Hanging loose in the nervous 1990s

In the era of the elastic family, new strategies are needed for rolling with life's punches, says Justin Urquhart-Stewart
What did Superman, Lassie and the Invisible Man have in common? Well, none of them proba bly needed a will. Superman didn't need to because he was indestructible, Lassie because she was a dog, and the Invisible Man - well, probably nobody noticed when he departed anyway.

Unfortunately for the rest of us it is an increasingly important issue. In days gone by our family structures were bigger, more permanent and reliable. We inherited from the Victorians the aspiration of the three- tier family of grandparents, parents and children. After the two world wars, social and financial changes led to the nuclear family, with husband, wife and for some odd reason 2.4 children, which has always sounded rather unpleasant.

Now in the nervous Nineties family structures have changed again. But this time they are far more elastic, primarily because of the increasing number of couples who do not wish to get married, and rising divorce levels. Additionally, financial pressures are likely to move grandparents back towards their children in order to form more financially viable units. Perhaps with job insecurity, early retirement and increased costs of care, family units will grow again to a new financial comfort level.

The elastic family can consist of partners married and unmarried, second husbands and wives, as well as sundry offspring scattered around the country. Grandparents can also be included as both families combine their limited resources. I wonder when the Government will introduce a tax break on our parents?

With this elastic family, it is all the more important to structure your finances to cover both their current demands and those for the future when you are not there. This is not impossible and in fact is becoming easier than before, but as ever you will need some help.

The biggest threat to the elastic family is inheritance tax. If you do nothing about your planning, 40 per cent of your estate on anything over pounds 154,000 could go in tax. Spouses can leave each other assets without paying tax, but that may merely compound the problem. Eventually the taxman will be waiting and he wants his share of every other transfer on estates that exceed the threshold.

Inheritance tax is a combined death duty and gift tax. Most gifts need not be taxed so long as you live for another seven years. As far as possible, married couples should also try to ensure that they both use up their own pounds 154,000 limit before either one goes over it.

However, you can further minimise this payment by various gifts of money around your family. For example, both husbands and wives can usually give each other as much as they like (but for an unmarried couple the law is not so helpful). In any one tax year you can give up to pounds 250 to as many people as you like - your elastic family need know no bounds. But you may only give away up to pounds 3,000 in any one tax year. This can also be carried forward in a tax year.

In addition, you can give your children pounds 5,000 when they marry, assuming you have anything left after paying for the reception. There are other exemptions, including gifts to charities and political parties. All of these can ameliorate the potential tax liability, but be careful that you still have enough to live on.

One consideration on inheritance tax is the possibility of establishing specific life insurance policies to pay the tax when the time comes. This does not save tax but provides the funds for the payment of it. If you have such life policies already consider putting them into a trust so that the sum insured does not become part of your taxable estate but goes directly to your beneficiaries tax-free. Your solicitor will show you how.

This brings into question the use of trusts. Often these appear overly technical but can in fact be an effective device for protection from tax. A trust is simply a method of transferring ownership away from your estate, to be held by trustees for the benefit of intended beneficiaries. This has the effect of potentially reducing tax liability. Trusts, whilst beneficial, need careful planning and professional advice in their construction.

Traditionally trusts have been seen as a means of grandparents passing on assets. These days, however, they have a new place. Trusts can be a very efficient way of separating and securing assets for specific individuals and children.

A key consideration when contemplating mortality is the control of our assets when we are no longer competent. Powers of attorney can ensure that plans are laid out in advance of illness or accidents. There are two main types, a general and an enduring power of attorney. In either case professional direction will be needed. They are a simple way of ensuring that an individual's affairs can be properly maintained. Failure to do so can result in much family difficulty at a very sensitive time.

Our wills and legacies don't have to be complex, and in fact I would counsel everybody to keep their inheritance affairs as straightforward as possible. Many an inheritance has been wasted in unnecessary expense of interpretation of the deceased's intentions.

Although there will be expense it is always essential to take advice. As with all financial products you can shop around. The inheritance laws are constantly evolving but that is no reason to delay. Try to ensure, however, that your advice also links into investment, insurance and taxation assistance and not just the legal elements.