Case Study: Mrs Collins - Elderly Client Adviser

Feature

posted 13 Sep 2000 in Volume 5 Issue 6

Case study: Mrs Collins
By Mike Curry

Background
Lady aged 82, recently widowed from a second marriage where her husband had run all the finances. The client was the sole beneficiary of her husband’s estate of over £200,000 and was referred to the IFA by the solicitor with concerns to improve her income stream and address long-term care provision.

Client Meetings

During the meetings with the client it became evident that the client assets were considerable and totalled in excess of £450,000. The majority of the assets were in a Managed Share Portfolio managed by a major high street bank, and the solicitor was not aware of these funds. The client’s priorities remained but the mitigation of Inheritance Tax (IHT) was added to previous concerns as the tax liability equated to £175,000 including the estate value of the former husband.

Assets of this value meant that an income supplement could readily be found to fund nursing care costs at the required level of £20,000 per annum from the overall portfolio which immediately addressed one client concern.

The concerns with regard to providing an income supplement and mitigating the IHT liability were addressed as follows. The client did not wish to fund a life assurance policy for IHT purposes given her age.

Solution

a) Deed of Variation was utilised to amend the beneficiaries of the deceased husband’s Will. The assets were placed in an offshore bond as part of a Discretionary Will trust arrangement to remove the assets from the client’s estate but allow access at the discretion of the trustees. This reduced the potential IHT bill by over £80,000 immediately, but retained client access for possible nursing care needs.

b) The management of the Share Portfolio was switched to a major stockbroker to provide a much more competitive charging structure. This was achieved at nil cost to the client, saving £11,000 in initial charges and £8,000 per annum in ongoing management charges. As part of this transfer, assets were stripped out without incurring a Capital Gains Tax (CGT) liability to meet the client’s other priorities as detailed next.

c) The funds released above (£120,000) were invested in an offshore capital redemption bond for estate planning purposes. These trust investments are a means of partially circumventing the Potentially Exempt Transfer rules for gifted monies, in that the PET has a discounted value and the investor retains access to both the residual amount and growth on the whole fund. The discounted amount depends on the ‘income’ level to be taken and the client’s life expectancy. In this particular case the client wished to take an ‘income’ of 5% per annum (£6,000) tax deferred and the amount removed from the estate on Day 1 was 43% of the original investment. This met the required income need and reduced the potential IHT liability by a further £20,640 immediately. All future growth will be outside the estate for IHT purposes ad the problem is therefore not being compounded. Assuming survival for seven years, the whole of the investment is removed from the estate for IHT calculations (saving a total of £48,000 in death duties).

Summary

The referral of this client by the solicitor to a specialist IFA resulted in meeting the client’s needs and largely resolving the potential IHT problem of which both the client and solicitor were unaware.

Restructuring of the asset base allowed the client to retain access to funds if needed, provided an income supplement in a highly tax efficient manner and removed 57% of the IHT liability from the date of investments (73% of the liability assuming survival for a further seven years). The potential IHT liability could have been negated entirely if the client had been willing to take a higher level of ‘income’ from the capital redemption bond, although withdrawals in excess of the 5% taken would have resulted in an income tax charge. The lower premiums required to cover the excess IHT liability through a life assurance contract may now be much more attractive to the client. In addition, the client is making significant savings with respect to the ongoing management charges on the residual portfolio.

This is just one example of how our respective professions can ensure our clients are properly advised by working closely together to ensure the ‘preservation of wealth’.

Mike Curry, Meridian Financial Services