Benefits of succession planning

Everyone, regardless of financial status, can benefit from having a succession plan. A succession plan sets out how an individual’s wealth is to be distributed when they’re no longer around and ensures that their loved ones will benefit. Without any suitable succession planning, loved ones could face delays in receiving proceeds, large tax burdens and even the courts deciding how assets are distributed; which may be contrary to the individual’s wishes. Creating a succession plan is a long and complex process, so it’s better to start sooner rather than later. With this in mind, here are 5 key benefits of succession planning.
 

1. Minimising UK Inheritance Tax 

Anyone who is UK domiciled, or is deemed UK domiciled, is subject to UK inheritance tax (IHT) on their worldwide estate. This would include the value of an FPI policy of life assurance or capital redemption. When the value of the estate exceeds any nil rate band (NRB) – the current threshold is set at £325,000 - an IHT tax charge of 40% is applied to the excess.  

However, individuals with potential exposure to UK IHT could consider using a trust structure to mitigate their liability, for example choosing one of 3 draft trust deeds offered by FPI. The UK IHT benefits of using a trust structure include:

1. Removing the value of the policy completely from the estate.
2. Removing any future growth of a policy from the estate.
3. Providing an immediate IHT saving in addition to a fixed income for life

Keep in mind that the timing of using a trust is important to ensure the maximum UK IHT benefits are achieved. 

Non-domiciles
Options are also available for individuals who are not yet considered UK domiciled or deemed UK domiciled. These individuals could look at placing their non-UK assets (such as an FPI policy) into a trust arrangement known as an Excluded Property Trust. 

The use of an Excluded Property Trust can remove the value of these assets from their estate for UK IHT purposes; even if they eventually become UK domiciled in the future.
 

2. Providing for Beneficiaries

Advance planning can see to it that benefits are transferred to intended beneficiaries without the administrative headaches invariably involved in obtaining Probate. A simple way to achieve this is to use a trust. 

A trust is a legal structure that allows a designated third party (the trustees) to manage assets on behalf of the beneficiaries. Trusts also offer an additional advantage over making an outright gift to a beneficiary because, in a trust structure, the original policyholder (if they are a trustee) can retain a certain degree of control over these assets once given away. This level of control could be suitable where:

• Parents and grandparents are concerned of risks if children / grandchildren inherit too much too soon.
• Intended beneficiaries may be in an unstable marriage or currently incapable of managing their own financial affairs.

Trusts are generally set up on either a ‘Bare’ or a ‘Discretionary’ (flexible) basis: 

1. Bare: This type of trust has fixed beneficiaries that cannot be changed. This type of trust would be suitable where the settlor is certain of the intended beneficiaries.

Example: The beneficiaries are the settlor’s two teenage children. The settlor has no plans to have additional children so will not need to change the beneficiaries. If the settlor were to have an additional child, they would be unable to benefit. 

1. Discretionary: This type of trust has flexible beneficiaries allowing the trustees to use their total discretion as to who is able to benefit.

Example: The settlor has a wide range of beneficiaries in mind. These could include immediate family members as well as future family members that have not yet been born.

NB: The taxation of trusts varies and they may not be suitable in all jurisdictions. 
 

3. Probate Avoidance

The scenario below outlines how probate avoidance can facilitate a timely and cost-effective transfer of assets.

Problem

Where an FPI policy is classed as an Isle of Man asset, we would require Isle of Man Probate to establish whom the executor is on the death of the last surviving policyholder. The executor named on the Probate document is then able to provide instructions to appoint a new policyholder*, surrender the policy, or submit a death claim. 

*subject to their being a surviving life assured or the product being a capital redemption bond.

Solution

Using one of the following methods will mean the payment of the death benefit to the beneficiaries happens much more quickly and simply. It may also save your beneficiaries the time and expense of obtaining probate.

1. Multiple policyholder ownership (i.e. spouse / civil partner) will mean that the ownership of the policy automatically transfers to the surviving policyholder whilst avoiding any requirement for Probate.
2. Placing the FPI policy into a suitable trust structure involves transferring the ownership of the policy away from the policyholder to the trustees. Upon the death of the policyholder, Probate is avoided as the trustees can continue to manage the policy and provide on-going instructions.

Note: If an individual has assets in a number of different jurisdictions, applications for probate could be required in each jurisdiction where those assets are held. 
 

4. Avoiding potential disputes

One way to avoid potential disputes is to have a professionally drafted will in place. The person writing a will is called the testator, and they generally name someone, the executor, in the will who they would like to manage their estate upon death. After the death of the testator, the executor takes control of the estate and can distribute the assets in accordance with the will. 

When someone dies without leaving a will, their estate will generally be distributed according to certain rules. These are the rules of intestacy and they vary from country to country. How the estate is finally distributed may not be how the individual intended. This could lead to loved ones missing out and disputes arising amongst other family members. 

For holders of an FPI policy, having a will in place will not avoid having to obtain Isle of Man Probate. However, it can assist in:

• Confirming who the executor(s) is/are should Isle of Man Probate be required, and
• Confirming how the executor(s) should distribute the funds of the policy or transfer the ownership of the policy if it is able to continue.

**FPI will follow an instruction from the legally appoint executor (named on probate document) and not someone who may be named as a beneficiary in the will**

Note: Individuals with assets in different jurisdictions may want to consider separate wills for where their investments are based - and that take into account any local succession laws such as forced heirship. 

Also, having multiple lives assured does not avoid the requirement for IOM probate on the death of the owner.

Even with a will in place, disputes between family members can occur. Holding a policy in a suitably worded trust structure will avoid any requirements for an executor to be appointed. The appointed trustees are the legal owners and can distribute the trust fund in accordance with the settlor’s wishes/terms of the trust. 

Where a policy is held in trust, it is no longer owned by the individual. The trustees (not an executor) will decide how the trust fund is distributed to the beneficiaries. 
 

5. Choosing the most suitable product

Succession planning can be about providing for the policyholder’s future generations. The type of product an individual holds can influence the planning options available upon their death.

To understand this we need to look at the two different ways an FPI policy could be set up:

• Life insurance: The product is able to continue until the death of the last life assured.
• Capital redemption: This can continue until maturity (usually a period of 99 years). Upon the death of the owner, it is able to continue to maturity.

If the product owner has a professionally drafted will, the executors will have clear instructions as to what is to happen on the individual’s death. This could include transferring the ownership to the intended beneficiary; something that is only possible if the policy can continue.

If the product were held in a discretionary trust, the trustees would have flexibility to provide for future generations (even those that may have not yet been born).