Saturday, 01 March 2014 12:30
Real life case study: Mark Brownridge of Mazars
Case overview
Mr and Mrs Walker were a retired, wealthy couple, aged 76 and 78. They have one grown up daughter, Miss Walker who is not dependent on Mr and Mrs Walker but helps organises their finances.
Unfortunately, Mr Walker had recently suffered a stroke which meant he would need ongoing care.Their income was mainly derived from rental properties and pension and totalled £100,000 per annum. Capital assets of approximately £15 Million were spread across various businesses, farmland, properties and investments. Their main property consisted of a family estate and farm
Mr Walker's illness had focused the family's mind on the future. In particular, ensuring the best possible care for Mr Walker and passing on their not inconsiderable wealth to future generations.
The Mazars' tax team had completed Mr Walker tax returns for a number of years but this was the first time the family had approached us for a more in depth advice review of their finances.
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The Case
Initial contact with clients is all about trust. We are all clients to someone and before we share our concerns, wants and needs with any potential business partner, we need a compelling reason to engage with them. This is what trust is.
It's my belief that, these days, it's not enough to just be Financial Planning experts. Only through effective and considered service can trust be cultivated and enduring relationships with clients developed.
Why have I started with this somewhat abstract theory? Because the following case study exemplifies perfectly why trust is so important in client relationships and benefits both clients and Financial Planning businesses.
We met with Mrs Walker and her adult daughter Miss Walker to talk through their concerns regarding their lack of IHT planning. We were already aware from a previous brief meeting that given their relatively complex existing arrangements, health and age, their advice needs could only be met by both a tax and Financial Planning professional. That's where being part of an accountancy practice really sets us apart as we can offer a clients access to a higher level of private client service.
Mrs Walker explained that she and her husband, Mr Walker were a retired, wealthy couple but that Mr Walker had recently suffered a stroke which meant he initially had to be admitted to a care home however was now being cared for at home. Their income was mainly derived from rental properties and pension and totalled £100,000 per annum. Capital assets of approx. £15 Million were spread across various businesses, farmland, properties and investments. Their main property consisted of a family estate and farm. Additionally, Mr Walker's brother and sister both collectively owned all of the land and buildings around the estate. Mr Walker's brother had exercised his power of attorney for Mr Walker and therefore took an active role in Mr Walker's finances.
As an initial exercise we attempted to frame the questions to help Mrs Walker discover what her financial plans were, what was important to her and the family, what she hoped to achieve and the lifestyle she wanted for everyone. Mr Walker had previously employed a number of different professional advisers who were all giving Mrs Walker conflicting advice but this was the first time Mrs Walker felt someone was actually listening to what she wanted.
From this, Mrs Walker identified that she was particularly keen to ensure that the overall estate remain owned by the wider family group and was therefore looking for ways in which property can be passed down to Miss Walker during her lifetime.
In addition Mrs Walker was concerned about the on-going costs of Mr Walker's care and wanted to ensure that they have sufficient income/liquid assets to ensure that those costs can be met.
Overall, in agreement with Mrs and Miss Walker, we identified the following objectives:
• To reduce the potential IHT liability of approximately £3.8m at present if both were to die immediately.
• To remain living in their main property until the death of Mr Walker, where upon it is envisaged that Mrs Walker will move in to a smaller property.
• To pass assets down to their daughter during lifetime wherever possible, and insure against the risk of not surviving seven years.
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• Ultimately, they wanted to get their finances in to such a position that the overall main property can be kept within the wider family (including Mr Walker's brother and sister) following the death of Mr and Mrs Walker.
• To ensure financial security throughout the rest of their lives, giving consideration to the possibility of continuing care fees for them both
It was clear that the most immediate needs was to calculate the IHT liability. Our tax team discussed their existing land, property and share holdings and uncovered some holdings and trust arrangements that were unaccounted for. Overall, the team calculated a £3.8Million IHT liability with insufficient liquid assets to meet this liability which was far in excess of what Mrs Walker had anticipated.
Our Financial Planning team then undertook a cashflow modelling exercise, discussing with Mrs X her income and expenditure needs now and in the future. This concluded that the couple were having to draw down on cash reserves to fund Mr Walker's care costs resulting in depletion of their liquid cash reserves by approximately £65,000 per annum. Again Mrs Walker had not appreciated the effect on cash reserves of their actions.
Once in receipt of this information both our tax and Financial Planning team sat down with Mrs and Miss Walker to talk through the possible options.
Given the number of different advice areas and other complexities, we broke our advice down into stages according to the priorities discussed to help keep things simple. Our primary recommendation was to gift the estate to Miss Walker to mitigate the significant IHT liability. Clearly as this gift would be classed as a potentially exempt transfer (PET) and to avoid the risk that Mr Walker would not survive for seven years after making the gift thus incurring an IHT liability, we also recommended establishing five separate gift inter vivos insurance policies for a total of £1.2m of cover (£3m at 40% IHT) and place each into the appropriate trusts to ensure that any sum assureds paid will fall outside of Mr Walker's estate.
Additionally, for Mr and Mrs Walker to remain living in the estate, an appropriate market rent would need to be paid to Miss Walker to ensure that the gift is not caught by the gift with reservation of benefit rules. If it was deemed that the gift was made with reservation of benefit then the gift would not be effective for IHT purposes and the asset would remain in Mr Walker's estate. Therefore, a market rent of £30,000 per annum was needed to be paid to Miss Walker to ensure that the gift was not caught by the gift with reservation of benefit rules.
To fund the payment of the premiums for the gift inter vivos, we recommended that Mr Walker elect for Flexible Drawdown from his Sipp which was valued at £165,000 which could then provide income to be drawn out each year to fund sufficient income to meet the costs of the gift inter vivos premiums.
From the modelling we undertook, we identified that Mr & Mrs Walker were highly unlikely to ever need the entire £2.9m that they currently held in liquid investments and savings. We recommended that these should be removed from Mr & Mrs Walker's estate in an attempt to reduce the IHT that would become payable on second death and invest in a Discretionary Gift Trust (DGT). We felt a discretionary Discounted Gift Trust was most appropriate (as it gave flexibility over the potential future beneficiaries of the trust) and would allow Mrs Walker to pass approximately £600,000 - £620,000 into the trust without triggering a tax charge (i.e. because the gift will be deemed to fall within her £325,000 nil rate band). Using the 5% allowance, the DGT could then provide Miss Walker with £30,000 of income to meet the market rent.
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Our wealth managers also provided an investment strategy based on the couple's attitude to risk and income requirements.
As a result of our joined up advice, the couple were able to:
• Lower the IHT liability on second death to a level that could potentially be funded without having to break up their main property and land.
• Remove the concerns over Mr Walker not surviving seven years which would lessen the IHT impact of the planning undertaken.
• Provide a regular income from the Discounted Gift Trust that can fund/part fund the payment of rent to their daughter.
• Utilise Mr Walker's Sipp fund, which was not currently being used, to fund the required gift inter-vivos arrangements
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Mr Walker's illness had placed on Mrs and Miss Walker not only an emotional strain but also worries over what the future held financially. Neither has a great deal of experience in dealing with the family finances as Mr Walker had been "in charge of the finances". By working with Mrs and Miss Walker, we were able to empower them for the first time to put plans in place that guaranteed their families long term future and tested their aspirations against their financial reality.
We were able to agree how best to structure their asset base, tax and income position, both now and throughout the rest of their life, and presented a strategy and methodology that is flexible enough to be revisited as their circumstances change.
By taking an integrated approach, we were able to provide them with solutions that met their identified needs and uncovered some they had not realised existed. The interaction of the financial planning recommendations and the tax implications were key in meeting their objectives and providing peace of mind.
And Mrs Walker's final comment to us? "We call you before we call anyone else". Now that's trust!
{desktop}{/desktop}{mobile}{/mobile}
What Happened Next
Our review covered so many different areas that the above advice is just the first in a number of stages. However, we have already been able to ease Mrs Walker’s fears over the fate of the estate and significantly reduce any potential IHT bill, meaning Mr and Mrs Walker can pass more of their wealth to the family.
We’re now turning our attention to the care fees issue. Further objectives are coming to light, such as funding school fees for their grandchildren and further generational planning involving the other properties. Mrs Walker has also reviewed her will.
When we first met Mrs Walker she was very distressed at her husband’s situation and at being left in charge of the finances and was receiving advice from a number of sources. Six months on, Mr Walker is slowly improving and Mrs Walker feels firmly in control of the family’s complex arrangements, viewing us as her “Go To” adviser.
{desktop}{/desktop}{mobile}{/mobile}
Key Points
Mr and Mrs Walker were a retired, wealthy couple, aged 76 and 78. They have one grown up daughter, Miss Walker who is not dependent on Mr and Mrs Walker but helps organises their finances.
Unfortunately, Mr Walker had recently suffered a stroke which meant he would need ongoing care.Their income was mainly derived from rental properties and pension and totalled £100,000 per annum. Capital assets of approximately £15 Million were spread across various businesses, farmland, properties and investments. Their main property consisted of a family estate and farm
Mr Walker's illness had focused the family's mind on the future. In particular, ensuring the best possible care for Mr Walker and passing on their not inconsiderable wealth to future generations.
The Mazars' tax team had completed Mr Walker tax returns for a number of years but this was the first time the family had approached us for a more in depth advice review of their finances.
{desktop}{/desktop}{mobile}{/mobile}
The Case
Initial contact with clients is all about trust. We are all clients to someone and before we share our concerns, wants and needs with any potential business partner, we need a compelling reason to engage with them. This is what trust is.
It's my belief that, these days, it's not enough to just be Financial Planning experts. Only through effective and considered service can trust be cultivated and enduring relationships with clients developed.
Why have I started with this somewhat abstract theory? Because the following case study exemplifies perfectly why trust is so important in client relationships and benefits both clients and Financial Planning businesses.
We met with Mrs Walker and her adult daughter Miss Walker to talk through their concerns regarding their lack of IHT planning. We were already aware from a previous brief meeting that given their relatively complex existing arrangements, health and age, their advice needs could only be met by both a tax and Financial Planning professional. That's where being part of an accountancy practice really sets us apart as we can offer a clients access to a higher level of private client service.
Mrs Walker explained that she and her husband, Mr Walker were a retired, wealthy couple but that Mr Walker had recently suffered a stroke which meant he initially had to be admitted to a care home however was now being cared for at home. Their income was mainly derived from rental properties and pension and totalled £100,000 per annum. Capital assets of approx. £15 Million were spread across various businesses, farmland, properties and investments. Their main property consisted of a family estate and farm. Additionally, Mr Walker's brother and sister both collectively owned all of the land and buildings around the estate. Mr Walker's brother had exercised his power of attorney for Mr Walker and therefore took an active role in Mr Walker's finances.
As an initial exercise we attempted to frame the questions to help Mrs Walker discover what her financial plans were, what was important to her and the family, what she hoped to achieve and the lifestyle she wanted for everyone. Mr Walker had previously employed a number of different professional advisers who were all giving Mrs Walker conflicting advice but this was the first time Mrs Walker felt someone was actually listening to what she wanted.
From this, Mrs Walker identified that she was particularly keen to ensure that the overall estate remain owned by the wider family group and was therefore looking for ways in which property can be passed down to Miss Walker during her lifetime.
In addition Mrs Walker was concerned about the on-going costs of Mr Walker's care and wanted to ensure that they have sufficient income/liquid assets to ensure that those costs can be met.
Overall, in agreement with Mrs and Miss Walker, we identified the following objectives:
• To reduce the potential IHT liability of approximately £3.8m at present if both were to die immediately.
• To remain living in their main property until the death of Mr Walker, where upon it is envisaged that Mrs Walker will move in to a smaller property.
• To pass assets down to their daughter during lifetime wherever possible, and insure against the risk of not surviving seven years.
{desktop}{/desktop}{mobile}{/mobile}
• Ultimately, they wanted to get their finances in to such a position that the overall main property can be kept within the wider family (including Mr Walker's brother and sister) following the death of Mr and Mrs Walker.
• To ensure financial security throughout the rest of their lives, giving consideration to the possibility of continuing care fees for them both
It was clear that the most immediate needs was to calculate the IHT liability. Our tax team discussed their existing land, property and share holdings and uncovered some holdings and trust arrangements that were unaccounted for. Overall, the team calculated a £3.8Million IHT liability with insufficient liquid assets to meet this liability which was far in excess of what Mrs Walker had anticipated.
Our Financial Planning team then undertook a cashflow modelling exercise, discussing with Mrs X her income and expenditure needs now and in the future. This concluded that the couple were having to draw down on cash reserves to fund Mr Walker's care costs resulting in depletion of their liquid cash reserves by approximately £65,000 per annum. Again Mrs Walker had not appreciated the effect on cash reserves of their actions.
Once in receipt of this information both our tax and Financial Planning team sat down with Mrs and Miss Walker to talk through the possible options.
Given the number of different advice areas and other complexities, we broke our advice down into stages according to the priorities discussed to help keep things simple. Our primary recommendation was to gift the estate to Miss Walker to mitigate the significant IHT liability. Clearly as this gift would be classed as a potentially exempt transfer (PET) and to avoid the risk that Mr Walker would not survive for seven years after making the gift thus incurring an IHT liability, we also recommended establishing five separate gift inter vivos insurance policies for a total of £1.2m of cover (£3m at 40% IHT) and place each into the appropriate trusts to ensure that any sum assureds paid will fall outside of Mr Walker's estate.
Additionally, for Mr and Mrs Walker to remain living in the estate, an appropriate market rent would need to be paid to Miss Walker to ensure that the gift is not caught by the gift with reservation of benefit rules. If it was deemed that the gift was made with reservation of benefit then the gift would not be effective for IHT purposes and the asset would remain in Mr Walker's estate. Therefore, a market rent of £30,000 per annum was needed to be paid to Miss Walker to ensure that the gift was not caught by the gift with reservation of benefit rules.
To fund the payment of the premiums for the gift inter vivos, we recommended that Mr Walker elect for Flexible Drawdown from his Sipp which was valued at £165,000 which could then provide income to be drawn out each year to fund sufficient income to meet the costs of the gift inter vivos premiums.
From the modelling we undertook, we identified that Mr & Mrs Walker were highly unlikely to ever need the entire £2.9m that they currently held in liquid investments and savings. We recommended that these should be removed from Mr & Mrs Walker's estate in an attempt to reduce the IHT that would become payable on second death and invest in a Discretionary Gift Trust (DGT). We felt a discretionary Discounted Gift Trust was most appropriate (as it gave flexibility over the potential future beneficiaries of the trust) and would allow Mrs Walker to pass approximately £600,000 - £620,000 into the trust without triggering a tax charge (i.e. because the gift will be deemed to fall within her £325,000 nil rate band). Using the 5% allowance, the DGT could then provide Miss Walker with £30,000 of income to meet the market rent.
{desktop}{/desktop}{mobile}{/mobile}
Our wealth managers also provided an investment strategy based on the couple's attitude to risk and income requirements.
As a result of our joined up advice, the couple were able to:
• Lower the IHT liability on second death to a level that could potentially be funded without having to break up their main property and land.
• Remove the concerns over Mr Walker not surviving seven years which would lessen the IHT impact of the planning undertaken.
• Provide a regular income from the Discounted Gift Trust that can fund/part fund the payment of rent to their daughter.
• Utilise Mr Walker's Sipp fund, which was not currently being used, to fund the required gift inter-vivos arrangements
{desktop}{/desktop}{mobile}{/mobile}
Mr Walker's illness had placed on Mrs and Miss Walker not only an emotional strain but also worries over what the future held financially. Neither has a great deal of experience in dealing with the family finances as Mr Walker had been "in charge of the finances". By working with Mrs and Miss Walker, we were able to empower them for the first time to put plans in place that guaranteed their families long term future and tested their aspirations against their financial reality.
We were able to agree how best to structure their asset base, tax and income position, both now and throughout the rest of their life, and presented a strategy and methodology that is flexible enough to be revisited as their circumstances change.
By taking an integrated approach, we were able to provide them with solutions that met their identified needs and uncovered some they had not realised existed. The interaction of the financial planning recommendations and the tax implications were key in meeting their objectives and providing peace of mind.
And Mrs Walker's final comment to us? "We call you before we call anyone else". Now that's trust!
{desktop}{/desktop}{mobile}{/mobile}
What Happened Next
Our review covered so many different areas that the above advice is just the first in a number of stages. However, we have already been able to ease Mrs Walker’s fears over the fate of the estate and significantly reduce any potential IHT bill, meaning Mr and Mrs Walker can pass more of their wealth to the family.
We’re now turning our attention to the care fees issue. Further objectives are coming to light, such as funding school fees for their grandchildren and further generational planning involving the other properties. Mrs Walker has also reviewed her will.
When we first met Mrs Walker she was very distressed at her husband’s situation and at being left in charge of the finances and was receiving advice from a number of sources. Six months on, Mr Walker is slowly improving and Mrs Walker feels firmly in control of the family’s complex arrangements, viewing us as her “Go To” adviser.
{desktop}{/desktop}{mobile}{/mobile}
Key Points
- With particularly complex cases, it's important to break down your advice into bitesize chunks. Take the time to talk to clients to understand what's really important.
- Setting out what they have and where they want to get to will help this conversation. Tackle the biggest priority areas first and park anything else for a later date.
- Trust is key. Clients who trust you, will happily have no reservation in sharing everything with you and in turn, you'll be able to service their needs better.
Biography
Mark joined Mazars in May 2006 from Grant Thornton and is a Fellow of the PFS and has achieved both the Chartered and Certified Financial Planner qualifications. He currently heads up the Research and Development function at Mazars. Mark's responsibilities are threefold. To research, implement and maintain panels of pension and tax advantaged investments To develop and put into operation, systems to ensure the effective roll out of Financial Planning services. To provide technical assistance to the Financial Planning teams in product related matters as well develop Mazars marketing materials.
Mark lives in Bedford and is married with a young, energetic son.
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