Estate Planning in a Recession

Company and personal insolvency is a growing threat in these economically turbulent times. 

Customers unable to pay bills, a drop in demand for products or services and a cooling property market are all factors that can undermine a business’s financial stability. In these circumstances it pays to try and ring fence family money and bequests from the hands of the Receivers or other creditors through estate and tax planning.

If you have a spouse or partner who is self-employed or a commercial tenant, or who has given any personal guarantees or acted as surety for their business or another family member; any bequest left to them outright could be taken by a Receiver or trustee in bankruptcy or taken into account on any financial settlement.  Any bequest should be left into a discretionary trust of which your partner or relative is a beneficiary.  At the date of your death, if your intended beneficiary is bankrupt, subject to financial liabilities or guarantees or the short-term prospects are generally uncertain, any bequest can be held within the trust structure and income used for the benefit of the beneficiary.  Conversely if there is no prospect of insolvency and “the coast is clear”, the discretionary trust can be simply wound up and the fund paid to the intended beneficiary straightaway.

The discretionary trust acts as a buffer zone so that a lump sum paid into it (provided there is no ongoing risk) can be forwarded on to the beneficiary or retained within the trust until the timing is right.  Your intended beneficiary can act as a trustee of the fund to give them control.

Likewise any death in service benefit, pension (or other) lump sum should be nominated to a discretionary trust to provide the same protection.  Life insurance policies should be written into trust to provide the similar flexibility.

Whether your spouse, partner, children or other relatives are self-employed, subject to guarantees, standing as sureties, bankrupt or otherwise at financial risk, thought should be given to protecting their inheritance.  We have all heard stories where the parent has left their estate to their children and unfortunately one of them has subsequently been declared bankrupt and the trustee in bankruptcy has simply taken the child’s inheritance and used it to satisfy the claims of his creditors. A relatively simple trust structure can protect the whole inheritance from a trustee in bankruptcy.  Once the bankruptcy order is discharged, the fund can be paid over to the beneficiary outright, free from any potential claims.

By following some straightforward will and estate planning principles, an inheritance can be protected and financial complications avoided.

This article was first published in Newsbrief, Autumn 2008.