Home Truths

Why Proactive Estate Planning Pays Off

BY CAROLINE GARNHAM

Downton Abbey was a historical TV drama released on Sept. 26, 2010. It centers around the aristocratic Crawley family who live in a Yorkshire country estate between 1912 and 1926, depicting the lives of the residents and their domestic staff.

In the sixth and last series, we see the rise of the middle class and the decline of the aristocratic way of life as taxes are raised and the costs of running large estates increases. Many British aristocratic families went bankrupt and were forced to sell off their land and possessions to pay off their debts.

Set in the 1920s, the Crawleys’ problems seem very quaint, but the lessons of history as they relate to large estates and wealthy families are often repeated.

DRIVING HOME

I have advised many families over several decades and see the same problems cropping up repeatedly. The traditional way to own a substantial mansion is for the eldest child to inherit both the house and the business, such as a farm, and for the other children to make their own way in life.

But this format is often resisted by families who want to treat their children fairly. If families want to keep the mansion for the children to share or leave it to one without the funds to maintain it, disaster will ensue.

The Johnson family decided to leave the house to the eldest son and the substantial farm to the second. The result was that the house fell into disrepair as Arnie the eldest son who inherited the house struggled to maintain it without sufficient income to support it.

“Tax planning is still possible, it is legal and well worth doing, but be careful: most tax authorities accept some planning, but not others.”

Meanwhile the second son Archie, who lived in a modest home, but had considerable income, lived in comparative comfort and luxury.

In another case, Uncle Anderson left the mansion and its possessions in trust for his nephew John, the eldest son who worked hard all his life to build up significant reserves to fund the maintenance and repair of the house, which was his pride and joy.

On the death of Uncle Anderson, John inherited the house, but his wife of many decades declared that she was not prepared to live in the mansion because it was uncomfortable, cold and draughty. She issued a divorce petition.

The divorce was protracted and messy, but ultimately the judge declared that the house was John’s, even though it was held in trust, so he was unable to sell it, and the significant funds he had accumulated to pay for the upkeep of the building and its maintenance should go to his wife.

THE SAME PROBLEMS CROP UP EVERYWHERE IN THE WORLD.

Patrick bought an estate in Mexico, which was his pride and joy. He and his wife, Mary, would visit at every opportunity and when the children were young, they would take them there for long holidays with their friends.

Patrick assumed, like so many founders of fortunes with substantial estates, that “happy days” in Mexico would continue for the family and so he left the estate to his wife Mary and three children, Matt, Jen and Damien.

But by the time Patrick died, his three children were married with children of their own and each had a very different attitude to the Mexican estate: one wanted to keep it, one wanted to sell it and one wanted to sell part.

Mary, Patrick’s widow, was distraught to see her family so divided and it pained her that they could not bear to be in the same room, let alone the same estate.

Then, of course, there is the tricky topic of taxation.

TAXING ISSUES

I was instructed by Mubarak and his wife, Jane, to review the ownership of their three homes in London. He bought his Mayfair home 20 years ago and it had gained in value by £6 million.

The second home was in Knightsbridge, which he had bought last year, and had not gained in value, and the third was in Kensington, which he was about to acquire.

I told him that under United Kingdom tax law, there was a relief from capital gains tax at 28 percent on the gain on a home that was a main or only residence, but this relief was only available for people who were residents in the U.K.

Mubarak had two daughters living in London and he was happy to transfer the ownership of a home to each of his daughters, provided they could not sell them.

If he gave his Mayfair home to his daughter, capital gains tax would be payable on the gain as if it had been sold at market value. He could, however, keep it and avoid capital gains tax if he still owned it on his death.

However, the entire value of the property would then be subject to inheritance tax at 40 percent. This could be avoided if he then left this home to his wife in trust.

After his death, the home could then be sold, the proceeds taken offshore and the tax avoided, since there is an exemption for gifts between spouses and for property gifted which is outside the U.K., if the settlor was non-U.K. domiciled at the time.

The other two houses could be given one to each daughter in trust, so they could not sell it. Provided he lived seven years, no tax would be payable on the capital value of the properties on his death.

Tax planning is still possible, it is legal and well-worth doing, but be careful: most tax authorities accept some planning, but not others.

The third area in which value can be hemorrhaged out of homes is in paying excessive fees for their maintenance and upkeep.

It is not unusual to see staff or administrative personnel charge excessive fees, take backhanders from contractors, steal, or in other ways take advantage. This is where good governance comes in. Good governance is the monitoring and review of every professional involved in the management of each asset class through effective contracts and regular reporting. Done well, it can save millions and lead to considerable peace of mind.

Caroline Garnham is CEO of Caroline’s Club and Garnham Family Office Services, London. Reach her at caroline@ garnhamfos.com.