Last week we looked at why many expats should consider trusts to assist them in several ways. Today we delve deeper into the practical use of trusts as efficient financial planning solutions.
Our example, 52-year-old Jim, is a typical expat in Asia with circumstances that would allow him to make good use of trusts. He is British and well established in Thailand, with his Thai wife, Nok, and two daughters. Jim has a son from a previous marriage that produced a grandson.
Jim's eldest daughter is currently planning to marry and Jim has reservations about her fiance. He is concerned that if he suddenly died there could be problems in that his future son-in-law could gain access to his legacy.
Jim also realises that Nok will have difficulty dealing with his estate if she is widowed. In addition Nok may come under pressure from both close and extended relatives who are likely to make pleas for access to the assets, which could quickly lead to their evaporation.
The tables show us that Jim has a potential UK inheritance tax liability of 432,000 (21.29 million baht). This is because he is still considered UK domiciled for inheritance tax purposes. As Nok is not UK domiciled, Jim's estate will have a nil-rate band or inheritance tax threshold of 325,000 and Nok will receive an additional tax-free allowance of 55,000 as a non-UK domiciled spouse. The remainder of his estate will be charged the 40% inheritance tax rate.
Jim also has a qualified recognised overseas pension scheme (QROPS) in Guernsey. Despite the recent changes to UK QROPS legislation, his benefits are preserved, leaving him happy with the current structure. His QROPS is under the care of a trustee and is not liable to inheritance tax as he has been offshore for more than five consecutive UK tax years. The current investment value of his QROPS is 220,000, which would be the current death benefit if Jim passed away.
There are two things that Jim has asked me to help him achieve. First is to restructure his assets, such that the family receive their legacy shares according to his wishes. Second is to formulate ways to reduce inheritance tax liability on his estate.
Jim would like his son and grandson to have part of his legacy, and his thinking is that the QROPS would be a relatively fair proportion of his estate. He also considers that this was an asset originally built from his work in the UK and fairly represents a portion which he considers relates to his son.
When Jim dies the trustees of the QROPS will simply liquidate the assets and pay the proceeds to the beneficiaries Jim specifies. However, Jim prefers that these assets not be liquidated but rather preserved with a succession plan for his grandson. As the QROPS trustees will be unable to do this within the actual QROPS trust, a new trust will be established to deal with the ongoing management of these assets. When the time comes, the assets may be transferred in specie (in its actual form rather than converted to something else such as cash) to the new trust so that they do not suffer from any market fluctuations by being sold at an inopportune time.
To achieve this, an empty trust will be set up to receive these assets. The trustee can be the QROPS trustee if they are prepared to act in this capacity. Alternatively, an agreement with another trustee may be made so that this aspect is taken care of automatically when required.
Turning to the other assets Jim wishes to have these written into trust for Nok and his daughters. One of the problems here is that if he settles assets above the nil-rate band of 325,000 into trust, he will be required to pay 20% tax on the amount above 325,000.This is paid on account and used toward inheritance taxes when assets are transferred to the trust.
There are two life insurance policies on which Jim is currently paying premiums. The first, in Singapore, is intended to cover the outstanding mortgage if Jim suddenly dies. The second is an amount for Nok and the girls for ongoing living expenses if he dies unexpectedly. Jim may now settle both these policies into trust naming specific beneficiaries. Because these are life insurance contracts the values being written into trust are the premiums paid rather than the benefit values.
Additionally, if the contracts are ongoing with premiums paid from Jim's earnings the values being written into trust are outside the values considered for inheritance tax assessment. Thus these two insurance plans can be written into trust and there are no UK inheritance tax consequences. This action removes 758,000 from the inheritance tax capital calculation, which reduces the liability from 432,000 to 128,800.
Jim may then settle the remaining liquid investments into trust. These are the offshore personal portfolio bond (OPPB) and the savings plan. This will not attract any initial tax as the total being settled into trust will be less than 325,000.This removes a further 308,000 from the inheritance tax equation.
Any assets Jim settles into trust as this stage will be classed as potentially exempt transfers and are subject to inheritance tax on a reducing scale if he dies within seven years. After that time they will be free from inheritance tax.
By transferring the liquid assets there is a further decrease of 123,200 taxable assets reducing the estate inheritance tax liability to only 5,600. While this is a pretty good achievement it still leaves the estate in a position where a great deal of organisation and ongoing management will be required. This is because the largest single asset is the Singapore property. If Jim settled this into trust he would create an exposure to initial tax installments.
While we have achieved solid inheritance tax planning, Jim came to me for two reasons. The second was the restructuring of the assets so that Nok would not have any headaches when he passes.
One of the solutions is to sell the Singapore property and invest the proceeds so that they can be easily settled into trust in tranches. However, although we have reduced the inheritance tax liability for today, what about future asset acquisitions and possible increases in asset values, particularly with the Singapore property?
There are still further solutions that can be adopted and we shall look at those next week. No two clients are the same, so if you believe your affairs could be better structured than they currently are, I encourage you to seek a no-fee, no-obligation review.
Andrew Wood has been an expat in Asia for 32 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or email to enquiriesthailand@fsplatinum.com.