civil Law – A codified system of rules (known as forced heirship) distribute the deceased’s estate in a set way to certain family members regardless of whether there is a will or they are the named beneficiaries. Some Civil Law countries will allow the will of a national from a Common Law jurisdiction whilst living there to take effect even on assets situated there.
· Sharia Law – Succession principles derived from the Quran and the Sunnah determine how the estate of a Muslim will be distributed, leaving only a proportion with testamentary freedom.
Succession planning solutions
As a minimum, where available, clients should ensure a valid will is in place to help avoid delays in administering their estate and possibly unintended tax consequences arising on their death. Where forced heirship rules apply, advice should be obtained before any alternative means of succession is put in place that is designed to counter the rules.
Life assurance policyholders have several options available to them that remove the need to see probate documentation. These options include:
· writing policies on joint ownership
· using beneficiary nominations
· placing the policy in trust
Individuals subject to Common Law can create succession plans that best suit their objectives, in the knowledge that wills, trusts and nominations are all recognised ways of
passing on the policy benefits to whoever they wish. Which option is used depends on the client’s actual succession and tax planning objectives, and how much control and tax mitigation is required.
Clients subject to forced heirship rules should take legal advice before proceeding with a trust or nomination. How each of these works is explained below. A key benefit of using nominations and trusts is that both avoid the cost and delay of probate before beneficiaries can receive the policy benefits.
How certain are wills?
Trusts and nominations remain private from others whilst wills normally become public knowledge after the testator’s death. In England and Wales this is currently at a cost of just £1.50 for a post-1857 death, and can be ordered online. It’s worth noting that the number of contested wills is at an all-time high probably due to increasingly complicated family structures driving competing claims, combined with the fact that others can see how the estate is distributed because of the complete visibility of the will.
According to the Ministry of Justice, the number of contested wills being heard at the High Court of England jumped in 2019, at 188 cases — an increase of 47 per cent on 2018. However, this is likely to represent the tip of the iceberg, as most disputes are settled or abandoned before the case gets to court, but rarely without significant cost and acrimony.
Trusts are a product of Common Law whereby the client as settlor creates a legal arrangement with their trustees who then own and manage the trust property for the benefit of the beneficiaries and in line with the trust terms and applicable law. Using a suitable trust jurisdiction with appropriate laws, such as the Isle of Man, can help protect the trust assets from forced heirship rules, leaving control with the trustees over their distribution.
Trusts can be created using individuals as trustees, including family and professional connections, but the complexity of trust law and the duties and obligations imposed on trustees can make appointing professional trustees a much better option.
Beneficiary nomination (with Private Placement Life Insurance ‘PPLI’ and investment life policies)
When a trust is not recommended by a client’s financial adviser as the appropriate solution, the client may consider using a contractual nomination to appoint beneficiaries. These nominees will receive the death benefit payable from the policy or inherit ownership of the policy depending on the nomination made by the policyholder.
Nominations are revocable arrangements that can be altered in the future and it is important to note that they are not effective for reducing any liability to inheritance tax on death. During the life of the policy, the policyholder has retained their right to benefit.
Additional benefits of PPLI
Additionally, wealth owned via a PPLI policy can reflect investments held within the policy across the world’s major markets which include private company shares. This means that the situs of the asset that the policyholder owns is merely the PPLI itself, as opposed to the multitude of geographically diverse assets within.
For example, if a non-UK domicile owns UK shares directly, this constitutes a UK estate for UK IHT, or a non-US citizen holding US shares constitutes a US estate for US estate tax. Alternatively, if the shares are held via an offshore PPLI, what the client owns isn’t either UK or US situs.
· How clients can pass on their wealth depends on the law of the country where they and their wealth is situated. This can make succession planning challenging.
· For individuals subject to Common Law, wills, trusts and nominations are effective in helping clients to retain control over their wealth and potentially manage inheritance tax.
· Trusts can be used with life assurance policies to ensure wealth is distributed in line with the policyholder’s wishes quickly and confidentially.
· The same is true for beneficiary nominations with life policy investments, with the additional benefits that the policyholder retains control in their lifetime, can easily change their minds, and without the additional cost associated with trusteeship. For more information, download our sales aid.
The information provided in this article is not intended to offer advice.
It is based on Quilter International’s interpretation of the relevant law and is correct at the date this blog was published. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this blog.