Nicola Coates CFP^CM from Turcan Connell advises a middle-aged couple on the tax planning and investment options open to them on the death of the husband's father. It's a bequest that requires careful handling.
Allan and Jenny were referred to me as a result of the loss of Allan's father Iain. Allan was approaching retirement age, Jenny is younger than Allan by five years, and together they had been caring for Allan's father Iain, for the last 13 years. Allan's mother had died many years earlier. Iain had been suffering from a degenerative illness and Allan and Jenny had been caring for him in their home with the support of their local care authority.
They now stood to inherit a sum of money but didn't know what to do next. By their own admission, they confirmed that they weren't confident with money and felt a significant weight of responsibility in terms of their impending inheritance. They have two adult sons and wanted to ensure they could pass down Iain's legacy but at the same time, having cared for Iain for the last 13 years, they now wanted to do something for themselves.
This is a real-life case study. Names and some other details have been changed to protect confidentiality.

I initially I met with Allan and Jenny not long after they had lost their father Iain and emotions were quite raw. We spent some time talking about how they were feeling now what if any thoughts they had regarding the future.
I explained we would likely need to work together over a number of months while we collated information to apply for Grant of Probate (Letters of Administration in Scotland) and prepared a financial schedule for their solicitor.
We spent some time working through Iain's financial position, Allan advising me that he knew his father had a number of investments and shares as Allan had latterly had to seek Power of Attorney as Iain's health had deteriorated. Allan had never really looked at what his father had or done anything with it as he didn't really know where to start. He spent lots of time collecting all the tax vouchers and making sure he had all the necessary paperwork to give to their accountant each year. He indicated that he found this an annoying and time consuming exercise, especially when he is also self-employed so has to do a lot of paperwork for his own affairs. I suggested that it would be helpful if I could speak with their accountant as this would assist me in being able to put together a financial statement for their solicitor.
Allan was aware that there would be an inheritance tax bill but he hadn't really known what to do in the last few years to reduce this and had felt uncomfortable discussing the position whilst his father was still alive. They told me that they had taken Iain on a couple of cruises in the last five years as it was a way of him getting a change of scenery and now that Iain had passed away, they thought that they might like to travel in the future. They hadn't really enjoyed the cruise ship particularly but Allan had been keen on sailing in the past and they wondered if they would have enough money to buy a boat and maybe sail around the Mediterranean in the colder months of the UK winter.
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I introduced the concept of Financial Planning to Allan and Jenny, explaining that if we could identify exactly what Iain's financial position had been; analyse Allan and Jenny's position and quantify what was left after inheritance tax, this would give us a starting point. We could then consider the costs of maintaining their lifestyle once Allan retired and then building in a scenario which looked at purchasing a boat and all the associated costs.
I explained the importance of assessing their risk profile when dealing with investments and that by ascertaining their ability to accept risk and the amount of capital loss they could cope with before they would want to keep their money 'under the bed', this would enable me, as part of their Financial Planning exercise, to make sure that we invested in a portfolio for the longer term to assist with their objectives. The results of the analysis were very interesting showing that Allan really didn't want to take any risk at all and Jenny was classed as a cautious investor.
After a number of months of research and further discussions with Allan and Jenny we identified that their inheritance consisted of a number of shares valued at £1.2 million together with cash of around £150,000. They had to pay a hefty Inheritance Tax bill although we were able to reduce this slightly as I had asked whether or not they had made use of Allan's mother's Nil Rate Band on her death. After some digging it became apparent that this would be available to us and they were eventually left with a little over £1 million pounds.
Allan and Jenny were also wealthy in their own right with three properties totalling £690,000 and cash of approximately £200,000 but they didn't have any real investments to speak of. We reviewed Allan's retirement position and identified that he had pension and rental income which would more than cover their regular expenditure. Allan had indicated that he and Jenny had decided that he would keep working whilst his father was alive but now that he had passed away, Allan would really like to retire straight away if this was possible.
I asked Allan and Jenny to consider their expenditure in some detail; consider each property and the costs of running each house. I asked them to think about what their costs would be and how these would change with Allan finishing work. I also asked them to think about their plan regarding purchase a boat. What kind of boat would they like to buy? Fuel costs would be important; what are the costs of mooring the boat and so on. so that we could accurately reflect this when modelling what they future might look like. We talked about their sons who were fairly self-sufficient and both with good jobs, but both were struggling to get their first house due to the large deposits required. They would like to help get them settled by giving them each a deposit to get them started. Jenny hoped that grandchildren might then follow!

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We went through their cashflow model and I included a scenario in which they purchased a boat, Allan confirmed that he had enjoyed researching what type of boat they would like online. They thought they would like to go away for maybe the next five winters and then probably sell the boat on. It became apparent that they could meet their objectives taking very little risk. Allan as Power of Attorney for Iain knew that there was a good dividend income but on further analysis, we identified this had been from one very large shareholding also involving currency risk. It took some time to explain how risky this approach was against a strategy of investing the total value of the shareholding into a diversified portfolio which would provide a significant reduction in risk but still be able to provide the income which in fact I had demonstrated they didn't actually need as they didn't lead a particularly extravagant lifestyle and had income and capital of their own.
Allan and Jenny had mirror wills leaving everything to each other and then to their sons. Their modelling had shown that they would actually keep accruing funds so they had the capacity to make substantial gifts. I introduced the idea of a Deed of Variation to Allan and Jenny whereby they could potentially redirect their inheritance to a Family Trust.
I referred them to a solicitor who put in place a Trust which Allan and Jenny had access to if they needed capital – especially in the early years whilst they were travelling and had additional boat expenses to cover, but explained how this would have the potential to reduce the inheritance tax burden on their children in future years. Allan also liked the idea that by setting up a Family Trust, it wasn't a full stop on his father's death and that Iain effectively endured in Allan's eyes through the Trust, still able to make provision for his existing and future family members.
Referring this part of the planning to a solicitor meant that she was able to explain the position with regard to the different types of trust and why and how a discretionary trust would help the clients achieve their goals. She also explained the duties and responsibilities associated with being a Trustee such that Allan and Jenny fully appreciated and understood the position prior to going ahead.
The Family Trust invested in a diversified portfolio within an offshore bond. We selected a high number of segments for the offshore bond to allow us maximum flexibility in terms of assigning funds out of the Trust and we agreed that the portfolio within the Trust would take a more balanced approach towards investment risk as the Trust objective was to provide for Allan and Jenny's grandchildren's education. As part of the Deed of Variation, capital gifts were made to each of the sons in excess of those stated in the Will to help them onto the property ladder.
We set up a portfolio for Allan and Jenny which made use of their Isa allowances and put in place two portfolios, Allan's targeting capital growth (albeit low risk) in order to make use of his annual capital gains tax allowance and a portfolio more geared towards income for Jenny in order utilise her basic rate income tax band together with her capital gains tax allowance. They would retain a high cash balance on receipt of Allan's tax-free cash from his pension but this would allow them to source a suitable boat in the next 12 months.

What happened next
Allan and Jenny came to see me after the estate had been settled. They had spent some time exploring their sailing idea, spending a few weekends on sailing trips near to where they lived and Allan had signed up and was part way through an online navigation course and that while he was finding it tough, he was enjoying it.
They wanted to review their position if they sold their two rental properties to see if this would make any changes to their position as they had been looking at ways in which they could tidy their affairs – Jenny didn't want to have to rush back home if they were enjoying themselves off one of the Greek Islands!
It was refreshing to see that a weight had been lifted from Allan and Jenny since the first time I had met them.