The brief
Kevin Garfagnini biography
Kevin is a CERTIFIED FINANCIAL PLANNERTM and one of the directors of the multi-award winning firm Mazars Financial Planning, where he has worked for over 20 years.
Many of Kevin's clients have been with him since the start of his time with the firm, and he believes that it is by developing deep long-term relationships with your clients that you will provide them with the highest quality of financial planning, which truly caters to their long-term needs.
Married couple Simon and Jean are retired and in their early 70s. They had always had a relatively modest lifestyle and had been living in rented property and managing on their state pensions, until they received an unexpected windfall of £3.8m. Naturally, this completely transformed their lives, and they needed guidance on what to do with their new-found wealth.
Simon and Jean had some ideas regarding where they could spend some of the money, including buying the property in which they currently live. However, as the windfall was considerably more than they needed personally, they were also keen to discuss how the remainder might be best put to use for the wider family.
They were especially concerned with the implications surrounding gifting the funds. They wanted to be smart with their fortune in order to achieve and maintain their desired lifestyle, while putting in place plans to help their extended family.
The planningWhen Simon and Jean first came to see us for advice on managing their windfall, they brought with them their daughter and a cousin. It soon became apparent that they had a large extended family.
We worked with them in helping to decide how much they wanted to keep aside for gifting. However, when they were deciding how this should be distributed, it soon became clear that some family members were very keen to get involved in the gifting aspects of the planning and some conflicts of interest were developing.
Keeping the peaceAs it was Simon and Jean who were our clients, we arranged to meet with them on their own and agreed with them that, while it was good to involve certain family members in the decision-making process, it was also important to avoid the conflicts which were starting to arise. We agreed that going forward, their daughter should be the only family member involved in the process as she was closest to her parents and had influence over the other family members. By the time of our next meeting, the family gifting issues had been resolved.
We also discussed other issues with Simon and Jean, which included the importance of providing cover for future financial liabilities, such as care home fees and the significant inheritance tax (IHT) liability that would result upon their death. They had not realised that the gifts they would be making to their family may become chargeable to IHT if they died within seven years of making the gifts. They did not want their family to be liable for any potential IHT charge.
We worked with them to identify suitable IHT mitigation options, which included insuring against the liability, making gifts directly and through trusts and investing into exempted assets. Simon and Jean confirmed that for personal reasons they did not wish to consider life cover as part of their IHT planning.
Setting up for life
We carried out a cashflow modelling exercise to ascertain the level of funds which should be retained in cash, to allow them to maintain their standard of living throughout their life, allowing for the extras that such a windfall could provide, and to also ensure that there are plenty of funds available for care home costs should that be required.
Acting in conjunction with the Mazars Tax and Trust department, we then recommended that Simon and Jean establish two appropriate trusts. By each gifting £325,000 into a trust, there was no immediate tax charge as this fell within each of their IHT nil rate bands.
Having established their appetite for investment risk, we recommended that the trust funds be invested in a professionally managed investment portfolio, structured in line with their agreed attitude to investment risk, with the objective of providing growth over the longer term, while allowing capital distributions and/or income in future should it be required.
Although Simon and Jean’s appetite for risk was not high, their large windfall meant that they had a high capacity for loss. Ensuring that they held sufficient assets readily available in cash to meet their short and medium- term requirements meant that we had scope to recommend that a smaller proportion of their surplus assets be invested in high-risk IHT efficient schemes, to meet their IHT mitigation objectives. The assets held would benefit from business relief, which is exempted from IHT after an initial two-year qualifying period. These investments would allow them to retain ownership and control of the invested funds.
We recommended four different IHT investment schemes to add diversity to their investment portfolio and to reduce the impact of any one manager underperforming. One of the schemes was an Inheritance Tax ISA, which meant that Simon and Jean utilised their annual ISA allowances.
They had never previously needed financial advice and the entire process was new and daunting to them. They said they really valued the time we had taken to meet with them and their daughter.
On our advice they also ensured that their wills were updated and appointed a lasting power of attorney.
What happened next
We met with Simon and Jean six months after our strategy was implemented. Further regular meetings have been arranged to ensure that they receive the guidance they require.
Simon and Jean were able to buy the house where they had spent the majority of their lives, using a portion of the money that they had received.
The gifts into trust mean that their extended family will also be able to benefit from the investment while leaving them with control over who should benefit and when.
Careful planning has helped to implement a tax mitigation strategy in order to reduce the IHT liability which they will eventually face.
This case study was originally published in the Q4 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.