Maximising Protection: Leveraging a Deed of Variation

In the realm of estate planning, the strategic use of a Deed of Variation can provide a shield for newfound wealth and ensure that assets are distributed according to the desires of the deceased. But what exactly does this legal instrument entail, and why is it crucial in protecting beneficiaries from various threats?

Understanding a Deed of Variation

A Deed of Variation, also known as an Instrument of Variation or a Family Arrangement, is a posthumous modification of a Will that allows beneficiaries to alter the distribution of assets. This versatile tool offers flexibility in adjusting entitlements or relinquishing specific bequests, providing beneficiaries with greater control over the inheritance process.

The Timely Application of a Deed of Variation

Timing is crucial in the execution of a Deed of Variation, as it can be drafted within two years of the date of death. This window of opportunity enables beneficiaries to make necessary adjustments to the Will, ensuring that assets are distributed in a manner aligned with their intentions.

Safeguarding Against Threats

One of the primary reasons for utilising a Deed of Variation is to shield assets from potential threats. By redirecting assets through a trust, beneficiaries can safeguard their newfound wealth from various risks, including:

Generational IHT

Direct inheritance can impact beneficiaries' own Inheritance Tax liabilities, potentially diminishing the value of the estate passed on to future generations.

Marriage After Death

The remarriage of a surviving spouse/partner can jeopardise the inherited estate, potentially disinheriting the deceased's children. By varying the inheritance to a trust, beneficiaries can mitigate this risk and preserve assets for future generations.

Protecting Assets Through Trusts

Diverting assets into a trust offers comprehensive protection against threats such as divorce settlements, long-term care fees, marriage after death, creditors, bankruptcy, and additional taxation. Assets held within a trust remain shielded while providing beneficiaries with access as needed.

Enhancing Tax Efficiency

In addition to asset protection, a Deed of Variation can optimise the transfer of assets in a tax-efficient manner. By redirecting assets to beneficiaries with lower Inheritance Tax liabilities, the overall tax burden on the estate can be minimised. Moreover, the Deed of Variation can facilitate the absorption of capital gains on assets sold posthumously, potentially eliminating the need to pay Capital Gains Tax.

Addressing Other Threats

Beyond tax considerations, a Deed of Variation also addresses other threats to the inherited estate, including:

Divorce Settlements

Inheritance assets can be at risk in divorce proceedings, potentially compromising the intended beneficiaries' entitlements. However, by varying the inheritance, beneficiaries can protect their assets from such threats.

Long-Term Care Fees

Assets passed on to beneficiaries could later be assessed for long-term care costs. By diverting assets through a trust, beneficiaries can shield their inheritance from these potential expenses.

Creditors and Bankruptcy

If beneficiaries face creditor claims or bankruptcy proceedings, the inherited estate could be at risk. However, a Deed of Variation provides a layer of protection, safeguarding assets from such threats.

Implementation and Considerations

Each adult beneficiary has the authority to vary their share of the estate through a Deed of Variation. However, when minor children are involved, obtaining consent becomes more complex and may require court approval. Nonetheless, unanimity among all beneficiaries is not necessary, as each beneficiary can vary only their own share.

Conclusion

While a Deed of Variation offers significant benefits in estate planning, it should not be viewed as a standalone solution. Its effectiveness may be subject to changes in government policy, emphasising the importance of periodic review and updates to estate planning strategies. Nonetheless, for beneficiaries seeking to adapt the terms of a Will and protect their assets, a Deed of Variation remains an invaluable tool in the estate planning toolkit.