What is a property protection trust?
There’s a growing number of couples who are concerned about preserving wealth for their children and grandchildren when they die. The cost of later life care can strip away the savings that you’ve worked so hard to build.
Estate planning can help protect your wealth for the next generation. Trusts are not only for the super-wealthy.
Standard mirror Wills do not include asset protection trusts. If safeguarding your wealth is important to you, read on, and we’ll explain how a simple Will trust can benefit your family.
What is a property protection trust?
The simplest way to explain the difference between a standard mirror Will and a Will containing a property protection trust is with an example:
Charlie and Anne - a case study
Charlie and Anne are married and have an adult son, Martin. They both turned 70 earlier this year. They own a house worth around £200,000 and have ISA and premium bond savings of £80,000. When they wrote their Wills in 2001, they wanted to keep things straightforward.
When Charlie dies, everything he owns passes to Anne, and she leaves everything to him. Both Wills say that when the survivor dies, everything passes to their son Martin. This is a typical arrangement for married couples with children.
Now, fast-forward five years. Charlie dies, and his property and money pass to Anne; she now owns assets worth £280,000.
Fast forward another 2 years. Anne has a bad fall and needs to move into residential care.
The local authority assesses Anne’s needs and finances. Since she has more than the Upper Capital Limit (UCL) of £23,250, she has to pay the full care home fees from her savings.
The care home costs £45,000 a year. Anne stays in the home for another five years until she dies, so the total cost is £225,000. Anne’s savings have reduced from £280,000 to £55,000, so her son Martin inherits £55,000.
IMPORTANT: In these examples, if both Charlie and Anne had to pay for their later life care for more than 4 years, Martin would inherit only £28,500.
Mirror Wills, like the ones Charlie and Anne made in 2001, are perfect for people who feel obliged or duty-bound to fund their partner’s later life care.
However, if you have worked hard and paid your taxes, you might reasonably expect the state to support you later in life. Most people want to leave as much of their wealth as possible for their family. If you agree, consider a protective trust in your Will.
Protective Property Trust Wills
Will trusts don’t exploit a legal loophole - they’re a legitimate and sensible estate planning tool.
There is a legal way to protect your half-share of the family home for your children. Will trusts are not only for the super-wealthy. Anyone can use a Will trust to direct their assets to the people they choose.
A property trust in your Will passes your (half) share of your home into a trust when you die. Unmarried couples can also use property trusts, but there may be tax implications to consider*. A property trust allows the surviving spouse or civil partner to continue living in the family home for the rest of their lives. This is called a ‘right to reside’.
The Trust protects the value of your share. It doesn’t belong to the surviving spouse or civil partner, so it is ‘ring-fenced’ by the trust for the final beneficiaries. Under the current rules, it is not taken into account if the surviving spouse is means-tested for residential care home fees. Notably, the children do not own the half share, so they do not have any capital gains tax implications from second home ownership. When both parents have passed away, the two half-shares are passed to the children.
What are the benefits of a property trust in my Will?
Let’s return to Charlie and Anne. They are still worth £280,000, but this time, when they put their Wills in place, they include a Protective Property Will Trust.
Fast-forward 5 years. Charlie dies, and his half-share of the family home is now transferred into a Property Trust created by his Will. The rest of his estate passes to his wife, Anne. She has the right to live in the property for as long as she wishes.
Anne remains in the family home and inherits all of Charlie’s bank accounts and savings. In practical terms, this means that everything remains the same for Anne as in our first example.
Fast-forward two more years. Anne needs more support, so she moves into a care home. The local Authority assesses her financial situation.
What does Anne own?
The house is still worth £200,000, and Anne owns half of it. The other half is held in trust, and the people Charlie chose as trustees are responsible for this share. Now that Anne has stopped living in the family home, it can be sold or rented. Anne’s cash and investments are still valued at £80,000, so her personal assets are valued at £180,000.
Anne remains in the care home for five years. In less than four years, her savings fall below £23,250, at which point the Local Authority offers financial support. When her assets drop below £14,250, she receives the maximum financial support from the Local Authority.
When Anne dies, her estate is only worth £14,250, but the trustees have invested Charlie’s share of the property trust. The care home cost has not affected this. If interest had been added, the trust fund may have increased in value.
In our first example, Martin inherits £55,000.
In our second example, Martin inherits £114,250, an additional £59,250. This estate planning trust has protected Martin’s inheritance.
IMPORTANT: A Will trust only comes into effect when you die.
Being a tenant in common and including a property trust in your Will does not benefit you in your lifetime. To safeguard your savings, you may have other financial planning options. I can happily refer you to a trusted financial planner who can explain your options.
Are there any other benefits?
Protective Property Trust Wills have other potential benefits. If Anne remarried after being widowed, her new husband would inherit everything because marriage cancels all previous Wills. If Anne died before her new husband (and failed to make a new Will), Martin would receive no inheritance from his parents. With a property trust in your Will, this situation can be avoided.
There are other forms of Will trust. Some forms of trust can be created in your lifetime rather than by your Will. Each type of trust has different benefits. I help every client understand the costs and benefits of trust before making their Will.
The property trust is a life interest trust. Charlie and Anne included their property in the case study above but passed any other cash assets to their partner. They could have decided to put all their property into a life interest Will trust, so the cash and savings would have the same protection.
You’ll find answers to the most commonly asked questions about Life Interest trusts below:
Life Interest Trusts FAQs
What is a Life Interest Trust in a Will?
A Life Interest Trust in your Will protects your share of the family home (plus any other cash, savings, and investments) against re-marriage or the long-term effects of care fees. Life interest trusts help when a property is jointly owned and are particularly useful when there are children from previous relationships.
How does a Life Interest Trust work?
The Life Interest Trust protects your share of the family home and other assets for your chosen beneficiaries (i.e., your children) whilst allowing your surviving partner to remain in the family home for the rest of their life or for as long as they wish. If the survivor doesn’t want to stay in the family home, it can be sold, and the money will be invested with the income paid to them. Alternatively, they might decide to rent the property and will be entitled to the rental income. The capital from your share of the family home will still be protected for your chosen beneficiaries.
Most couples who own a family home jointly will own it as joint tenants. This means that when one co-owner dies, the property will pass automatically to the surviving co-owner, regardless of what the Will says.
Is there a potential problem if we own our property as joint tenants?
If your partner dies, you will inherit the property by ‘survivorship’. As the the surviving co-owner:
you can sell the home and spend the money
your partner’s beneficiaries could be disinherited
any means testing assessment for state benefits or care will include the full value of the house
you’ll pay for your care until your savings reach £23,250
you could change your Will and leave the house to someone else
your partner’s beneficiaries could be disinherited
if you meet and marry a new partner, they will inherit the house unless you update your Will
your partner’s beneficiaries could be disinherited
To protect your share of the family home, you must own it as tenants in common and include a Life Interest Trust in your Will. Holding the family home as tenants in common means that you and your partner own distinct shares of the family home, which pass under the terms of your respective Wills.
What happens when I die?
When you make your Will, you name people you trust to be your Trustees. Trustees are people who look after your assets for the benefit of others.
When you die, your Trustees will be responsible for managing your share of the family home, and they will need to allow your surviving partner to remain in the family home undisturbed and in compliance with the terms of the trust.
Can I sell the family home if I’ve made a Life Interest Trust Will?
Yes, you can sell. The trust is created by your Will on your death, not before. If you sell your current home and buy a new family home (owned as tenants in common), then the terms of the Life Interest can apply to this new home.
If you sell the home in your lifetime and don’t buy a new one, the Life Interest Trust of the property cannot apply. However, if you’ve included a life interest trust of all your residuary estate (cash and assets), any sale proceeds would be protected by that trust.
Can the survivor sell the family home if I die first?
Yes, the Life Interest Trust can be drafted to enable the survivor to sell the family home and buy a new property, which will be held on the same terms.
If the property is cheaper, surplus cash will be invested to provide an income for the survivor while protecting the capital for your chosen beneficiaries.
Who will pay the bills and sort out any repairs?
While the survivor is living in the family home, they will be responsible for the bills and any repairs as they enjoy and benefit from the property.
Can I give my house to my children now instead of using my Will?
This is not advisable for several reasons. You create potential Inheritance Tax consequences for you and issues with deliberate deprivation. The Deprivation of Capital Rules deal with giving away assets that ought to be used to pay for your care will ‘undo’ the gift. You’ll still have to pay for your care.
Perhaps the most significant disadvantage is if you put the family home in your children’s names and they then divorce, die, or become bankrupt, the family home will be at risk, as the house would be one of their assets.
What are the disadvantages of a Life Interest Trust?
There are extra administrative tasks and costs when dealing with a trust in a Will.
The disadvantages of a life interest trust should be weighed against the benefits of protecting assets. If the trust is drafted flexibly, and your executors and trustees take sound legal advice at the point of need, your estate will be protected, and any additional expenses will be kept to a minimum.
Probate Fees: Where a Will includes a trust, a Grant of Probate will be needed, and there will be disbursements and fees. Your trustees can complete the application themselves or seek and pay for professional assistance from your estate’s funds.
Trust Registration: HMRC requires Life Interest Trusts to be registered on their Trust Registration Service, and again, I can help your Executors and Trustees arrange this.
Stamp Duty Land Tax: If the survivor wishes to move house, the sale will be subject to Stamp Duty Land Tax at the second-home rate.
What do I do next?
Please get in touch if you would like advice about updating your Will or making a new Will
Please note that information provided on this website:
Does not provide a complete or authoritative statement of the law;
Does not constitute legal advice by Carisma Wills;
Does not form part of any other advice, whether paid or free.