Protecting the Estates of Cohabiting Couples
Generally, relatively few cohabitees receive adequate advice on the protection and inter-generational tax planning of their estates, be it pensions, Death in Service (DIS) benefits, life cover, property assets, savings and investments or lifetime inter-generational transfers.
Integrated financial planning and effective legal planning are essential in delivering the desired outcomes for cohabitees. The use of lifetime and deathtime Trust frameworks is a popular, reliable solution but many clients are rarely advised to use them by legal service providers and may be led to believe they are overly complex, and expensive to maintain which need not be the case.
Many cohabitees do not even have a Will and do not fully understand what difficulties can be created at probate and that their assets may not be directed where they would like them to go under intestacy rules. Their partner is often excluded from benefiting from the residual estate.
Thankfully, the majority of cohabitees at least have simple Wills that direct assets “absolutely” to their chosen Beneficiaries which is effective for directing wealth but inefficient in protecting it and extremely tax ineffective when assets are directed to a partner where spousal exemption rules do not apply, thus running the risk of double taxation in some cases.
If you are a parent or have family members who you wish to benefit from the wealth you have created during your lifetime, you must consider possible future outcomes that may befall your chosen Beneficiaries and address any concerns that you may have now or may emerge in the future.
Common concerns many cohabitees have are;
- What is the risk to your wealth following your death?
- If you leave your estate to your partner and they require long term care, what will happen?
- Loss of tax allowances because your Wills are tax ineffective.
- Will your assets ultimately pass to your chosen Beneficiaries after your partner deceases if they change their Will?
- What would happen to the inheritance your chosen Beneficiaries receive if they were to divorce?
- There may not be IHT payable when you die but it means your partner is highly likely to pay IHT because of your combined wealth.
- IHT will be payable when the first partner deceases and unnecessary double taxation may occur on the death of the surviving partner.
If you look beyond the inheritance to the Beneficiary, you will appreciate the many potential issues that exist and some of them are unique to cohabitees.
Questions and Answers
No, as a proportion of the value you protect it is typically much less than one percent of the estate value.
No, apart from £10 nothing goes into them until you die so until then there may only be an occasional cost e.g. changing a Trustee. There will be some initial advice costs when you die.
We encourage you to consider adult family members, or trusted friends, speak to your planner for guidance.
No problem, you don’t even have to change your Will. It is usually possible to make most changes by means of a new instruction to your Trustees (Letter of Wishes).
125 years in England and Wales and 80 years in Northern Ireland. Most families use them for at least one further generation.
Under current rules there is no tax going into the Trust after any IHT has been paid. A Trust is like a person and has its own tax allowances for Income Tax, Capital Gains Tax and Inheritance Tax. Your Trustees can take advice in the future.
Yes, at probate your Trustees can elect to appoint out any required value within two years of your death.
Protecting the DIS Benefits of Cohabiting Couples
Generally, few Cohabiting clients receive adequate advice on the protection and inter-generational tax planning of their estate, be it pensions, Death in Service (DIS) benefits, life cover, property assets, savings and investments or lifetime inter-generational transfers. The impacts are frequently greater because the current laws benefit married clients and often disadvantage cohabiting couples. Whether you are a family where a legal partnership has never been a priority or have formed a new partnership later in life, your planning requirements may be more complex.
Integrated financial planning and effective legal planning are essential in delivering guaranteed outcomes, and DIS benefits are one of the most significant considerations often neglected by providers of legal services. This is largely because Cohabiting clients are unaware of the risks to their DIS benefits and do not understand what simple steps can be taken to address them.
The unpredictability of life requires us to be prepared. DIS is an excellent employer benefit that will pay out tax free (in many cases at the discretion of your employer) to your chosen Beneficiaries if you are employed by them when you die. It is good practice to check the details of your employer’s scheme and benefits and establish the value of any likely payment.
Your DIS benefits will be paid to the approved nominated Beneficiary (usually your partner or your children) and it will be their choice to decide how to use the funds, for example, to pay off a mortgage if required or to be invested by your financial adviser to provide a long-term income source.
You should consider any possible future outcomes that may arise once your chosen Beneficiary receives the DIS payment (tax free).
- If your partner enters into a new relationship could there be a potential risk to the funds intended for other desired Beneficiaries?
- If, historically, your partner is not good with money, will the DIS benefits be used wisely?
- The DIS benefits will form part of your partner’s estate and will pass to the Beneficiaries in their Will. Is this the outcome you want?
- Will the addition of a DIS benefit to your partner’s estate increase the potential for an Inheritance Tax (IHT) liability?
- Would the DIS benefits be exhausted if they were required to pay for care for your partner, resulting in others not benefiting?
If you are in a blended relationship and want your DIS benefits to pass to your children and not your partner, would you like them to do so in a protected and tax-efficient manner?
Questions and Answers
The majority of DIS benefits can go into an APT at the discretion of your employer. We encourage you to check with your employer before establishing your APT.
No, as a proportion of the value you protect it is typically much less than one percent of the DIS benefit.
No, nothing goes into your APT until you die, so until then there may only be an occasional cost, e.g. for changing a Trustee. There will be some initial costs for advice when you die.
We encourage you to consider adult family members or trusted friends. Speak to your adviser for guidance.
No problem, just fill out a new nomination form from your new employer to direct benefits to your APT.
There is no tax on funds going into the APT. A Trust is like a person and has its own tax allowances for Income Tax, Capital Gains Tax and Inheritance Tax. Your Trustees can take advice in the future.
Trusts can face claims from third parties, but without an APT there is no protection.
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