Receiving an inheritance is rarely the simple good news that people outside the family assume it is. It arrives attached to a bereavement, often when you are still coming to terms with the loss, and it can prompt strong feelings from relatives who have their own views about what should happen to it. On top of that, there are decisions to make, and some of them have deadlines.
This article sets out the main options open to you, including one that surprises most people: with the right advice, you may be able to redirect part or all of what you have inherited, in a way that is tax efficient and better suited to your family.
First, Pause Before You Spend
The most valuable thing you can do in the first few weeks is nothing at all. Money that is spent or absorbed into a current account is more difficult to plan with afterwards, and several of the options below are far simpler to arrange while the funds are still separately identifiable.
Put the money somewhere safe and separate, tell any adviser you already work with, and give yourself permission not to decide immediately. Grief is a poor state in which to make irreversible financial decisions, and there is no prize for acting quickly. The one thing worth checking early is whether any deadline applies to your situation, and the most important of those is the two year window for a deed of variation.
Deeds of Variation: Redirecting an Inheritance
A deed of variation allows a beneficiary to redirect some or all of an inheritance to someone else. It must be made within two years of the death, and it can be a genuinely powerful planning tool. In effect, and provided it is drawn up correctly, the redirected gift can be treated as though it had come from the person who died rather than as a gift from you.
People use deeds of variation for all sorts of sensible reasons.
- Skipping a generation, so that money passes to children or grandchildren who need it more than you do.
- Redirecting a share into a trust, so it can be looked after for young or vulnerable beneficiaries.
- Correcting an outcome that no longer reflects what the family believes was intended, for example where a Will was written many years ago.
- Balancing shares between siblings where circumstances have changed since the Will was signed.
- Increasing a gift to charity, which can also affect the inheritance tax position of the estate.
There are important limits. You can only vary your own entitlement, not somebody else's. The variation has to be in writing and signed by everyone giving something up, and it must contain the appropriate statements if the intended inheritance tax or capital gains tax treatment is to apply. The personal representatives must also join in if it increases the inheritance tax due, and the arrangement must not be made in exchange for money or anything else of value. Where a child or someone lacking capacity would be affected, additional protections and possibly court involvement come into play. The tax treatment does not carry across automatically to means-tested benefits or care funding: redirecting an inheritance may be treated as deprivation of capital, so take specialist advice before signing anything. This is not a document to attempt from a template, and the two-year deadline is unforgiving.
Placing an Inheritance Into Trust
Sometimes the question is not who should receive the money, but how it should be held. Putting inherited assets into a trust means they can be managed by trustees for the benefit of the people you choose, under terms that you set.
That structure suits a number of situations.
- Protecting money for children who are too young to handle a large sum, or who you would rather did not receive it all at eighteen.
- Providing for a family member who is vulnerable, disabled or receiving means-tested support, where the trust terms and benefit rules have been considered carefully.
- Keeping assets for children and grandchildren in a structure that may offer some protection if their circumstances later change, although no trust can guarantee protection in a divorce or bankruptcy.
- Giving trustees discretion to respond to circumstances you cannot predict today.
A discretionary trust is often the most flexible option, because the trustees decide how much each beneficiary receives and when, guided by your wishes. Trusts do come with responsibilities: trustees have legal duties, there are tax and reporting rules to follow, and the terms need to be drafted for your actual circumstances rather than copied from a standard form.
Trusts and Future Care Fees: An Honest Word
Many people ask whether putting an inheritance into trust will protect it from future care fee assessments. Trusts can form part of legitimate planning here, and for some families they do provide valuable protection. However, local authorities can look at whether assets have been given away deliberately to avoid contributing towards care, and where that is found, they may still assess you as though you held the money.
That is why motive, circumstances and proper advice matter so much. There is no fixed safe period: a local authority can consider why a transfer was made and whether care needs were reasonably foreseeable at the time. We would always rather explain the position honestly at the outset than promise protection that does not hold up.
If the Inheritance Relates to a Personal Injury Settlement
There is a specific situation worth flagging. If the money you have received derives from a personal injury settlement, or if you yourself are receiving compensation as well as an inheritance, a personal injury trust may be relevant to your position. A qualifying trust can allow compensation to be disregarded under relevant means-tested benefit and care-funding rules, and there are strict rules about what should be paid into it.
The critical point is that personal injury compensation and other money, including an inheritance, should be kept apart. Adding or mixing non-compensation funds can make tracing difficult and jeopardise the disregard. If both apply to you, get specialist advice before either sum is moved anywhere.
Update Your Own Will
This is the step almost everybody forgets. A significant inheritance changes your own estate, sometimes dramatically, and a Will written when your position was much simpler may no longer distribute things the way you would want.
It is worth reviewing several things at once: who inherits and in what shares, whether your estate is now large enough for inheritance tax to be a live issue, whether your chosen executors are still the right people, and whether a trust in your own Will would serve your family better than outright gifts. If you inherited property, also check how it is owned and what should happen to it on your death.
If you are also the person administering the estate, our probate team can take that work off your hands so you can concentrate on your own family and your own decisions.
Talk It Through With AIB Estate Planning
There is no single right answer to what you should do with an inheritance. It depends on your family, your finances, your health, the size of the sum and what the person who left it to you would have wanted. What we can do is lay out the options clearly, flag the deadlines that apply to you, and help you put whatever you decide into a properly drafted document.
Call AIB Estate Planning on 0800 048 7320 for a calm, no pressure conversation. If a deed of variation might be useful, please do get in touch well before the two year point, because that deadline cannot be extended.
This article is general information, not legal or financial advice. For guidance on your circumstances, call AIB Estate Planning on 0800 048 7320.
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