Life story

It’s a privilege, as private client lawyers, to be able to help individuals with what are usually difficult and daunting topics to talk about – death, end-of-life planning, losing mental capacity, or family relationships. It’s our duty to keep things as simple as possible, and offer a friendly and reassuring presence. If you can do this, you will build lasting relationships with many clients (often through generations), which is undoubtedly one of the most rewarding aspects of a career as a private client lawyer.

This article takes you through an initial meeting with fairly typical clients – using a fictitious case study – and looks at the issues that might arise as a result of the information they provide. Rather than covering the law in great technical detail, we highlight the areas that would need consideration (and discuss any issues that would require further investigation, as they arise).

If you’re considering private client as a specialism, we hope this article shows you the range and complexity of this area of work, and if you’re already working in this area, we hope it provides a reminder of some of the things to keep an eye out for.

Our case study

• David (57) and Emma Smith (55) have been married since August 2010.
• David has a daughter from a previous relationship, Rachel (25).
• David and Emma have two children together, Adam (19) and John (15).
• David, Emma, Adam and John all live together in a five-bedroom detached property. David and Emma own the property as joint tenants.
• David runs the family business (manufacturing and selling high-quality headphones). He owns 100% of the shares.
• Emma works as the company secretary for the business.

Wills

Emma’s relationship with Rachel

As with many modern families, David and Emma are a blended family, with David having a child from a previous relationship: Rachel.

It is important to determine what Emma’s relationship with Rachel is like. Ideally, we need to know whether Emma considers Rachel to be one of her own children (and therefore is happy for any combined wealth to be shared on her and David’s deaths). Alternatively, if the relationship is less good, a discussion will need to be had around ways to equalise their combined wealth, taking into account notional family ‘pots’ of wealth.

Of course, Emma may tell you during the meeting that she considers Rachel to be her child, but actually have no intention of keeping Rachel in her will if David dies first. If the wills are put in place on the first death to leave everything to the survivor, and David dies first, Emma could then change her will to reduce Rachel’s inheritance or cut her out of the will completely. With this in mind, you should consider raising the option of utilising trusts (discussed below) within their wills.

Ownership of the family home

The family home is owned as joint tenants. This means that if either David or Emma dies, the surviving spouse will take the whole property (regardless of the content of their wills). For many couples, this will be fine. However, depending on the type of planning they wish to do, it may be more appropriate for the tenancy to be severed so that they own the property as tenants in common. This would mean that their respective share of the property would pass in accordance with their respective wills.

It is good practice to check the ownership of the property at HM Land Registry, regardless of what the clients tell you, in order to ensure that you are able to provide the correct advice based on their actual ownership.

First death – flexible life interest trust

On first death, most couples will leave the majority of their estate to the surviving spouse. This is especially true where the clients are in their first marriage and all of their children are from that marriage. However, where there are previous marriages and/or children from other relationships, like Rachel, it is important to advise the clients on alternative ways to structure their wills.

We find that by providing anecdotes (while maintaining confidentiality), we can help clients understand why they may want this additional level of protection

One option that we often advise clients to consider is for them to both leave their estate to a flexible life interest trust (FLIT) on first death. This gives the first person to die assurance that their share of the assets will be protected for the benefit of their ultimate beneficiaries (their children) on second death. If they were to leave their assets outright to the surviving spouse, there would be nothing stopping the surviving spouse from changing their will after the first spouse dies.

The FLIT provides the surviving spouse with the right to the income from the assets that are to go into this trust, for the duration of their lifetime. This structure would be backed up by a letter of wishes providing guidance on how the deceased would want the trust to be run. For example, it might say that the surviving spouse’s lifestyle should be maintained. This wording, coupled with a power to advance capital to the surviving spouse, would enable the trustees to use their discretion to ‘dip’ into the capital held in the FLIT in circumstances that are set out in the letter of wishes. This might include covering the cost of medical treatment, moving house, or just carrying out general repairs / maintenance on the family home.

David and Emma might not see this as the most ‘romantic’ way of leaving one’s estate. However, it is important to highlight to them how often things can go wrong (in terms of non-bloodline children being left out of a will on second death) if this structure is not utilised. We find that by providing anecdotes (while maintaining confidentiality), we can help clients understand why they may want this additional level of protection.

Second death – discretionary trust

On second death, clients such as David and Emma will probably want to leave most, if not all, of their assets to their children. However, no one can predict with certainty when they are going to die. Therefore, the children’s circumstances when they have both died may be such that it would be inappropriate for them to inherit wealth at that particular time – for example, if they are financially immature, going through a divorce / separation, or suffering financial difficulties (such as a bankruptcy).

Leaving assets to a discretionary trust on second death effectively provides a ‘buffer’ between that death and each child receiving their share. The trustees can wait until any dangers have passed before transferring assets out to the children. They may decide to drip-feed money out to see how the children manage a portion of their inheritance, before transferring more out to them.

It is important to note that the trustees of the discretionary trust have absolute discretion. As such, they could, in theory, go against the testator’s wishes. The reality is that they would not do this unless there was a very good reason. However, this highlights how important the choice of trustees is. They must be people who will act neutrally and who David and Emma know would do the right thing. It is for this reason that many clients will appoint a professional trustee (such as their solicitor), especially where the family dynamic and/or their assets are complex.

Family business

David owns 100% of the company shares. It is important to ascertain what he envisages for the future of the business in practical terms, as this will influence the way in which the company is passed on / dealt with. For example, does Emma or any of his children have an interest in carrying on the business?

David may wish to consider a cross option agreement which can cover arrangements allowing others who are involved in the business to buy out his share. The agreement can cover details of timing, the exercise price (either a fixed price or methodology for calculating the amount for the shares), and the financing of the purchase. The shareholders’ agreement and articles of association should also be reviewed to deal with issues such as the transfer of shares, appointment of directors, and decisions requiring shareholders’ consent.

Another aspect to consider is inheritance tax (IHT), and whether the shares would attract business property relief (BPR). There are various requirements to satisfy in order for assets to qualify for this relief – this is outside the scope of this article.

Assuming that the shares do qualify for BPR, maximising the exemption through careful will- and trust-planning can increase the amount of funds being passed down to David’s family, and can also effect a means to succession planning and asset protection.

For example, if David left his shareholding to Emma, who then sold the shares, the proceeds would:

• form part of her estate for IHT purposes, and
• have lost their BPR status.

If the shares were left to a discretionary trust and sold, however, the proceeds would sit inside the trust and be available to be utilised for the discretionary beneficiaries, as directed by the trustees.

Lifetime gifting / estate planning

When taking will instructions, you must ask David and Emma about the extent of their assets. However, if they wish to receive advice relating to IHT and estate planning, it is good practice to provide a separate fee estimate and highlight that this is additional work to the preparation of the will (subject to your firm’s guidelines). Your client engagement letter should be clear on what the retainer covers and what it does not.

If David and Emma wish to receive advice on IHT and estate planning, a good starting point would be to calculate their current IHT liability.

Each individual is entitled to a nil-rate band which is currently set at £325,000 (subject to any failed lifetime gifts). The government has more recently introduced the residence nil-rate band (RNRB), which applies to estates where a residential interest passes to lineal descendants. The allowance is currently set at £175,000, but tapers once an estate exceeds £2m in value. Care should be taken to review the availability of the RNRB when preparing wills for David and Emma, particularly if trusts are being used.

It is wise to get the ‘seven-year clock’ running sooner rather than later, if the clients are confident that assets are surplus to their requirements and they wish to make direct gifts

If David and Emma’s estate is subject to IHT, there are options available. However, it is important to first ascertain their comfort levels in terms of what assets they wish to retain for their financial security. For example, David and Emma may wish to retain all or most of their assets for their own peace of mind, as they do not know what the future holds and they are still relatively young. While this may mean more IHT will be due on their estate, it is important to remember that tax is only one aspect to consider – the client’s comfort levels should come first and foremost.

If David and Emma feel that they do have assets which are surplus to their requirements, the simplest way to reduce their estate for IHT purposes would be to make outright gifts (known as potentially exempt transfers (PETs)). If both David and Emma survive for seven years after the date of the gift, the value would be treated as fully exempt and fall outside of their estate for IHT purposes. If one or both of them died within the seven-year period, their portion of the gift would be included in the value of their estate for IHT purposes. However, the tax on those assets (if any) starts to taper after three years’ survivorship. It is therefore wise to get the ‘seven-year clock’ running sooner rather than later, if the clients are confident that assets are surplus to their requirements and they wish to make direct gifts.

David and Emma may wish to consider passing on some of their wealth to the next generation. Rachel is 25, Adam is 19 and John is 15.

While a direct gift may be appropriate for Rachel, it is important to highlight that the gifted assets would form part of Rachel’s estate and could be subject to personal claims, such as bankruptcy / divorce. Direct gifts to Adam and John may be unsuitable due to their age / financial maturity. Trusts could be considered (as discussed above around the second death).

You should also clarify whether any lifetime gifts are to be treated as in addition to any gifts in the will, or whether “hotchpot” should apply – that is, that any lifetime gifts are to be taken into account when that beneficiary’s share in the will is calculated.

There are a number of other ways David and Emma could reduce their estate through lifetime gifting by making use of exemptions, including the following.

• Annual exemption: a person may make gifts of up to £3,000 in each tax year, free of IHT. This can also be offset against larger gifts. Any unused allowance can be carried forward one tax year, so that a maximum of £6,000 can be available.
• Small gifts to the same person: gifts of £250 maximum to one person in any one tax year are exempt. This is in addition to the annual exemption, and could be useful for, for instance, gifts to grandchildren.
• Gifts between UK-domiciled spouses: these are exempt from IHT.
• Gifts in consideration of marriage: a parent to a party of the marriage can give £5,000, a remoter ancestor (such as a grandparent) £2,500, and anyone else can give £1,000, free of IHT.

Another useful exemption to review would be that of normal expenditure out of income. Record keeping is essential – the back page of form IHT403 can be used to record the client’s income and expenditure to work out whether there is any excess income which can be gifted away, free of IHT. There is no seven-year survivorship requirement when utilising this exemption. For this exemption to apply, the expenditure must:

• form part of the donor’s usual expenditure
• be made out of the donor’s income
• after allowing for all such payments, leave the donor with sufficient income to maintain their usual lifestyle.

Lasting powers of attorney

As private client lawyers, it’s important to raise the option of putting in place lasting powers of attorney (LPAs) with all clients (regardless of their age). We tend to find that when we ask clients whether they know about LPAs, their response is along the lines of “erm, I think I did one of those for my mum a few years ago”. Generally, those who are not elderly (such as David and Emma) have not thought about putting in place LPAs for themselves, as they believe they are many years away from losing capacity. That may be true. However, none us know whether we might be subject to an untimely accident, so anyone over the age of 18 should really have LPAs in place.

There are two types of LPA.

An LPA for financial decisions allows the client (donor) to choose one or more attorneys to look after their finances. In this document, it is possible to limit the authority to deal with certain assets. Generally, an attorney will make decisions relating to:

• investing the donor’s money
• buying or selling property
• paying bills
• arranging insurance and repairs to their property.

An LPA for health and welfare decisions allows one or more attorneys to make health and care decisions on the donor’s behalf. Their attorney(s) can only act when the donor lacks capacity to make such decisions for themselves, for instance:

• whether to consent to a certain type of medical treatment
• what kind of social activities the donor takes part in
• where the donor lives
• what the donor eats (for example, they may wish to follow a vegan diet)
• giving or refusing consent to life-sustaining treatment.

If the client does not have a validly registered LPA in place, and then, as a result of illness or following a serious accident, they become mentally incapable, someone would have to apply to the Court of Protection to look after their finances and ask to be appointed as their deputy. This is costly (both initially and on an annual basis thereafter) and time consuming, and the client will not be in a position to choose who that person should be.

Building your skills

We believe that as private client lawyers, it is our duty to ascertain the client’s objectives. One of the best ways to learn about how to make your clients feel at ease is to sit in on as many meetings as you can (with more senior lawyers). If you can observe different lawyers interacting with clients, you will see that everyone has different techniques and methods (which you can then pinch for your own use!).

What works for one client won’t necessarily be suitable for another. It is vital to ‘read the room’, and ensure that any comments you make / questions you ask won’t offend the client (unless, of course, you need to ask such questions in order to provide relevant legal advice).