Deed of Variation help please.

lohr500

As mentioned in previous threads, my father passed away in November and everything passed to my mother as his surviving spouse.

The estate was excepted from an IHT/Probate perspective.

The total estate value is close to £1M and if house prices increase over the next few years and my mother does not pass away, then it is likely that IHT will be payable on her death.

My mother has gifted some cash outside of her earnings from surplus income to the grandchildren, but longer term there is still a risk of the estate being liable for IHT on her passing.

Is there any mileage in considering a Deed of Variation to pass some of the estate she inherited from my father to the grandchildren?

I'm struggling to get my head around how a Deed of Variation works in this scenario.

Thanks in advance for any replies.

Keep_pedalling

A DoV is pointless in this situation as it would also reduce the amount of transferable NRB that could be used on her estate. For example at the moment her estate will have exemptions of up to £1M, if she gives away £100k via DoV her estate immediately drops by £100k but exemptions are reduced to £900k. The effect is neutral but can be negative when compared to her making a simple gift and living a further 7 years.

lohr500

Thanks again @Keep_pedalling

This makes complete sense now and I can see why it wasn't suggested as an option earlier.

I guess the time to consider deeds of variation is when my mother does pass, if we don't want to increase our own IHT liability through inheriting our share of her estate.

Keep_pedalling

https://forums.moneysavingexpert.com/discussion/comment/81904733#Comment_81904733

Or she could review and change her will now. This option avoids the issue of you inheriting but can’t make a DoV because through illness or accident you no longer have the mental capacity to make one.

lohr500

A good point which we should consider.

poseidon1

Just to clarify, when looking at your mother's taxable estate I assume you have not included the current value of tbe Discounted GIft Trust she currently receives withdrawals?

Hopefully that trust fund is accruing IHT free growth outside her estate, notwithstanding the relatively high level of annual withdrawals she is receiving.

lohr500

I haven't included the current value of the discounted gift trust as I understood from the documentation I found that it sat outside of her estate. The ultimate beneficiaries of the trust, on the death of my mother, are myself and my brother.

There is something in the documentation saying that to avoid a taxation liability, the annual withdrawal amount should not exceed 5% of the initial trust value.

But as per my previous post, I realise that she cannot class the monthly payments from the trust as income. So this does restrict the level of gifting from surplus income.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81904907#Comment_81904907

All noted, however to be clear your mother is tied to the originally contracted percentage level of withdrawals which can neither be increased of reduced under the terms of the scheme.

Hopefully, the scheme is reviewed at least once a year to ensure the underlying investment fund choices are growing at a sufficient level to more than accommodate the fixed rate of withdrawals.

I have seen some unfortunate scenarios where the underlying investment choices were far too cautious, leading to the settlor effectively 'eating' their own settled capital thereby diminishing the value of trust fund year on year and defeating the original objectives of the trust.

lohr500

That's really good advice @poseidon1.

Reviewing the scheme is a good point and I should do this as the growth is not keeping pace with the withdrawals.

Until my father's death i wasn't even aware of it's existence.

With annual withdrawals at 5% since it's inception in 2012, the capital has fallen by 18%. So time to review the investment choices?

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81904979#Comment_81904979

Definitely.

I would be concerned if there had been no such reviews in this regard since inception. These schemes are not really ' fire and forget' arrangements.

It could well be your father's original investment fund choices were far too conservative from outset for the withdrawal level chosen.

In your parent's postion I would be disappointed there has been a loss of nominal capital over the last 13/14 years, even more so when inflation is taken into account so time to try and stem the 'rot' if possible.

lohr500

I've reached out to his former IFA this evening to try and get some background on the policy and to establish if she was actively involved in advising on it in recent years.

I suspect my father decided to "go it alone" several years ago after he transferred most of his IFA guided investments into cash assets.

Based on my own experience of ReAssure (with whom the policy is lodged) , it is perhaps not surprising that the capital value started falling from 2020 which is when they took over the policy from Legal & General !!
Up to that point the annual residual capital was ebbing and flowing around the initial investment value. Probably not a stellar performance, but at least it wasn't being diluted.

The fund name is L&G Mixed Management Fund Life Accumulator Series 21().

Having looked into the detail I am shocked and surprised that he didn't change the risk level on the portfolio. He was all over his accounts and was always rate chasing on his cash ISA's.

I also noticed on one of the more recent statements from ReAssure that they mention that if the policy is held in trust, then it may need to be registered with HMRC. I have asked his former IFA if this is applicable and if it was done.

It will be interesting to see what response I get from his former IFA.