At the age of 89, Mrs B had already been widowed for some years. After
breaking her hip in a fall, she moved into residential care. While she
recovered fully from the fall, she continued to suffer from short-term
memory loss, diabetes and a heart problem.
She sold her property for £93,500 when she moved into care. She had
£7,000 in a fixed-term building society account and also had a
portfolio of shares, passed to her on the death of her husband, which grew
to £125,000 by the time she was 89.
Prior to her illness, Mrs B was advised to effect an enduring power of
attorney and appointed her two daughters. They wanted to arrange her
affairs to ensure she could remain within the home of her choice while
minimising the erosion of capital within her estate. I was asked to explain
how this could be achieved.
For sentimental reasons, Mrs B wished to maintain the share portfolio
intact as her late husband constructed it. Both her daughters were adamant
this should be done as they did not wish to cause their mother any distress
and because, from time to time, she took an interest in the progress of the
portfolio. The dividends from the share portfolio amounted to £3,460 a
Mrs B also had a state pension amounting to £346.49 a month along
with an attendance allowance of £51.10 a week. Her care fees amounted
to £1,220 every four weeks.
Her other main expense was her Bupa subscription of £160 a month.
This left a shortfall of £914 a month to be met from investment
income. Of the £93,500 realised from the sale of the house,
£3,500 was required to cater for Mrs B's personal needs, leaving
£90,000 available for investment.
I put together a cashflow forecast for the next five years based on the
Care fees, Bupa premium and dividend income increasing at 5 per cent a year.
Pension income and attendance allowance increasing at 3 per cent a year.
3 per cent net interest rate.
This indicated that an initial sum of £5,000 should be placed on
deposit, with the £7,000 currently in a building society being added
when the fixed term expired. This left an amount of £85,000 to be
invested, with a requirement for monthly income payments equivalent to 7.5
For the funds on deposit, I recommended a Sun Bank Liquidity account.
While the interest rate of 4.25 per cent was not the highest available,
this account could accept pension credits and other income and could fund
the care fees by standing order on a four-weekly basis.
This simplified the management of Mrs B's finances as all income and
expenditure passed through one bank account, enabling the attorneys to
manage the affairs without any intervention.
I then suggested putting the £85,000 available for investment into a
Clerical Medical with-profits bond to fund regular monthly withdrawals of
£531.25, equivalent to 7.5 per cent of the initial investment. I
selected this because the reversionary bonus rate would ensure a degree of
growth on the investment, limiting the potential for erosion of capital.
Early surrender penalties and market value adjusters were not applicable
in the event of death, so the policy was written solely on Mrs B's life.
The bond had no initial charges, which was a critical point since,
realistically, the term of the bond was uncertain.
The total value of the estate was £225,500. Although this was below
the nil-rate band for inheritance tax, which was then £231,000, as a
precautionary measure the bond was written under a gift and loan trust. As
the power of attorney did not grant the attorneys power to create a trust,
the trust deed was created by Mrs B. The trust worked as follows. Mrs B
lent her daughters the £85,000, which they invested as trustees. As
the bond increased in value, the growth was held within the trust and
therefore outside Mrs B's estate. The income taken from the bond was
treated as repayment of the loan so, on Mrs B's death, the amount that
would be accounted for IHT purposes would be the original investment less
Some 15 months after these plans were put in place, Mrs B died
unexpectedly after a short illness. The planning had preserved the value of
her estate in line with expectations and the death benefit payable from the
with-profits bond was £86,003.
The share portfolio had risen in value to move the estate into the IHT
bracket. However, as the with-profits bond had been written under trust, of
the £86,003 it returned, only £77,035 had to be accounted to the
estate. This reduced the estate by £8,968 and the subsequent IHT
liability by £3,587.20.