Lifetime Planning Aids

Here I shall briefly touch on other lifetime planning aids which individuals may feel appropriate, depending on their circumstances.

1. Powers of Attorney

We've covered Wills, but they only come into effect when you die. So what if you have a stroke or a bad accident which leaves you physically and/or mentally incapable of managing your affairs?

Well, you really need to execute a Power of Attorney. This is a document that appoints a person or persons to act on your behalf if you are unable to do so yourself. There are currently 2 types, General and Enduring.

A General Power of Attorney applies where someone is physically incapable of managing their affairs. It can give general authority to the Attorney or it can be very specific. For instance, someone could be appointed to act as an Attorney in the signing of a contract if the donor is out of the country. No power is taken away from the donor but, quite simply, power is given to a third party or parties. More than one person can be appointed to act and they can act independently of each other (joint and several) or both together (joint).

An Enduring Power, however, is far more powerful, because this is intended to continue if the donor becomes mentally incapable. This confers tremendous responsibility on the Attorney, who has a duty to register the Power with the Court of Protection if the donor has become, or is becoming, mentally incapable. The registration process is onerous and costs money, but this pales into insignificance compared to the process of appointing a Receiver for a patient who is mentally incapable and who has NOT got an Enduring Power of Attorney. This process takes many months, costs a fortune and the Receiver then has to account to the Court of Protection annually for all of the income and expenditure of the patient. To rub salt into the wound, the Court also take a percentage of the annual income for the privilege of overseeing the accounts.

I always liken the Enduring Power of Attorney to an insurance policy. Absolutely useless unless it's required, and if you need one but haven't got one then it's probably too late to get one.

2. Notices of Severance

These are simple documents that are used to sever the joint tenancy of a property. Most joint property is held as beneficial joint tenants, which means that in the event of the death of one of the owners then the other takes by survivorship. Such property does not form part of a person's Estate and does not get dealt with according to the terms of a Will.

However, a Notice of Severance will "sever the joint tenancy" so that each party will own 50% of the property (the percentages can be uneven, for instance 70/30). This means that their share of the property CAN be dealt with by a Will and is a useful planning aid to mitigate Inheritance Tax or to protect assets.

3. Protecting assets from the local authority

"Why would I want to do that?" I hear you say. Well, since Care in the Community was introduced, people going into residential or nursing care have basically lost their assets (and sometimes even been made bankrupt) in order to pay for their care. Present rules allow you to keep £20,000. The cost of care can be £20,000 per year or more and it doesn't take long to whittle away someone's Estate at that level of charge. Many OAP's are "cash poor, property rich" and it is the ones who live alone that I would call vulnerable.

However, the good news is that there are things that can be done provided that there is not already any reason why the patient should feel that they would need nursing care. For example -- if a patient has been diagnosed as having Alzheimer's, then this is what is known as regressive; it does not get better, only worse. So, even if the disease is in its infancy, the chances are that an Alzheimer's sufferer will need permanent nursing care at some point. Once diagnosed, if the patient disposes of their assets so that the local authority picks up the tab for the care, then they will be treated as having made a "deprivation" and the family of the patient (or the recipients of the assets) will be pursued. And they do it, believe me.

4. The Annual Gift Exemption and tax-free investments

These are little-used planning aids that can help to significantly reduce an Estate for IHT purposes. I mentioned in a previous article in this series that there is an annual gift exemption of £3,000. There is also an exemption that applies to annual amounts of £250 to any number of people. There are special exemptions for gifts to children in the year they marry, as well as other special exemptions too. Professional advice is required. But it doesn't take a genius to work out that if you gift just £3,000 per year for 20 years to your family, then that represents a tax saving of £24,000 if that money had been in your Estate at the time of your death.

There are also various tax free investments promoted by the Government. The most common is the ISA, and you can place up to a set amount per year into an ISA which will grow free of any Capital Gains tax. There are other investments which have been made free of CGT by the Chancellor who wants to encourage more private long term investment. See! It pays to follow the Foolish principle of long-term buy and hold!